AOL Plugs Into Wireless World

DULLES, Va. —  As Internet users unleash themselves from the personal computer, so is America Online.

The nation’s largest Internet service provider has embarked in recent months on a costly, high-stakes gamble to transfer its PC-based dominance to the fast-paced world of gadgets, appliances and wireless devices. AOL Time Warner is slapping its popular online service onto almost anything with copper wires and a belt clip.

There’s AOL for cell phones and hand-held organizers. In November, the company unveiled a two-way pager. Add to that AOLTV and AOL by Phone, two new products aimed at marrying AOL with more traditional consumer appliances.

On paper, the so-called AOL Anywhere strategy--in the making for three years--makes perfect sense: Offer your service virtually anywhere your customers might want it.

In reality, it’s somewhat riskier, and AOL is forging ahead without a clear answer to an all-too-familiar Internet question: Will it make money?

“The big question that looms is around the revenue potential,” said Andrea Rice, managing director of Internet research at Deutsche Banc Alex. Brown. “How can you generate revenue on these devices? Ads are not as effective because of their size, so will AOL be able to get a subscription-based fee? . . . They are at the forefront of the anywhere, any time revolution. But they’re not going to make much money in the next few years.”

Investors will get their first hints about how the AOL Anywhere strategy is doing when AOL Time Warner releases its first quarterly earnings report as a combined company today and provides Wall Street with guidance for the rest of the year.

Thus far, AOL officials have refused to say how much they’ve spent developing AOL Anywhere or whether any of the new products--most of which hit the market over the last two months--are yet profitable. They insist, however, they expect the devices to carry their own weight.

“We wouldn’t be in a business if we believed it would be a money-loser,” said Jonathan Sacks, AOL’s newly promoted president. “But we’re still early in the life cycle.”

In the short term, the company will be lucky if it breaks even. Profit margins on the AOL Anywhere devices are about half as fat as what AOL earns on its bread-and-butter online service subscriptions, analysts estimate.

On some devices, such as cell phones and hand-held organizers, AOL doesn’t earn any money. For example, the company develops special AOL software for Sprint, AT&T;, Palm and others, then gives it away for free to members.

One of the hottest new devices is AOL Mobile Communicator, a pager-size device that allows users to trade e-mail and instant messages as they ride the bus or wait in line at Starbucks. Teens are expected to snap up the gadgets, despite the stiff $329.95 price tag.

But grown-ups seem to like them, too--perhaps too much. Inside AOL headquarters, the devices have become so addictive that AOL division Barry Schuler recently banned them at an executive meeting.

But for now, the gadgets might be more popular than profitable. At current prices, rivals suspect that AOL is probably barely covering its fixed costs, not counting marketing or product development.

AOL is charging $19.95 a month for an unlimited wireless connection. AOL rival EarthLink and others charge $39.95 a month for a comparable plan. Even BellSouth, which provides the wireless service that AOL relies on for the Mobile Communicator, charges $49.95 a month for its version.

“They’re not making much money at that price,” said Lance Weatherby, executive vice president of EarthLink Everywhere, the Atlanta-based company’s answer to AOL Anywhere.

Meanwhile, AOL hasn’t yet figured out whether the pagers, with their tiny screens, have potential for advertising or marketing. “We’ll go back and look at that later this year,” said Lisa Hook, chief operating officer for AOL Wireless.

Putting all the devices together, AOL Anywhere will probably earn a net profit of about $4 million this year, according to Merrill Lynch Internet analyst Henry Blodget. That’s a tiny fraction of the newly merged AOL Time Warner’s expected 2001 earnings of more than $2.5 billion.

By next year, Blodget estimates AOL Anywhere will net about $21 million in after-tax profit, but that still won’t total even a penny a share.

So why bother? Because the cost of sitting idle could be greater. As the Internet disconnects from the PC and floats toward the world of wireless, AOL must make sure it keeps up with its members’ lives, just as Microsoft has had to reinvent itself amid a shift from Windows-based products.

“A lot of people are moving to wireless, and getting the customer now is a good idea,” Weatherby said.

Although no one knows for sure, everyone is betting that the AOL Anywhere strategy will boost member loyalty and lower the churn rate.

Analysts say AOL loses about 2% to 3% of its members per month, or as many as one-third annually. But as members also subscribe to AOL on their TVs, their cell phones and their pagers, they might find leaving for another Internet service provider increasingly less attractive.

“This is great for embedding AOL more deeply into your life,” Sacks said. “The more we interact with people, the more important we are to them.”

AOL officials say it’s too soon to know whether the devices reduce its churn rate, but other industries have found success through similar cross-selling of services. Wells Fargo Bank, for example, found that customers who signed up for online banking and bill paying were half as likely to close their accounts.

Future profitability of AOL Anywhere will depend on whether the company teams with the right players and avoids investing in hot new tech toys that become tomorrow’s dinosaurs.

“The ugly underbelly to all this is figuring out where the technology is going and which technology will survive,” Hook said. “That presents some challenges.”

Currently, AOL seems to be covering its bases with a variety of mostly nonexclusive contracts with companies such as Nokia, Motorola, OmniSky, Palm and DoCoMo, a leading mobile Internet service company in Japan.

Whether AOL members actually buy the devices is another issue. Though AOL has never been shy about boasting about its membership figures, the company is unusually silent about sign-ups for its AOL Anywhere devices, including AOLTV, the Mobile Communicator and the new $499 Gateway Instant AOL Internet appliance.

AOL by Phone, which allows users to access their AOL account from any telephone and have a computer read them their e-mail, has signed up 200,000 users since October, said John Borthwick, vice president of new product development. But the $4.95 monthly fee has been waived until the end of the month and many users might drop the service once they have to pay for it.

Blodget estimates that by the end of the year, AOL will convince a total of about 500,000 members to pay for AOLTV, AOL by Phone and Mobile Communicator. By 2002, that could triple to nearly 1.5 million, with each paying an average of $20 a month on top of the current $21.95 subscription cost.

But the monthly charges add up quickly. A subscriber who signs up for AOLTV, AOL by Phone and the two-way pager would pay $61.80 a month. With the slowing economy and speculation that AOL will hike its monthly fee later this year to $23.95, it’s unclear how much more AOL members will open their wallets.

“We’re trying to be sensitive to the budget of our members,” Hook said. “We know not everyone will buy every product.”

Analysts, however, think AOL users will pay more for the added services and convenience. They note that average cable and cell phone bills total about $50 a month. “There’s still some head room,” Rice said.

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AOL Anywhere?

AOL Time Warner is aggressively pushing the dominance of its America Online brand into a wide array of gadgets, from Internet appliances to wireless devices, hand-helds, television and cell phones. Here are two of AOL’s new products:

*

AOL Mobile Communicator

* Features: Two-way pager allows users to trade e-mail and instant messages

* Pros: Wireless connection to AOL e-mail and instant messages from virtually anywhere; tiny keyboard makes writing easier; unlimited time

* Cons: Expensive toy; can’t view e-mail attachments; unable to synchronize with AOL address book

* Launch: November 2000

* Cost: $329.95 plus a $19.95 monthly fee on top of regular AOL connection charges

*

Instant AOL Gateway TouchPad

* Features: First in a series of new Gateway Internet appliances offering customized version of AOL

* Pros: Smaller, simpler and quieter than a PC; good for kitchen, family room

* Cons: For the price, consumers might as well buy a PC; unable to view e-mail attachments; no hard drive

* Launch: November 2000

* Cost: $599 for device

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AOL on the Go

AOL’s effort to expand its dominance from personal computers to all manner of gadgets is well underway. Here’s a look at some of the products and devices behind the AOL Anywhere strategy:

*

AOLTV

* Features: Connects your television to the Internet so you can check e-mail, chat online while watching regular TV programs

* Pros: Good TV program guide; if you have two phone lines, two members can sign on under same master account

* Cons: Can’t view TV picture and surf Web at same time; too expensive

* Launch: Summer/fall 2000

* Cost: $249.95 for set-top box, plus $14.95 a month on top of regular AOL connection charges

*

AOL Web-enabled cell phones

* Features: Ability to access e-mail and limited AOL content on AT&T; or Sprint phones

* Pros: Sprint also offers instant messaging; ability to personalize Web content to automatically have weather, sports scores, stock quotes displayed

* Cons: Frustrating and slow to use phone keypad for writing; hard to read e-mail on small screen

* Launch: Summer/fall 2000

* Cost: No charge from AOL; phone carrier may charge extra

*

AOL by Phone

* Features: Use any phone to access e-mail, stock quotes, sports scores and weather

* Pros: Handy way to access e-mail when away from home or office; offers a free two-minute phone call anywhere in U.S. to reply to e-mail

* Cons: Creepy computerized voice reads your e-mail; occasional glitches with voice-recognition software; no way to access address book yet; no way to easily reply via e-mail

* Launch: October 2000

* Cost: $4.95 a month on top of regular AOL connection charge.

AOL for hand-held organizers

* Features: Allows owners of Palm, Windows CE or Pocket PC devices to get e-mail

* Pros: Easier than cell phones for reading and writing

e-mail; instant messaging also available on Palm

* Cons: Costs $100 to $300 to add modem to hand-held

* Launch: Late 1999, with continual updates and additions

* Cost: Free software from AOL