Will AOL Go The Way Of The Model T? Mark Lewis, 04.19.02, 12:40 PM ET FORBES MAGAZINE
Is Robert Pittman following in Henry Ford’s footsteps? If so, that may not be good news for AOL Time Warner shareholders.
Ford was a revolutionary who changed the world, only to grow complacent and eventually lose his industry leadership position. His wildly successful Model T car put the horse and buggy out of business, but then Ford stuck with the Model T too long while rivals stole customers by adding bells and whistles.
Pittman, co-chief operating officer for AOL (nyse: AOL – news – people ), may be on the verge of making a similar mistake. Pittman has taken direct control of the firm’s America Online unit, which has been plagued by slow growth as Internet dial-up customers defect to rivals offering high-speed broadband connections. America Online has made slow progress in migrating its huge base of dial-up customers to its own broadband offerings.
Now AOL reportedly is retrenching. Friday’s Wall Street Journal reports that the media conglomerate “is rethinking its cornerstone strategy of promoting such broadband access nationwide.” The paper quotes Pittman to the effect that America Online should focus on getting its current customers to retain their AOL dial-up service, even after they have signed up for broadband service from a rival firm.
Apparently, Pittman has been pleasantly surprised by the number of AOL customers who have retained their dial-up service as a kind of backup to their broadband service. “A lot of companies go broke trying to speed up the consumer adoption curve,” Pittman told the Journal. Whereas AOL will happily milk its high-margin base of dial-up customers for as long as these folks are willing to keep sending in their monthly $23.90.
The problem is that as broadband gains mass acceptance, even technophobes will eventually gain the confidence to venture out beyond the reassuring confines of AOL’s walled garden. And broadband is gaining momentum. On Friday, BellSouth (nyse: BLS – news – people ) reported that it added another 108,000 digital subscriber line (DSL) customers during the first quarter, bringing its total to 729,000. Earlier this week, SBC Communications (nyse: SBC – news – people ) said it added 183,000 subscribers during the quarter to push its total to 1.5 million. The cable firms–and AOL’s own Time Warner cable unit–continue to push ahead with broadband, and EchoStar Communications (nasdaq: DISH – news – people ) has pledged to offer satellite broadband access nationwide if federal regulators will approve its proposed acquisition of DirecTV.
AOL finds itself in a tough spot, little more than a year after closing on its acquisition of Time Warner. That deal was supposed to create a content-and-distribution colossus, but the Internet distribution part of the equation has not yet worked out as promised, so the stock price has shriveled. Already there is talk on Wall Street that AOL should spin off its online unit and revert to a content-and-cable play.
Neither Pittman nor his boss, AOL Chairman Steve Case, seem eager to embrace that idea. “The promise of the merger remains intact,” Case told the Journal. “We just hit a speed bump.” AOL’s soon-to-be chief executive, Richard Parsons, also defended the merger. So it’s full speed ahead–except that Pittman seems to be keeping one foot on the brake by talking about a renewed focus on maintaining that dial-up base.
Perhaps he is correct. And that Henry Ford analogy may not be such a dire portent, since even after losing its leadership position, Ford Motor (nyse: F – news – people ) eventually moved beyond the Model T and continued to be a profitable business (at least until recently).
But when AOL acquired Time Warner, it had grander things in mind than to merely continue as a profitable firm. This merger was supposed to remake the media environment. It was all about the future, whereas dial-up service is well on the way to being a relic from the past–like the Model T. When even the stodgy old Baby Bells are talking up broadband, does Bob Pittman really want to be known as Mr. Dial-Up? He is right that AOL should make as much money as possible from dial-up before it goes away. But that hardly sounds like the centerpiece of a visionary growth strategy.