AOL Broadband Lands a Big One

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Events inside America Online's high-speed-data unit have been moving as quickly as the data that passes through its broadband connections. In the past four months, the division has tapped a new AOL Broadband president, as well as a new CEO and chairman.

That effort to revamp the high-speed unit was further boosted by last week's deal between parent AOL Time Warner Inc. and AT&T Corp., which unwinds the Time Warner Entertainment L.P. partnership. That transaction gives AOL's high-speed offering its first berth on an unaffiliated MSO's systems — those of AT&T Comcast Corp., the child of the pending AT&T Broadband-Comcast Corp. merger.

What remains to be seen is if the new management and the AT&T Comcast deal afford AOL a better connection to the broadband market — particularly in forging deals with other MSOs.

The three-year access deal gives AOL a pathway to at least 30 percent of post-merger AT&T Comcast territory, or a total of 10 million homes. It's subject to the closing of the AT&T Broadband-Comcast merger, expected in December, and the closing of the TWE deal sometime in mid-2003.

If so, AOL would offer cable-modem service within four months in Boston, Seattle, Indianapolis and Nashville, Tenn. It's no coincidence that those are systems where AT&T Broadband or Comcast have recently forged access deals with other ISPs.

The remaining 5 million homes passed, covering most of AT&T Comcast's East Coast footprint, will be added in the second year of the deal. In year three, there is an option for AOL to extend access to an additional 9 million subscribers.

The deal is an opportunity to prove that multiple-ISP arrangements over cable can work, according to Lisa Hook, who took over as president of AOL Broadband in April.

AOL's only other cable deal has been with sister company Time Warner Cable. It has rolled out alongside EarthLink Inc., ISP sibling Road Runner (Time Warner Cable's in-house high-speed provider) and several regional outfits.

"I do think that we are at the point where we are able to show on Time Warner Cable that we can launch a multiple-ISP relationship that is beneficial to the cable operator," Hook said. "Road Runner is continuing to grow nicely, and AOL is adding incremental growth on top of that.

"We are continuing to differentiate our broadband product so that it does occupy a different market position than the cable operator's house brand."

The economics have raised some doubts, though. News reports have said AOL will pay AT&T Comcast a per-subscriber access fee as high as $35 to $40, which has left some wondering whether the ISP can generate enough profit after the expense.

Hook declined to provide the access charge for competitive reasons, but she said the deal was cut with economics in mind.

"We think that the economics will work out fine," she said. "This deal compares favorably to the Time Warner Cable deal and for our other distribution deals, so we are quite happy with it."

$54.95 RETAIL TAG

On the consumer side, AOL is also sticking to a nationwide pricing philosophy, charging $54.95 per month for broadband service, including AOL Anywhere remote access.

That is comparatively high. Sibling Road Runner charges $44.95; EarthLink Inc. offers a package at $41.95; and Comcast charges between $39.95 and $44.95 for its entry-level service. AT&T Broadband charges between $42.95 and $45.95 for its entry-level offering.

But being $10 higher doesn't necessarily price AOL out of the market, Hook insists.

"This is not a value brand or a price-driven brand, so we look for ways to build a price-value relationship for our members and to continue to be the product in the market that is compelling and pulls people in despite that price premium," she said.

Sticking to the high price is an attempt to maintain the perception that AOL's services are a cut above the others, said Forrester Research analyst Charles Golvin. By offering services such as instant messaging and parental controls, AOL is trying to set itself aside from more basic cable offerings "in order to preserve that premium perception that is behind the pricing position," he said.

Others, including Yankee Group analyst Adi Kishore, have doubts.

"I don't know that they are going to be able to justify that price point," said Kishore. "I think that is definitely a problem."

AOL's broadband hunt also includes a search for more MSO partners. But it doesn't appear the AT&T Comcast deal is encouraging other operators to jump on board more quickly.

COX PROSPECTS?

Take Cox Communications Inc., which is a prime candidate given its multiple ISP service trial involving AOL and EarthLink in El Dorado, Ark.

Cox is talking to AOL, but the issues are more related to sheer technical concerns than business strategy and marketing, said senior vice president of strategy and marketing Dallas Clement.

Cox assumed control of its data service from Excite@Home Corp. — its now-bankrupt default provider — in February, Clement noted. This summer, it's been busy transitioning a group of Road Runner customers in former MediaOne Group Inc. territories to its own service, he added.

"So we are very, very new to the environment of operating our own [data] platform, and we are trying to establish appropriate methods and procedures, digest what we have and really understand what it means to operate with multiple ISPs," he said. "For us, there is no need to announce a deal before we understand how it is actually going to work — by virtue of the FTC or any TWE arrangement, there is nothing like that that is causing us to do anything that is other than what we can actually execute on."

The Federal Trade Commission required Time Warner Cable to offer multiple ISPs as a condition of the 2000 merger of Time Warner Inc. and America Online Inc.

NOT OVERPOWERING

Some analysts have speculated that AOL's inability to sign on with other MSOs stems from concern that the ISP's brand and marketing might overpower the native service. Hook said that is a theory AOL needs to disprove.

"Absolutely, people have had success with their house brands. But I think that now it is our job to show that we are additive to the market and will not cannibalize their house brand," she said. "What we have seen is we do grow the market, we grow the category and in some cases accelerate the adoption for their own brands — all of which is terrific."

Given Cox's own customer relations and ability to bundle data with voice and video, the MSO doesn't fear it would be overshadowed, said Clement.

"Having said that, I also feel as though AOL is a good company, they have a good product, and they have choices of DSL, etc.," he said. "In terms of just plain old good business, it makes some sense to have other people selling my network.

"So we are having those discussions, and again it is not contentious — it's all about operationally, how do we execute, and so we are working our way through it."

Cox has said it will likely have some sort of deal forged by then end of the year, "and right now, I don't see anything that causes me to think that is bad thinking," Clement said.

Based on the details of other multiple-ISP deals that have been announced, "it seems like what has been done out on the market seems reasonable," he added.

JUICING UP CONTENT

And as No. 4 ISP EarthLink rolls out a technology that eliminates pop-up advertising, there are signs AOL also may be moving away from its heavy ad presentation and toward the more substantial content that earned it early success.

The ISP has recently made several steps toward expanding its content, from AOL Music's Sessions@AOL, which offers recording artists in exclusive studio performances, to the debut in June of four new songs from Bruce Springsteen's new CD, The Rising.

Just last week, it also inked a marketing deal with ESPN to bring X Games highlights and SportsCenter
footage to AOL Broadband users.

Hook said AOL also is working to gain content in from own backyard, via fellow AOL Time Warner properties Warner Bros. and Warner Music Group.

"There are a number of areas where it is happening, where people are working together, and I think that you'll see that more and more," she said.

There have even been rumors AOL might consider a buyout of streaming-media provider Real Networks Inc., which has built up a successful subscription service through RealOne SuperPass. Hook said she had no knowledge of that, nor was it AOL policy to comment on such matters.

The question is, will customers think the content is worth the extra $10 per month? Golvin said there are strong indications AOL customers are finding value in that fare. A Forrester survey indicates that AOL customers are the ISP customers most loyal to their service.

"I think in aggregate, the loyalty number does say those things are meaningful to the customer base," Golvin said.

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