AOLs Pricing Upgrade Opens New Service Prospects

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Steve Case is not an idiot.

A year ago, shortly after America Online's chairman
unveiled a $19.95-per-month, unlimited, flat-rate service, I asked him when he would start
to unbundle features or introduce a la carte pricing. Amidst the network overloads and
customer unrest of that period, he admitted that it would be "idiotic" to make
any changes in pricing or packaging.

In Internet years, 14 months is nearly an eternity. So it's
neither surprising nor idiotic that AOL has now unveiled plans to bump its rate up 10
percent, to $21.95 per month, starting in April. More quietly, it has laid plans to
"unfeature" the service, as newly promoted AOL president Bob Pittman
characterizes it, although the exact nature of this fragmentation is not yet clear.

Now that the fury has died down about access problems and
about AOL's constant and seemingly arbitrary content restructuring, the company feels that
it is free to recalibrate its services. Not to mention the fact that thanks to its
CompuServe acquisition, AOL now controls more customers than the next 15 Internet-access
services combined.

Despite a ripple of complaints, AOL's price increase
appears almost irrelevant compared with cable's effervescent rate brouhaha. Ah, the joys
of unregulation. AOL's juggernaut becomes even more significant in the context that
Internet-access fees and usage can affect cable pricing and content plans.

By setting a new price benchmark, AOL is giving other
Internet-access providers the opportunity to raise prices, too -- much-needed increases
that many ISPs have been eager to initiate. Yet, dozens of ISPs quickly vowed to hold the
line at $19.95 or lower -- seeking to lure customers away from the "training
wheels" role that AOL has served in introducing millions of users to the online
world.

Some specialized ISPs have slipped in with access packages
that levy extra fees when users exceed several dozen hours per month. Prodigy (with about
1 million customers) vehemently promises to stick to the $20 price. Of course, none of
these packages matches the always-on, high-speed features of cable-modem service -- but
they do offer pointers about customers' price sensitivity (or lack thereof) and their
interest in value-added content packages.

Case acknowledges that AOL may lose subscribers, yet his
forecasts for annual growth call for a net gain of 2 million to 3 million users per year
for the next few years -- with many of them coming from new overseas services in Europe
and the Pacific Rim. Through the past year of chaos and upheaval, AOL's customer base has
climbed 43 percent, from 7.7 million to 11 million customers. (About one-third of the new
users are outside of the United States.) AOL has become a Wall Street darling again,
thanks to a stock price that has tripled from about $40 to nearly $120, bolstered by a
balance sheet that shifted from a $129 million quarterly loss to a $20 million quarterly
profit during 1997.

Thanks to new financial resources, AOL is also accelerating
projects at its new AOL Investments unit, which will manage $200 million of equity stakes
in music, travel, discount telephony and other services that the company can sell to its
membership. And that's where the real value of AOL may shine through. One analyst
anticipates that AOL will have a $1 billion bankroll for new ventures during the coming
year.

These relationships with subscribers -- however tenuous at
times -- seem to be sticking. In an environment with so many choices for Internet access
and content, millions of users are opting for the formulaic simplicity that hard-core Web
surfers sneer at. By building customer loyalty and longevity, AOL could be making it
harder for new high-speed providers to draw customers away from it. But AOL is poised to
put its content onto others' platforms.

Not surprisingly, AOL's pricing rearrangement comes as the
company reignites its flirtation with the cable and video industry. Several initiatives
seem to be under way, variously dubbed "AOL-TV." Some of these get their
momentum from the entertainment and marketing brands that AOL is establishing -- even
faltering ventures such as "Entertainment Asylum," from AOL Studios. Pittman --
drawing on his MTV and Viacom cable background -- acknowledges that he expects AOL to
invest in broadband technology and multimedia projects that encompass video, graphics and
interactive entertainment.

In its role as a content-producer and packager, AOL has
been developing Digital Cities (local information in more than one-dozen markets). Its
Electra women's site and many of its "channels" are already proving themselves
as potential launching pads for multimedia programming that can move beyond the narrowband
confines of a proprietary service.

Case and Pittman have become poster guys for the new
interactivity. Arm-twisting. Arbitrary. Single-minded. But rich, and definitely not
idiots.

I-Way Patrol columnist Gary Arlen signed on with
QuantumLink before Pittman was programming Madonna.

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