High Hopes for Free AOL

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Time Warner Inc.’s plans to revamp its AOL online service involve offering service for free to broadband subscribers in an effort to attract greater advertising revenue.

The announcement last week came as no surprise. But though earlier reports had cited internal estimates that AOL parent Time Warner was expecting a big earnings hit as the Internet-service provider’s narrowband users defected, Time Warner management said it believes earnings will increase as a result of the new strategy.

Driving that profitability: a billion-dollar operating cost reduction by the end of next year, by slashing subscriber acquisition marketing costs. Also adding to cost savings, AOL said it would cut as many as 5,000 jobs in the next six months, according to a Reuters report.

AOL will provide free software to broadband customers, including AOL e-mail, instant messaging, a local phone number with unlimited incoming calls, social networking applications; and safety and security features, such as parental controls.

Former AOL members who have left the service within the past two years will be able to reactivate their old screen names.

On a conference call with analysts, Time Warner chief operating officer Jeff Bewkes said that while the former America Online will be giving up some subscription revenue, it will more than make up for that deficit in increased advertising sales.

AOL expects adjusted operating income before depreciation and amortization (AOIBDA, a measure of cash flow) to rise each year from 2007 to 2009 (remaining unchanged in 2006) and advertising revenue should grow at or above market rates over that time. Revenue should rise starting in 2009.