Street Not Keen on AOL Plan

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New York -- AOL Time Warner Inc. stock got hammered Tuesday, dropping 14 percent in the wake of a much-anticipated analysts' meeting that mapped out the new direction of its America Online Inc. Internet unit.

Although AOL president Jonathan Miller and several other AOL Time Warner executives spent more than four hours Tuesday detailing the plan, investors appeared to focus on the declining ad revenue at the troubled online unit and sold the stock in droves.

AOL stock was down $2.36 each to $14.21 per share in 4 p.m. trading Tuesday, a 14.2 percent decline. The stock had been as low as $14.05 in earlier trading Tuesday, down $2.52 each.

In his presentation to analysts here Tuesday, Miller outlined a plan where AOL would refocus on broadband content, but he added that online-advertising revenue would be down 40 percent to 50 percent in 2003.

That decline, he said, is largely due to the expiration of long-term deals. With the decline in high-margin advertising revenue, AOL said, cash flow at the unit for 2003 would be down 15 percent to 25 percent.

On the AOL Broadband side, Miller said the Internet-service provider will take an MSO approach, targeting more lucrative broadband customers and focusing on upselling them premium services.

AOL Broadband also intends to offer exclusive content from AOL Time Warner properties like Warner Music Group, Time Inc., film studios Warner Bros. and New Line Cinema and its Home Box Office premium-cable channel. In addition, AOL will work to develop exclusive Web content with these and other content providers. AOL added that its first venture along those lines would involve HBO Comedy.

The moves are an effort to step away from AOL's previous strategy of growing subscriber additions to one of fostering growth though adding value to the service.

The AOL Broadband add-on has been available for $14.95 per month -- and it will stay at that price point -- but AOL had previously used it as a retention tool. Now, the service will be heavily marketed to AOL narrowband users to encourage them to migrate to the broadband service.

"We missed the first wave of broadband because we were too focused on connectivity and too timid about pushing our products," Miller said. "That ends now."

AOL has had success in striking deals with telephone companies using their digital-subscriber-line services, but it has had less luck in landing high-speed-data carriage deals with cable operators. So far, only Time Warner Cable -- a division of AOL Time Warner -- and Comcast Corp. have agreed to access deals with AOL.

The company acknowledged its sometimes-adversarial relationship with MSOs, but Miller stressed that it is working hard to change that. For example, past cable deals required that AOL perform all provisioning and billing for the AOL Broadband service. Now, the cable operator will perform those functions, Miller said.

AOL reiterated its 2002 revenue guidance of between $8.8 billion and $9 billion. Advertising and commerce revenue should be between $1.5 billion and $1.6 billion. Cash flow at the online unit is expected to be $1.7 billion to $1.8 billion.

AOL Time Warner also affirmed overall company guidance for 2002, with cash-flow growth expected to range between 5 percent and 9 percent on revenue growth of 5 percent to 8 percent.

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