The Turnaround of AOL

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Case Details:

Case Code : BSTR195
Case Length : 19 Pages
Pages Period : 2001-2005
Organization : AOL, Time Warner
Pub Date : 2006
Teaching Note :Not Available
Countries : China
Themes: Corporate Turnaround
Industry : Media, Entertainment, and Gaming

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"AOL's dial-up business is a classic cash cow - hugely profitable today but inexorably declining. Take out AOL's Internet access business, and you still have a new-media powerhouse." 1

- Kevin Werbach, Assistant Professor, Legal Studies and Business Ethics, The Wharton School of the University of Pennsylvania in 2005.

"We have 110 million unique visitors every month; we are close to being a leading portal already. We have a great stable of brands that we can link together for an improved use as front door. We envision as a new portal that really leverages consumer expertise that we've learned over the years and leverages our existing Web audience." 2

- Joe Redling, Chief Marketing Officer, America Online in 2005.

AOL - Back On Track

In November 2005, the US-based Time Warner, a leading global media and entertainment company, reported an 80% increase in net income in the third quarter of 2005. In the same quarter, net income increased to US$ 897 million as compared to US$ 499 million in the corresponding quarter in 2004 and revenues increased to US$ 10.54 billion from US$ 9.94 billion.

The revenues of America Online (AOL), a division of Time Warner, fell by US$ 100 million US$ 2 billion. This reduction was attributed to the loss of 678,000 dial-up service subscribers in the third quarter, leading to a fall in subscriber revenues to US$ 1.66 billion (Refer Table I for the details of quarter wise revenues and operating income of AOL). However, one positive aspect was the increase in revenues from online ads by 28% to US$ 328 million. Richard Parsons (Parsons), Chairman and CEO, Time Warner, said, "It's a priority for us to accelerate the transition to this audience-based business of our AOL business model, it doesn't mean that we are going to give up the subscriber business. Trends are really favoring growth in online advertising."3

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The growth in the advertising business was a result of Parson's plans to establish AOL as an advertising support service rather than an internet access provider. With customers shifting to broadband,4 AOL was losing subscribers rapidly. AOL had 20 million subscribers by 2004, having lost 2.6 million subscribers in a period of one year.

AOL's dial up business, though still profitable, was showing a declining trend in revenues. Parsons' strategy was to keep the dial up business intact, as it generated considerable revenues and also work towards increasing revenues from advertising. His plan was to develop AOL on the lines of Yahoo! and Google by concentrating on the internet advertising revenue model. Time Warner was heavily criticized after it merged with AOL in 2001. Post merger, the share price of AOL Time Warner fell by 60%. There were demands from several quarters to sell off AOL, particularly after the dotcom bubble burst in the early 2000s. At this time, there was a steep decline in the subscriber base of AOL and correspondingly significant reduction of revenues.

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1] "AOL: In Search of a New Strategy," Knowledge@Wharton, November 02, 2005.

2] Anderson Diane, "AOL Builds a Beta Version, but will Users Find it Better?" Brandweek, June 20, 2005.

3] Vise David A, "Time Warner to Buy Back More Stock", Washington Post, November 03, 2005.

4] Broadband refers to a high-speed interactive TV and PC cable service. The transmission technique allows several data channels to be carried over a common wire using a wide band of frequencies. Information can be sent on many different frequencies or channels within the band concurrently, allowing more information to be transmitted in a given amount of time. As customers asked for more features in cable network services, the demand for broadband networks grew drastically in the US during the early 21st century. Following this, many companies began investing in broadband networks to leverage the growing demand.


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