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Monday, July 10, 2006

Could AOL's Plans Hurt Time Warner? (TWX)

Press reports indicate that AOL is considering allowing a large portion of its paid subscriber based to begin accessing the company's content free of charge. The hopes are that this will build audience figures and page views so that AOL can compete more effectively for online ad dollars with companies like Yahoo! and MSN.

Unfortunately, the move is as risky as shooting a cigarette out of a woman's mouth with a gun held over the shoulder and a mirror used to view the target.

For the three months ending March 31, AOL's subscription revenue was $1.538 billion. Advertising revenue was $392 million. Although it is unclear how much of the subscription revenue might disappear in the move, if even a third goes away, advertising would have to rise 50% to offset the drop. It is also unclear what cost savings the Time Warner internet unit would have if its can lay-off thousands of employess who support its subscription business.

Yahoo!'s entire revenue for the same first quarter 2006 was $1.567 billion, so the pool of internet advertising dollars may not be large enough to accomodate the move by AOL.

According to NetRatings, Yahoo! had 105.4 million visitors in April. MSN had 92.8 million. Google had 92.1 million and AOL had 70.4 million. Based on these figures, even if AOL passed Yahoo! in total visitors and could reach the Yahoo! ad revenue level that makes up most of its over $1.5 billion in revenue, its would not come close to replacing its subsription sales base.

AOL's move may seem attractive at first, but it is not an action that most sane people would take.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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