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AOL hikes monthly fee
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February 9, 1998: 7:58 p.m. ET
Unlimited accounts to cost $21.95; 500 CompuServe employees laid off
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NEW YORK (CNNfn) - America Online Inc. Monday announced plans to hike monthly unlimited access subscription fees by 10 percent as part of a broad restructuring program.
The world's largest online service company also announced it will cut 500 jobs at the recently-acquired CompuServe division.
News of the rate hike sent shares of AOL (AOL) surging 11-7/8 to a 52-week high of 110-3/8 in New York Stock Exchange trading.
AOL, whose subscribers faced a barrage of busy signals when it shifted to an unlimited use plan in December 1996, said it is raising the fee to $21.95 a month to keep pace with the cost of the increased usage. The change takes effect in April.
"Our expanding membership and surging usage confirm that consumers want the content, services, features and ease of use that are uniquely AOL," said AOL Chairman and Chief Executive Officer Steve Case.
Appearing Monday on "Moneyline With Lou Dobbs," Case said the decision to raise rates had nothing to do with the CompuServe acquisition and that AOL still had thousands of competitors. (135K WAV) or (135K AIFF)
Case said usage of the system has tripled since many of the subscribers opted for the unlimited plan. He said the average AOL user was online for 7 hours before unlimited pricing. That figure jumped to 23 hours once unlimited use went into effect.
"Each additional minute our members spend online adds to our cost of delivering unlimited- use service. Revenues from advertising, commerce and other sources continue to grow as anticipated, but are not yet able to cover the growth in member usage," he said.
The move is significant because many Internet providers, including Netcom On-Line Communication Services Inc., which pioneered unlimited pricing, were moving away from that model at the time AOL was putting its plan into place. Netcom and other Internet providers said they couldn't make money charging $19.95 a month for unlimited plans.
Netcom has since re-packaged its offerings in an attempt to cater to the business community.
However, AT&T WorldNet, which currently has more than 1.1 million subscribers, is taking a wait-and-see stance. The company said although it routinely reviews usage to determine a price that would support a consistent level of service, it doesn't plan any immediate pricing changes.
Still, Dan Schulman, vice president in charge of AT&T WorldNet, left the door open for a future announcement.
"We've seen a tremendous increase in the number of WorldNet subscribers as well as the number of times they log on and the amount of time they spend.
"The average unlimited customer spends more than 40 minutes a day on the Internet and we've seen a 200 percent increase in e-mail usage," he said.
Schulman said the company constantly looks at the amount of investment needed to keep network quality high for subscribers and takes into account the amount of time spent online.
"We're always trying to have the right balance of price and value," he said.
America Online said it is leaving the cost of two other monthly pricing options intact. Members who already have an Internet provider can have unlimited connect time to AOL for $9.95 a month. Members also can opt for a low-level usage plan for $4.95 a month. That includes three hours of connect time, with each additional hour costing $2.95.
Some analysts were surprised by the timing of the announcement, although others feel that subscribers are willing to pay more for quality service.
Asked to comment on the timing, Keith Benjamin, a technology analyst at Banc America Robertson Stephens, said it was made "because Steve Case thought he could get away with it."
Benjamin said the price hike could add up to 50 cents a share to AOL's earnings, although the company told analysts not to expect any large increases from the price hike.
Traver Kennedy, managing director of the Abderdeen Group, a technology consulting firm, said price isn't necessarily the most important thing to consumers.
"Price isn't the only factor that plays into a decision on Internet services. Clearly, we've already seen indications that users are happy to pay a higher price," he said.
Kennedy said AOL's move will likely up the floor for the cost of unlimited Internet accounts.
"Because of AOL's dominant position, particularly for consumers, this does set a new benchmark price floor... This will open more opportunity at the low end, but all ISPs (Internet service providers) want to move to a higher price by giving customers more speed or value-added services," he said.
Kennedy said AOL and other service providers do need to watch pricing moves carefully, since users have already shown they're not loyal to one particular service. The amount of time a customer stays with one service now averages about nine months, he said. Subscriber turnover, known in the industry as the "churn rate," is already a problem for AOL.
However, Kennedy said customers are more concerned about getting a flat-rate plan than they are about small increases in the monthly rate.
"By simplifying [pricing], you get more people to sign on because they know what they're going to spend. In North America, people are used to paying a given price for a level of service," he said.
In other news, AOL announced a shifting in its management structure. Robert Pittman, president of AOL Networks, will become president and chief executive officer of America Online with Case staying on as chairman.
Ted Leonsis, president of the creative arm AOL Studios, will head up the creation and development of local content for the company's various brands worldwide, including AOL and CompuServe. One of those changes will be leveraging the popularity of AOL's Web site, which many audits show to be the most popular Internet site.
Lennert J. Leader, AOL's chief financial officer, will become president of AOL Investments. He will be in charge of managing AOL's growing investment portfolio. Leader will be charged with guiding its mergers and acquisitions.
AOL blamed the job cuts at CompuServe on redundancies. Officials said the company will refocus on improving the quality of core CompuServe services in an effort to stem losses.
AOL said it is offering affected employees severance packages ranging from six months to more than one-year's salary, depending on seniority, and also will provide outplacement assistance.
Mayo Stuntz Jr., president of CompuServe Interactive Services, said his primary goal in 1998 is to solidify CompuServe's American subscriber base.
"Our revitalization program will enable us to take full advantage of AOL's scale, resources and experience to improve CompuServe and make it more competitive in the U.S. market," he said
AOL also said it was conducting a review of SpryNet, the Internet provider it obtained through its CompuServe acquisition. In addition, AOL is canceling the "C" Web forums project that was started at CompuServe before the acquisition. Prior management saw "C" as an attempt to put some of CompuServe's most popular discussion forums on the Web. The company had planned to offer read-only access for free and charge a monthly fee that included posting privileges.
AOL is scheduled to report fiscal second quarter financial results on Tuesday. According to First Call, analysts expect the company to report a profit of 16 cents a share, up from a loss of 60 cents a year ago.
--by staff writer Cyrus Afzali
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