NEW YORK (CNN/Money) -
AOL Time Warner plans to launch a second Internet service under the Netscape name for a cheaper price than its flagship product, a source within the company familiar with the matter said Tuesday.
The service, set to launch in early 2004, will cost $9.95 a month, compared with AOL's premium service that costs $23.90 a month. It will be very basic, including Internet access, an e-mail address, a home page with limited news items, and the Google search function, the source told CNN/Money.
Shares of AOL Time Warner (AOL: down $0.02 to $15.73, Research, Estimates), the parent company of CNN/Money, tipped lower Tuesday.
While there's a chance the service may pull some subscribers from the company's core AOL users, the intent is to block other Internet service providers -- such as EarthLink (ELNK: down $0.64 to $7.56, Research, Estimates) and United Online (UNTD: down $5.19 to $25.73, Research, Estimates) -- from drawing customers away from AOL.
"It's only reasonable to assume that premium priced dial-up services, like AOL, MSN and EarthLink, would be making moves to introduce their brands at lower prices," said Mark May, an analyst at Kaufman Brothers. "I'm not sure that it comes as a huge surprise."
AOL has seen growing competition from cheaper dial-up services, including rival EarthLink, which offers a $10.95-a-month PeoplePC Internet service. United Online, which is the result of the merger of Juno and NetZero, also offers services for $9.95.
"The company is targeting customers who are really focused on price. It's really a different audience [than AOL customers] -- there's a small segment of the market focused on price," the AOL source said. "It's slimmed down, basic Internet access."
EarthLink, United Online shares tumble
The immediate reaction was negative for other IPSs offering discount services, as some investors worried that the new AOL service could steal away market share. Shares of EarthLink sank nearly 8 percent, while United Online shares tumbled 18 percent on the news.
"The stock price drop is nothing more than a knee-jerk reaction," said Mark Goldston, chairman, president and CEO of United Online. "I'm pretty stunned by the drop. AOL has been in the [discount] market for two years ... this is now the third foray by AOL after two hugely unsuccessful forays."
AOL has been offering a $9.95-a-month service recently as a test product under the CompuServe Basic name to customers who planned to close out their AOL accounts because of the price. The company also already offers a second discount service in partnership with discount retailer Wal-Mart (WMT: up $0.43 to $59.38, Research, Estimates).
Discount dial-up services make up about 20 percent of the total dial-up market, according to analysts. United Online, which currently registers 2.55 million paid users, is forecast to corner between 30 and 50 percent of the discount market by the end of 2003.
Meanwhile, EarthLink's PeoplePC service had 197,00 subscribers at the end of the second quarter, according to the company, and AOL's CompuServe Basic claims about 2 million, analysts said.
EarthLink spokesman Julian King declined to comment on Tuesday's stock price drop, but said the company had anticipated AOL's move into the discount market and doesn't expect the rival service to lure subscribers away from EarthLink's PeoplePC brand.
Shares of United Online have soared 173 percent in the last year, while EarthLink's shares jumped 64 percent.
Marketing could be key
Analysts said how much of an effect the new rival Netscape service has on its competitors has yet to be seen.
"It's still unclear to what degree AOL will market the service. They may not be all that aggressive," May said. "This has to be a very successful product to win market share."
The fact that AOL has not marketed its two other discount services heavily, perhaps out of fear it could attract premium service subscribers, leaves open the question of whether it will promote the Netscape service with full force. Some analysts said the service could be used as a feeder into its higher-priced AOL offering.
"While we do not know how aggressively Netscape will be marketed, we believe that AOL TW will selectively use its content as a competitive differentiator, and to try and migrate users to AOL," Mark Zadell, an analyst at Blaylock & Partners, said in a note Tuesday.
Digital services, which are offered by phone and cable companies and provide much faster connections than dial-up services, also have been lowering their prices recently in an effort to win more customers. DSL/broadband services make up about 27 percent of the total market, while premium and discount dial-up add up to 73 percent, according to May.
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