AOL: You've gotta catch up
The once-dominant online service has some swell ideas for online networking products. Unfortunately, other companies thought of them first.
By Stephanie Mehta, FORTUNE senior writer

NEW YORK (FORTUNE) - AOL is struggling to break out of a prolonged slump. But will rolling out new-and-improved versions of other companies' innovative ideas be enough?

A couple of top-level AOL executives came to New York this week to demonstrate the company's latest product launches: AIM Pages, a social-networking site that lets users create their own pages and AIM Phoneline, a free computer phone service.

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The good news for AOL, which, like, is owned by Time Warner (Research), is that AIM Pages is easier to use and a bit more thoughtfully designed than, the leading social-networking site. And AIM Phoneline has some big advantages over Skype, the world's biggest peer-to-peer Internet telephony service.

The bad news for AOL: MySpace and Skype already exist.

As AOL makes the transition from provider of old-fashioned dial-up service -- the company said it lost a larger-than-expected 835,000 subs in the first quarter -- to a collection of sites supported by online advertising, services such as AIM Pages and AIM Phoneline will be key. (AIM stands for AOL Instant Messenger, the company's real-time online communication tool.)

And both launches boast some nifty features. AIM Pages, a trial version of which launched this week, is linked to users' IM buddy lists. When a user updates her AIM Page, all her buddies will be alerted to the new content, and they can view the page by clicking on a little icon.

AIM Phoneline will offer users a free local phone number for inbound calls, while Skype charges a monthly fee of about $4 for its SkypeIn service. John McKinley, president of digital services at AOL, says the free phone number is "a perfect complement to people living on their mobile phones" but who don't want to give those digits to, say, a potential date or casual acquaintance.

AOL has good reason to pursue social-networking and communications services: They're "sticky" services that keep users and paying advertisers coming back for more. But that's also AOL's challenge. It will be hard to get MySpace or Skype users to switch to the AOL offerings if all their friends are part of those other communities.

Playing catch-up

More worrisome, however, is AOL's pattern of improving on other companies' ideas rather than inventing new services itself. Since its inception, AOL has billed itself as a leading online communications and community-builder. Doesn't that sound like a company that should have come up with MySpace?

And just because AOL builds a better mousetrap doesn't mean the mice will come: Last year it unveiled AOL Total Talk, a broadband phone service that is, by many measures, easier to navigate than the one offered by voice-over-IP pioneer Vonage. Total Talk hasn't caught on, though McKinley says the experience helped AOL build AIM Phoneline.

To be sure, AOL has had bigger issues to worry about in recent years, and it had to invest heavily to make it easier for marketers to publish their ads on AOL sites. The company also has reorganized, and McKinley says AOL is now in a position to start unveiling some brand-new services.

"We don't want to tip our hands," he says, "but we have a bunch of things coming that show we're playing offense."

Time Warner shareholders can only hope. Despite a trickle of positive developments at AOL - the shift to the portal strategy, a successful webcast of the Live8 concerts last summer, increased online ad sales and a big investment by Google (Research) - Wall Street still values AOL as a declining dial-up operator.

And even when AOL is doing interesting stuff, the perception is that its deep-pocketed competition - guys like Microsoft (Research), Yahoo (Research) and even partner Google - are one step ahead.

As part of his demonstration of AIM Pages, Jim Bankoff, AOL's executive vice president for programming, community and messaging, emphasized that AIM Pages would open AIM up to allow developers to write applications and create their own modules for the service - basically making it easier to create "mash ups" of multiple services.

"Now that we're on the web, the next stage is to over index in embracing open standards," he says. But it also seems like an acknowledgement that a lot of innovation on the Web is going to come from outside AOL.

That's fine. All the big players on the Internet are finding great ideas elsewhere. Yahoo didn't invent photo sharing but it got a big boost in the area by acquiring Flickr. Ebay (Research) bought its way into the telecom space with its purchase of Skype and News Corp. (Research) spent $580 million to buy MySpace's parent. AOL could take a leading role in the next hot application simply by making AIM the go-to place for smart, inventive people who like to tinker on the web.

But that doesn't mean AOL can stop trying to invent new stuff, too. In his presentation, Bankoff pointed out that 2006 marks the 10th anniversary of the "Buddy List," the tool that helped make Instant Messaging a mass market product.

It is a swell thing to celebrate, but it also is a poignant reminder that IM probably was AOL's most recent great invention. Time Warner shareholders surely are hoping it wasn't also AOL's last.

Plugged in is a daily column by writers of FORTUNE magazine. To reach today's columnist, Stephanie Mehta, e-mail Top of page

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