AOL Is Moving Closer to Jettisoning Dial-Up

By Zachary A. Goldfarb, Frank Ahrens

Tuesday, August 5, 2008

AOL is finally in a position to shed the dial-up-access business that once offered tens of millions of people their first glance at the Internet.

In April, parent company Time Warner promised to make clear its plans for AOL's future by its second-quarter earnings call, scheduled for tomorrow. And it "won't disappoint," a source close to the situation said yesterday.

Time Warner had already indicated earlier this year during public discussions over restructuring the struggling AOL that it would consider spinning off the dial-up business. The unit, which turned AOL into the nation's leading Internet company in the 1990s, has hemorrhaged subscribers for years.

AOL has financially isolated the dial-up business, said sources who spoke on the condition of anonymity because the company is in the quiet period before earnings are announced. The separation would make it easier to sell the dial-up business outright or sell a piece of it to a partner while retaining access to the monthly cash generated by subscribers.

Time Warner also has had widely reported discussions with Yahoo about merging AOL's audience and advertising properties — a vast array of online sites and a massive advertising network — with Yahoo's, but nothing has come of the talks.

In the end, Time Warner could still choose to hold on to either or both the audience or the dial-up businesses, the sources said.

Tuna N. Amobi, an analyst with Standard and Poor's, said providing Internet access, developing content and selling ads have grown far apart as business models over the years. "It really makes sense because of the way the landscape has been evolving," he said. "It simplifies the structure."

The moves come as Time Warner chief executive Jeffrey L. Bewkes has taken ambitious steps to transform AOL into a leading online advertising network, known as Platform A. AOL moved its headquarters from Northern Virginia to New York earlier this year to be at the center of the advertising world.

AOL long had been anchored in Dulles. About 100 people work on dial-up in Dulles, and another 100 work overseas. AOL's subscriber service had 8.7 million customers in the first quarter, a decline of 3.3 million from the first quarter of 2007.

A widely discussed potential acquirer of the dial-up business is EarthLink, an Atlanta company that specializes in dial-up.

Another option is that private-equity firms might be attracted to the dial-up business's subscriber revenue. Recent tightness in the credit markets might make financing a private-equity deal difficult, however.

Time Warner has spent more than $1 billion to beef up the advertising network, acquiring six ad companies. Their integration, however, has been rough.

Advertising growth across AOL lagged far behind the industry in the first quarter. AOL ad sales grew at 1 percent compared with 18 percent overall on the Web.

AOL is likely to hang on to its advertising and content business if ad sales pick up. Some analysts say the integration of AOL's various ad companies, while painful, is largely complete and could yield benefits.

"If you compare where they are today with where they were last year, there's a lot of progress," Amobi said. "They've reshuffled the sales force all into Platform A. It used to be that they were all in different silos."

Media analyst Laura Martin of Soleil Securities Group said advertising growth could come in at 20 to 30 percent this quarter. "We're hoping that it goes back to more industry-like levels," she said.

Martin said more work was necessary, though, before AOL could declare victory in its effort to revamp. "It's in the middle of the turnaround," she said. "It's not finished yet."

Tagged: AOL, business, Dulles, technology

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