February 3, 2003
As Broadband Gains, the Internet’s Snails Fall Back
By SAUL HANSELL
America Online now has some company in the Internet doghouse. Last week, the company said the number of subscribers to its flagship Internet service, by far the nation’s largest, had fallen in the fourth quarter, the first decline in its history, further contributing to the woes of its parent, AOL Time Warner.
But executives at the America Online division can at least find solace that its plight is shared by the other leading dial-up Internet access providers, EarthLink and Microsoft’s MSN, which also have shrinking numbers of dial-up subscribers.
The problem is speed. Consumers have been dropping their slow dial-up services and switching to faster service, called broadband. AOL and the other dial-up leaders do offer broadband service, but the latest quarterly results show that consumers are shunning these offers, despite increased promotion. Rather, they are buying broadband services offered by cable and telephone companies.
“People still look to the telcos and the cable guys first for broadband service,” said Jed Kolko, who is an analyst with Forrester Research.
Final results are not in from every company, but it appears that broadband subscriptions in the United States increased to about 16 million at year’s end from 10 million a year earlier, out of about 60 million total households online. The broadband offering by the three big dial-up players totals no more than 2 million subscribers.
A recent study by Nielsen/NetRating found that the number of people who connect to the Internet at home over dial-up connections had actually started to decline as broadband users increased by 59 percent over the last year.
“We were surprised by the rapid acceleration of broadband adoption in the home,” said Bob Visse, the director of marketing for MSN at Microsoft.
At year’s end, America Online, had 26.5 million subscribers, a loss of 176,000 from the previous quarter. For last year, it added only 1.2 million subscribers, far less than the 3.7 million it added in 2001.
AOL said its marketing campaigns were less effective in the fourth quarter than it expected. As a result, the number of dial-up customers paying the full $23.90 monthly price increased only slightly.
But AOL reduced the number of customers that are offered free or discounted service as an attempt to keep them from canceling altogether.
At year’s end, AOL had about 650,000 broadband subscribers, up only a handful in the fourth quarter, despite a new television campaign and heavy promotion on its own service.
Even more surprising, Microsoft, which thought it would capitalize on AOL’s problems with a fancy new product and a $300 million multimedia blitzkrieg for its butterfly mascot, saw no growth in the quarter; it has nine million subscribers for its various MSN Internet services.
Microsoft said the total included a decrease in use for its narrowband Internet service and MSNTV service, formerly WebTV, offset by increases in its broadband service and its Hotmail extra-storage service (which offers a larger e-mail box). John G. Connors, the company’s chief financial officer, told investors last month that the company would not meet its earlier goal for subscriber growth in the first half of this year.
EarthLink, the third-biggest Internet service provider, kept its subscriber count flat in the final quarter of last year, at 4.8 million. But that masked a reduction of 70,000 dial-up subscribers, offset by acquisitions that added 130,000 subscribers and the addition of 98,000 broadband subscribers. If it were not for acquisitions, EarthLink’s dial-up subscriber count would have declined by 8 percent last year, Goldman, Sachs estimates.
“This is no surprise for us,” said Charles G. Betty, EarthLink’s chief executive. “We saw the narrowband market peak two years ago.” Mr. Betty estimates that four million households got dial-up Internet access for the first time last year and that fewer than three million newcomers will enter the market this year.
He said that EarthLink was betting the market would split and that many customers would move to broadband service and many more would gravitate to lower-cost dial-up services. EarthLink has bought PeoplePC to compete with United Online’s growing $9.95-a-month dial-up services.
America Online is still by far the leader in one important measure: profits. Last year it had Ebitda, or earnings before interest, taxes, depreciation and amortization, of $1.8 billion on sales of $9.1 billion. That is down from Ebitda of $2.3 billion in 2001, and this year the measure will decline again, analysts estimate.
Still, EarthLink and MSN have never made a profit, although they both intend to soon. United Online, posted its first profit, of $1.5 million, in the third quarter. And even SBC Communications, the phone company with the most broadband subscriptions, is still losing money on them. (The cable companies do not report publicly on their broadband profitability.)
The other full-price dial-up services are also losing ground. SBC’s dial-up service, mainly the venerable Prodigy service it had acquired, has fewer than half of the customers it did a year ago. And even a venture with Yahoo to add features to SBC’s dial-up offering could not prevent the service from losing 150,000 subscribers in the fourth quarter alone. AT&T will no longer discuss how many subscribers it has for Worldnet, its dial-up Internet service provider, which had 1.4 million subscribers a year ago, according to ISP-Planet, a Web site.
The major telephone companies are all expanding their broadband subscriptions for what is called D.S.L. or digital subscriber line, service at an annual pace of more than a 50 percent. In the last quarter of 2002, SBC Communications added 245,000 subscribers, Verizon Communications added 148,000, and BellSouth added 97,000.
The cable companies have been growing slightly slower because they have a greater share of the market, but most have yet to report their fourth-quarter results.
Last week, AOL Time Warner said that Road Runner, the high-speed service of its cable systems, added 291,000 subscribers in the fourth quarter, more than any broadband service to report results so far. That leaves Time Warner cable with 2.6 million broadband data subscribers, or 24 percent of its total customers.
AOL, by contrast, sells broadband service to only 2.5 percent of its users.
“AOL, the world’s largest Internet service provider, only has 650,000 subscribers, while Road Runner has 2.6 million — go figure,” said Michael W. Harris, the president of Kinetic Strategies, a consulting firm in Phoenix. AOL’s strategy of charging $10 a month more for America Online’s broadband service than for Road Runner does not appear to be working, he said.
“Most people who are coming to broadband want the most speed at the lowest cost,” he said, “and they are getting that from their cable companies.”
In a conference call with investors last week, Richard D. Parsons, the chief executive of AOL Time Warner, said the company would redouble its effort to justify the price premium of the AOL broadband offering.
“While a number of people are getting AOL over broadband now, the product isn’t really differentiated in a way that we would like,” he said, noting that the company would soon introduce a new service with more features. “I don’t think you are going to be able to look for clear indications of how the new broadband initiative is being taken up by consumers until midyear, because before you start throwing lots of marketing dollars after it, we want to put the product together — we want to do some test marketing.”
Microsoft, too, is looking to refashion its MSN service as a premium add-on for customers with broadband service from local companies. It spent $500 million to develop new features for MSN 8.0, like a software system to detect junk e-mail messages. But the advertising campaign to promote it did not stem a decline in customers for its dial-up service.
Microsoft said it was hobbled by a large number of defections among customers who had signed long-term contracts a few years ago in return for rebates of as much as $400.
“Those customers are very price-sensitive, and they have been going to whatever offer is most attractive,” said Mr. Visse, the marketing director.
Mr. Kolko, of Forrester Research, said that for all of Microsoft’s advertising, it had not been able to establish itself in the fastest-growing part of the market.
“The butterfly doesn’t tell people anything specifically about the broadband service,” he said.
As of the end of the third quarter, Microsoft had 500,000 broadband subscribers as part of a joint venture with Qwest Communications International. It also has a small number of additional subscribers through arrangements where it buys and resells D.S.L. lines from other phone companies. But Mr. Visse said these arrangements were not profitable and so it had not marketed them.
“We’ve decided that we will only grow this business if we can grow it profitably,” Mr. Visse said.
Mr. Betty, of EarthLink, however, questions how big the market will be for the add-on services that Microsoft and AOL are planning, given that they add $10 or $15 a month to the already high broadband bills.
“I’m not convinced that the market for a premium service is anything other than a very small market,” he said.
Copyright 2003 The New York Times Company——-
