Time Warner re-invents AOL to take on Google

Time Warner has ripped up the old business model for AOL in a last ditch attempt to save the internet pioneer it merged with at the height of the dot.com boom.

AOL will stop trying to sell internet access and instead turn itself into a pure online media business, dependent on advertising revenue and competing directly with Google, Yahoo and Microsoft's MSN.

The bold move comes as AOL is haemorrhaging more than 10,000 subscribers every three months. The 17.7 million that remain will be told that, from next month, they will no longer have to pay for e-mail, chat and entertainment.

The adoption of the plan, rubber stamped by Time Warner's board last week, is a triumph for Jeff Bewkes, the chief operating officer who assumed responsibility for AOL at the start of the year. Its success or failure will determine whether he stays as favourite to succeed Dick Parsons as Time Warner chief executive.

AOL lost 976,000 subscribers in the second quarter of the year, as dial-up subscribers switched to the faster broadband services offered by rivals and content-only customers decided that access to an AOL e-mail address was no longer worth the money.

But Mr Bewkes said the new strategy means there is now "no reason for anyone to leave AOL" and from now on "we are going to stop sending our members to our competitors".

Wall Street had begun to fear that there might soon be nothing left of the company which first encouraged millions of Americans to get an internet connection. It was at the height of its pomp in January 2000 when it stunned the world by announcing a $350bn (£186bn) merger with Time Warner. Many parts of the latter's media empire seemed decidedly "old economy" at the time, but it is the cable television assets that are currently blooming while AOL has been a drag on Time Warner shares.

Carl Icahn, the billionaire investor, spent last year harrying the board to get them to sell it or break it up. AOL's European operations are on the block, with deals that will see Time Warner continue to provide content expected by the autumn.

Mr Bewkes explained how he persuaded the board that it was time AOL maximised the number of people visiting its sites, and switched to the advertising-driven model preferred by rivals. "We would be giving up 30 billion to 40 billion page views this year if we didn't do this," he said. "That is the equivalent of 10 per cent of Yahoo, 20 per cent of MSN, a third of Google."

The plan is bold because it will immediately wipe out subscription revenue from up to 6.2 million content-only subscribers. And its financial impact is highly unpredictable because it remains to be seen how quickly the remaining 11.5 million dial-up customers abandon AOL in favour of broadband services from rivals.

Essentially, he is banking on $1bn in cost savings from marketing and supporting dial-up internet access, and then betting that a big marketing splurge ("You've got mail - for free") will attract a whole new set of internet users to AOL's services, enabling the company to attract advertising on its sites. In an optimistic sign yesterday, the company said AOL's advertising revenue rose 40 per cent to $322m.

And Mr Bewkes echoed the rationale of the original 2000 merger - widely doubted by Mr Icahn and others - that there will be synergies to exploit between a revived AOL and the rest of the Time Warner empire. "AOL's extra traffic provides an audience for all the digital product coming out of the networks and publishing sides of Time Warner," he said.