AOL plans to move offerings outside its "walled garden" and onto the Web

DULLES, Va. — America Online helped the United States discover the Internet. But millions have learned to surf the Web without it, and the world's biggest Internet service provider is reinventing itself in a bid to become competitive again.

AOL still makes money getting people online via dial-up modems for $23.90 a month. That market is shrinking fast, though, as subscribers defect to faster broadband connections or cheaper dial-up services.

The so-called walled garden that AOL created for its members in the 1990s — a private network of Web sites reachable only if you have proprietary AOL software — also is becoming harder to sell. Jamie Stein, a 27-year-old Hollywood script consultant, dropped his membership after discovering how much was available free on the open Web. Like many, he feels he outgrew AOL.

"It seems like the layman's way to explore the Internet," Stein said recently. "At this point, it's becoming less and less of a necessity."

But AOL has a plan, which executives at corporate headquarters here describe as one of the biggest strategic shifts in the company's history. It's to move many services once reserved for paying members — including music, a search engine, video clips and shopping sites — onto the open Web to attract more visitors and advertisers.

The moment of truth will come this summer, when the company expects to release a revamped AOL.com homepage, a flashy version of its instant messaging program and a new Web-based e-mail service. AOL executives hope the homepage will become a starting point for Web surfers much as Yahoo.com and MSN.com are now — sites that draw more visitors and reap higher profits than AOL.

To succeed, AOL has to move enough offerings outside the walled garden to draw nonsubscribers but at the same time retain a large enough slate of special features, such as virus protection and monitored chat rooms for kids, so subscribers will feel they're still getting something for their money.

The company also is taking deliberate steps to overcome its reputation as a service reserved for Net neophytes and regain the confidence of the advertisers it burned with brash deal-making during the dot-com boom.

"AOL is not only having to make changes to meet existing demands in the marketplace, they're also having to fix the sins of the past," said Jeff Lanctot, a vice president with interactive-ad agency Avenue A/Razorfish.

New role of underdog

AOL as underdog is a big change from four years ago, when it completed the defining deal of the dot-com era: the $106 billion acquisition of old media giant Time Warner.

That union didn't work out as planned. While Yahoo!, Google and other Internet titans have grown explosively thanks to a resurgence in online advertising, AOL has had to lay off employees to keep its profit from dropping. That's because advertisers and subscribers fled AOL; paying membership is down to 22.2 million in the United States after hitting a peak of 26.7 million in September 2002.

At the same time, AOL generated $8.7 billion in revenue and nearly $1 billion in operating income last year. Company executives figure they should try to milk that for as long as they can.

So they're running a big advertising campaign touting the safety of the walled garden. They want not only to bring in new members but also to keep faithful subscribers happy.

Doug Beaver, an Arcadia, Calif., salesman, learned how to navigate the online world through AOL in 1995 and has stayed with the service, paying $14.95 a month for a broadband version even after getting a fast DSL connection through SBC-Yahoo. Beaver, 57, knows news, sports scores and e-mail are available for free elsewhere but can't imagine giving up the AOL software for fighting spam, viruses and spyware.

"I use the Internet a lot for work, and to me, peace of mind is worth what they charge," he said.

Increasing ad sales

For AOL, the key is to increase online ad sales faster than subscription fees fall. Banner ads, video ads and text ads delivered along with search engine results generated $1 billion in revenue for AOL last year, a 28 percent jump from 2003, helping to offset a 2 million drop in subscribers.

It's also trying to earn money selling a broadband version of AOL, access to faster connections with sister company Time Warner Cable and new services such as a plan for making calls over the Net.

When it comes to getting new visitors to its Web sites, AOL has a head start: It owns several popular sites on the open Web, including MapQuest, Moviefone and Netscape. Even as the number of subscribers has shrunk, the number of people visiting AOL's Web sites has grown, to more than 106 million.

"What I'm trying to get to over time is a balance" between subscriptions and advertising, said AOL Chief Executive Jonathan Miller.

The company stuck its nose outside the garden last spring when it quietly moved most features from AOL Music onto the open Web. Soon, without any promotion, 3 million to 4 million nonsubscribers were visiting the site each month to watch music videos and listen to live songs recorded in AOL's studios.

That allayed the company's fears: People found AOL Music on the vast Web, and subscribers didn't bolt just because songs were also available for free to nonmembers.

AOL then launched a comparison-shopping service, Pinpoint, in September. This week the company is starting a similar service for travel, called Pinpoint Travel. AOL intends to make sure it appears in the search engines of Google, Yahoo and others. Most AOL offerings don't appear in search engines now because their Web crawlers can't penetrate the walled garden to index what's there.

Opening services to the general Net "makes the potential for my audience unlimited," said AOL Travel General Manager Jeff DeKorte. "I've got the entire Web to shoot for in order to build this business."

AOL also improved its search engine, which is powered by Google and generates revenue from text-based ads. The engine was moved onto the open Web in January and will be built into most of AOL's services.

New products' goal

One goal of the products expected this summer is to help shed AOL's image as Internet with training wheels.

The new version of AOL Instant Messenger, or AIM, is designed to let users send e-mail and text messages to cellphones. The Web-mail program would let users check several e-mail accounts on one page. And AOL hopes people surf to its pages through the company's browser, which is being tested now.

AOL won't flourish without convincing advertisers that it is a good place to do business. That will mean abandoning proprietary technology that for years has forced companies to redesign their Web ads specifically for AOL and has prevented them from tracking their performance.

America Online also has to make up for a history of bullying tactics and failed promises by its aggressive sales team, which forced the company into a settlement with federal regulators over improper accounting and turned off many spenders for years.

But Heidi Browning, media director for Organic, a San Francisco ad agency, and executives with other ad agencies said AOL had made huge strides in winning them back.

AOL engineers have nearly finished switching the system to conventional HTML, the standard building block for Web pages. Salespeople have become more humble, responsive and quick to please advertisers.

Said Browning: "It's been a true renaissance."