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Well before AOL completed its $106 billion merger with cable operator Time Warner in January, the gigantic ISP dwarfed its competition. Now in AOL Time Warner's wake, its competitors are gearing up to fight for survival with their own high-speed partnerships and aggressive marketing strategies.
"Everyone will be moving away from dial-up. The margins on offering dial-up for these competitor ISPs are pretty low now," says Abby Christopher, a senior analyst with telecom consulting firm Ovum. "AOL's not gonna be threatened by any dial-up competitors."
But there are competitors out there, and those ISPs are looking for the edge that will help them hit the mother lode of high-speed subscribers in 2001.
With right around 27 million Internet subscribers before its merger, AOL still rules the field in dial-up access. At the end of 2000, cable modems were still running well ahead of DSL in the access war. That means @Home, the high-speed ISP portion of Excite@Home, was pacing the market with more than 3 million cable modem subscribers. When the company revealed its year-end results last month, it projected as many as 5.5 million high-speed users by the end of 2001.
Microsoft's MSN Internet Service tried to move near the top of the field of rival ISPs by offering a $400 rebate for customers that signed a three-year contract. Last week, Microsoft ended the program and instead said that it would be offering one free year of MSN for new personal computer buyers. If MSN scaling back its ambitious marketing tactics means another victory for AOL Time Warner, it also gives a spark to the other ISPs going after the broadband customer.
Atlanta-based EarthLink held 215,000 high-speed users--primarily via cable and DSL--and about 4.3 million dial-up users. In the fourth quarter, EarthLink showed a sequential decrease in its dial-up subscribers for the first time in company history, while noting that broadband subscribership jumped 55 percent in the last three months of 2000. Still, EarthLink's agreement to get access later this year to Time Warner's cable networks means that 2001 should be a year of more broadband growth.
After extending its partnership with SBC Communications for another nine years, Prodigy Communications will continue having prime access to the DSL customers in SBC's ILEC areas. Prodigy plans on seeing some serious benefit from riding on the back of SBC for most of the next decade. Through SBC, Prodigy expects to service around 3.75 million DSL customers over the course of their agreement as SBC's preferred wholesale ISP for its Project Pronto initiative
One of the more popular free ISPs, which offers basic dial-up service for no cost, Juno Online Services ended 2000 with 4 million active subscribers to its service and plans to begin migrating them to high speed this year through its partners like Comcast Cable.
More mergers ahead?
According to John Girard, an analyst and director of research for the network center at The Gartner Group, studies show that most high-end Internet users tend to be in their 40s with lots of income. On the flip side, many of the new broadband services ISPs are using to draw subscribers, like digital music subscriptions and instant messaging to rival AOL's product, are targeted at a much younger audience.
"The biggest problem they face is AOL has a tremendous reputation among the younger audiences," Girard said. "I haven't seen MSN or EarthLink or any of these guys derail that reputation."
In the end, MSN could be positioned as the only remote threat to AOL Time Warner, especially if it follows through with plans to create an instant messaging product similar to AOL. At around four million Internet subscribers, MSN runs just as far behind AOL Time Warner as EarthLink does. However, MSN also boasts a healthy number of unique visitors to its web sites each day, most notably the e-mail portal Hotmail.
Naturally, analysts have begun predicting that Microsoft will seek to challenge AOL Time Warner through a merger with another ISP, rather than continuing to build its access business organically. Those ISPs most often mentioned as MSN targets are EarthLink and the leaders of the "free ISP" brigade such as Juno and NetZero.
"There's some pretty exciting partnerships out there that can conceivably become big players with broadband subscribers," Christopher said. "I don't think anyone will ever match AOL, but putting a dent in them is possible."
2001 could be a year to find out.
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