• Fortune, Friday, July 7, 2006 11:15 AM

Fortune writer Stephanie Mehta says AOL, in green-lighting a plan to give away e-mail and other services, "has a serious case of Yahoo envy"--but it's not clear the strategy will work for them (by the way, Fortune is a Time Warner company--so go figure). First, AOL made its service more like Yahoo's by making its portal stuff free for non-subscribers. Next came the report yesterday that AOL will now give away its ISP materials like e-mail for free--to those who already get their service from somewhere else. If this proves to be true, AOL will have transformed from a subscription-based ISP with an ad business on the side to an ad-supported Web portal with a subscription business on the side. If that sounds familiar, Mehta says, it's because it is--that's the same transformation that took place at Yahoo some 7 or 8 years ago. The good news is that AOL is attracting advertisers; thanks to strong ad sales, its Web business grew 26 percent in the first quarter, compared with Yahoo's 34 percent growth rate. The bad news continues to be subscriber defection: AOL lost 850,000 subscribers in the first quarter, as more and more people just don't see the value in the service anymore. So why have they decided to give e-mail away for free? Well, for one thing, there are plenty of places to get it for free. For another, e-mail is a prime gateway to more content for Web portals--stickiness is the name of the game for content providers, so it's worth it to preserve more e-mail users and maybe even add a few more, Mehta says. It seems as though AOL is now finally throwing in the towel with its ISP business. Indeed, you will now be able to get all of AOL's services for free. This will lower costs; it will also kill off considerable revenue, slowly. It remains to be seen whether the company can embrace its new role as a media company, and achieve Yahoo-like valuations. At least it's finally a step in the right direction.

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