AOL will sacrifice nearly $1 billion in operating profit through 2009 if Time Warner follows through with a proposal from its CEO to offer its Web-based services free of charge to customers who have
Internet service with another provider. The proposal cuts roughly half of AOL's projected Internet subscription profit in the U.S. over the next three years, from $1.6 billion this year to about $800
million in 2009. The company would lose 12.6 million U.S. subscribers between now and then, totaling just over six million. Web access accounts for the bulk of the AOL's revenues; all of its future
growth would come from the sale of Internet advertising. In fact, AOL believes its operating profit in Web advertising will jump from 17 percent this year to 42 percent in 2009. Additionally, the
company believes it can cut $1 billion from its marketing budget. As a result of the changes, overall revenue would decline from $6 billion, $4.2 billion of which comes from Internet subscriptions, to
$4.9 billion by 2008, before increasing again in 2009. To do this, AOL would have to increase advertising revenue at an annualized rate of 25-30 percent. The company is assuming that many of its
dial-up subscribers would remain under the new plan. It's unclear what would happen if more subscribers than expected upgrade to broadband as a result of AOL's offer.
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