• by Wendy Davis  @wendyndavis, August 3, 2006

In an attempt to retain users who upgrade to high-speed lines, AOL will make a host of services--including e-mail, software, and security features--available for free to all people who connect via broadband, the company confirmed Wednesday.

Until this week, AOL charged the 6.2 million U.S. subscribers who connected via broadband $15 a month for e-mail and other services. The company will continue to offer dial-up service with bundled extras at around $26 a month, and will also introduce a $10-a-month unlimited dial-up plan, but will stop marketing efforts directed at acquiring new narrowband subscribers.

In a conference call with analysts and the media, company executives said the pricing shift marks a continuation of AOL's plan to increase ad revenue by drawing eyeballs.

"This will remove the biggest barrier to our members staying with AOL as they migrate to broadband," said Jeff Bewkes, Time Warner Inc. president and chief operating officer.

As online advertising has boomed, the company has changed tactics from acquiring subscribers to obtaining visitors and keeping them on the site as long as possible, in order to serve more ad impressions. AOL started its first major initiative to attract non-subscriber eyeballs last year, when it made content available for free at AOL.com.

In the last 15 months, the company's ad revenue has surged. Last quarter, ad revenue totaled $449 million--up 40 percent from the second quarter of 2005. "We have seen growth across the board," AOL Media Networks President Mike Kelly told OnlineMediaDaily. AOL's ad revenue comes from branded ads, search, and ads served on third-party sites through the network Advertising.com.

Kelly added that the elimination of fees should help boost AOL's ad sales efforts. "It will mean more users and more traffic," he said.

Still, the move to stop charging broadband subscribers seems likely to put an immediate dent of around $90 million a month in the company's subscription revenue, which amounted to $1.546 billion last quarter. But AOL said the impact on the bottom line would amount to far less than the lost subscriber fees, because the company will save about $1 billion by the end of 2007 by cutting marketing costs and jobs. In the short term, AOL estimates a loss of around $300 million.

While any tactic that immediately cuts off a revenue stream is risky, AOL might not have had much choice, given that the company's subscriber base has been shrinking fast as more and more Web users have started connecting via DSL and cable modems.

The company's subscriber ranks dwindled to about 17.7 million U.S. consumers as of June 30, down from a high of around 26 million in 2002. The defections seemed likely to continue as more and more users upgraded to broadband.

"It's probably the best possible strategy for keeping AOL relevant in a world that's increasingly about broadband," said Joe Laszlo, a senior research analyst with Jupiter Research. "They believe that by going free, they'll increase overall audience, and deepen the level of engagement of this audience."