• by Wendy Davis , Staff Writer @wendyndavis, December 22, 2006

In August, AOL decided to stop charging broadband users for e-mail addresses, software and other long-time premium services, in hopes of stemming the tide of defectors.

As of today, it looks like the effort was successful. For the first time in four years, AOL now has more users than it did one year ago, according to a Reuters report. "The numbers we've been tracking show that total paid and free memberships are on track to exceed the paid memberships we had recorded last year at this time," AOL chief executive Randy Falco wrote in a note to employees, Reuters reports.

While the increase in users goes a long way toward vindicating the company's decisions to stop charging approximately 6 million broadband users $15 a month, the company's work clearly isn't done yet. AOL currently is in a state of flux, as it adjusts to new management--Falco and COO Ron Grant--as well as the loss of key executives, including Jim Bankoff, who spearheaded the free broadcast of Live 8 and the launch of celebrity gossip site TMZ.com.

Additionally, speculation is mounting that AOL might merge with either Yahoo or MSN. Merrill Lynch this morning released a report stating that several trends--including Google's continued growth in search at the expense of Yahoo and MSN--could spur a major industry consolidation.

Merrill Lynch pegs a Yahoo-AOL merger as the most likely scenario, but also says that a Microsoft-AOL merger and Microsoft-Yahoo deal make sense.

But the report also predicts that, if AOL is going to merge, MSN or Yahoo are among the only options. Why? The merger with Time Warner-- frequently described as "disastrous"--likely will deter other traditional media companies from seeking to acquire AOL. "Importantly, we do not believe that other traditional media companies would be interested in AOL," states the report. "[T]he last combination of AOL with a major media company is one of the poorest mergers in history."