Saying it needs more money to keep upgrading its service, America Online announced a price increase on Monday that will bounce its US$19.95 monthly fee up to $21.95, beginning in April.
The $2 hike ought to fund some sweet upgrades, as the service stands to gain about $22 million in monthly revenues - or $264 million annually from the price increase, assuming it maintains its current 11 million subscribers.
At the same time CompuServe, which was bought by AOL last year, announced a restructuring that includes 500 layoffs, the suspension of "C" - its plan for a Web-based service, and in-house scrutiny of its SpryNet Internet service provider to see just what the company can do with its assets.
AOL�s stock surged on the news, jumping up by nearly $11 to its all-time high of $109.37.
"This smacks a little bit of greed and a little bit of self-aggrandizement," Allen Weiner, an analyst at Dataquest, said about the price increase. "This is reflective of what they view to be consolidation in the former online service market ... of their view that they are the only online service provider."
However, Weiner thinks AOL - and Wall Street - isn�t giving enough credit to the clouds of competition forming on the horizon. With a number of big players investing heavily in creating portals to the Web - like Yahoo, the Lycos-Tripod combo announced last week, Netscape�s NetCenter, Microsoft�s new start page effort, CNET�s Snap, and others - Weiner thinks that users will soon be tailor-making their own AOL-like service by choosing the Internet service provider they like best and setting their browser�s home default on their favorite navigation site.
"It�s not necessarily a propitious time [to raise prices], in terms of competition," he added. "I think others will view this as a time to lower their prices by a buck."
But Bill Bass, an analyst with Forrester Research, took just the opposite view of the situation: "AOL�s got dominating market share and so now is a good time for them to try and raise prices - I don�t suspect you�ll see a whole lot of people balking at paying the additional money."
Steve Case, AOL�s chairman and CEO, seemed unconcerned about potential churn sparked by the price increase. "Our members have told us - and their usage demonstrates - that they want us to continue to provide AOL on an unlimited basis," Case said in a statement.
"The pricing change we are announcing today will help AOL continue to make the necessary investments to provide the best possible Internet online experience, while keeping pace with the cost of our members' rise in usage," he added.
The company says it has spent some $700 million on service upgrades over the last year and added more than 1,000 customer service representatives.
"AOL members now spend on average more than 23 hours a month online compared with just 7 hours before unlimited use pricing was introduced," Case said. "Each additional minute our members spend online adds to our cost of delivering unlimited use service. Revenues from advertising, commerce, and other sources continue to grow as anticipated, but they are not yet able to cover the growth in member usage," he said.
Greg Vogel, an analyst at NationsBanc Montgomery Securities, figures AOL�s plan is to bring the ISP aspect of its service up to break even, so that the advertising and commerce deals can make the company truly profitable. When the service provider changed its method of financially accounting for acquiring new members - taking a $385 million charge for the accounting changes in its first fiscal quarter of 1997 - one could argue it essentially wiped any profit reported in the past right off its books.
And at this point the advertising and commerce are keeping the company in the black. "The ISP business would have had a $24 million loss in the September quarter if they didn�t have e-commerce and advertising," Vogel said. Bringing the ISP business to break even, then, is likely to mean a tidy profit.
And the company seems to have little to lose, at least in the short term. AOL watchers don�t think the price increase will result in any serious attrition - but they also say the move is unlikely to translate into a de facto $2 increase in monthly fees at ISPs.
"If everyone�s the same price, what�s to keep AOL from owning the market?" Vogel asked, making a good argument for others to hang onto the $19.95 price structure and try to make inroads into AOL�s stranglehold on the market.
