AOL Watch ("The AOL List"): Highway Robbery?

David Cassel (
Mon, 9 Feb 1998 16:31:08 -0800 (PST)

		     H i g h w a y   R o b b e r y ?


A 10% price increase was announced Monday for AOL's dial-up customers. 

"The good news is that you have integrated AOL more and more into your
daily lives," a smug Steve Case wrote in a letter to subscribers.  The bad
news?  Starting in April, dial-up customers will pay an extra $2.00 a
month -- $24.00 per year -- to access AOL.

The change comes at a time when studies indicate AOL has one of the worst
performance records in the industry.  On average at least 30% of calls to
AOL failed to connect between June and November, PC Week reports, citing
one study showing call-failure rates as high as 41%. 
( )  They note
the industry average is 67% smaller -- a failure rate of just 10-13%.
C|Net adds that AOL still performs worse than that average, coming it at a
whopping 16% failure rate for December 
(,4,18824,00.html )  And a November survey
by PC Week ranked AOL as having the worst performance, with the worst
speed of repair, the least-knowledgable technical support staff, and the
lowest customer satisfaction score.  Only 18% of the users surveyed felt
AOL's connections were reliable. ( ) 

"The deteriorating service is now being matched by a price increase!" one
angry subscriber complained.  AOL still suffers from ongoing reliability
problems -- as this internal service report from last Tuesday shows. 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

   3:33 pm - 5:35 pm -- Some members have had problems listing,
		        reading and sending mail. 

   1:40 pm - 3:02pm  -- 3% of mail was unreadable. 

   5:30 am - 5:45 am -- 3% mail read was down, 2% mail sent was down. 

  11:25 pm - 2:58 am -- 14,000 members were without IMs or Buddy List. 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

"Its wrong AOL is doing this," one Community Leader conceded about the
price hike. ("But I really don't care, as long as I still get it for free
with my Community Leader account.")  Concerns about AOL's reliability are
widespread.  TechWeb reports 26 lawsuits were filed last year related to
service outages.  ( )
-- and arguing against an acquisition of Netscape, even AOL's own Motley
Fool noted that AOL "could use some help in making its network thoroughly
robust and fault-tolerant" 
( )

In fact, though AOL has said the #1 complaint from subscribers is
unsolicited commercial e-mail messages, AOL hasn't even allocated
sufficient resources to handle complaints.  "Unfortunately, you may
encounter full email boxes periodically," one form letter states, "and we
apologize for this inconvenience.  We are currently working on ways to
improve the capacity of these boxes..." 

Significantly, the announcement about the price increase came ten days
after AOL acquired control of CompuServe's subscribers.  "The monopoly
pricing has begun,"  one AOL Watch reader commented.  Friday AOL also
announced plans to start delivering advertisements to CompuServe's
subscribers (,4,18916,00.html )  -- even
though three days earlier, CompuServe's subscribers received e-mail from
Steve Case promising to "preserve the service's look and feel".  ("This is
a NON-Reply Mailbox,"  Case's message concluded.  "Messages sent to it
will be returned.")

But the price increase actually indicates the failure of AOL's current
advertising strategy. "The more we do on the advertising and commerce
front, the more likely we'll be able to preserve the existing pricing,"
Steve Case told Robert Seidman, in an interview published yesterday.  
( )  24 hours
later, the existing pricing had been shelved.  Case's announcement Monday
concedes advertising revenues "aren't yet keeping pace with the phenomenal
increases in usage"-- and also suggests why on-line games were the first
target of price increases.  "[E]ven though members pay a fixed rate, we
pay additional costs for every minute a member spends online." 

Subscribers are expected to bear the brunt of AOL's push for advertising
revenue.  Unfortunately, high-bandwidth ad banners in chat rooms currently
strain the memory capacity of their subscribers' computers -- a point AOL
staffers privately acknowledge.  "They have been able to reproduce the
problem with the ad banners in chatrooms," one in-house memo commented two
weeks ago, noting "This is the first step towards fixing the problem.  At
this time, we have no concrete date for a fix..."  And subscribers who
haven't blocked pop-up ads at keyword "Marketing Preferences" are also
receiving more and more advertisements.  "Today, I have set a new record," 
one subscriber told AOL Watch.  "Before I signed on, I had to look at 6
ads, 2 of which were the same."  (Implausibly, Steve Case told Seidman
that AOL's pop-up ads are different than spam e-mail, "because part of the
problem with spam is that there is no quality-control aspect.")

But AOL's scramble for profitability doesn't end there.  AOL also laid off
500 CompuServe employees Monday, "to operate its service more efficiently,
and take full advantage of shared AOL resources." 
( )  The lay-offs
constitute more than a third of CompuServe's workforce -- and the press
release indicates a "review" was also initiated for CompuServe's internet
service SpryNet.  This raises troubling questions about AOL's
profitability.  "Analysts expect the online giant to post its fourth
consecutive quarter of profits," C|Net reported erroneously Wednesday --
then quickly scrambled to correct the story. 
(,4,18848,00.html )  AOL didn't show a
profit in its third and fourth quarters last year.  "The company lost
$4.7 million, or $0.05 per share, for the third quarter," read one AOL
press release, and though AOL had erroneously declared a profit for the
second quarter, the SEC ruled otherwise. 
( )  Subscribers are becoming
cynical, one recent comment suggests.  "Funny how Steve Case keeps
bragging about all the profits AOL is making and how much revenue the ads
are generating -- yet they still have to raise prices to make money." 

In fact, Steve Case told Reuters that AOL's rate hike won't improve the
company's profitability.  "The price increase basically will not drop to
the bottom line because of the increased network costs that we are
experiencing," he claimed.  Reporter James Pierpoint noted that Case
"declined to disclose how much revenue the rate increase will generate..."
( )
And occasionally, new expenses appear.  One enterprising individual
registered the domain in Australia (, a Sydney
newspaper reports.  They're currently asking AOL $50,000 for the rights to
it.  (  

Yet AOL still has little financial justification for their rate hike. 
"AOL is relatively flush with cash," the Wall Street Journal reports
today.  "It recently sold a debt issue of $350 million and received $175
million from the sale of its third main division, Internet-access-provider
ANS, to WorldCom Inc."  In addition, AOL boasted in a press release that
"its public company investments alone are valued at about $200 million"  
( ) Nonetheless, AOL is
instituting their rate increase -- which AOL Watch estimates would bring
in just $168 million per year if applied to AOL's current U.S. membership. 
15% of AOL's subscribers reside outside the United States, Steve Case
recently reported (,25,18689,00.html) 
-- and as AOL's billing FAQ notes, "Only US customers of the current
$19.95 unlimited use plan will be affected."  In addition, Reuters notes
approximately 25% of AOL's subscribers haven't signed up for unlimited
access ( ) 

Subscribers are angry.  Monday morning one user forwarded information
about the new billing plans to 39 friends -- and a subscriber who'd paid
for a year's service in advance told AOL Watch they had closed their
account Monday.  Another subscriber told C|Net "After more than five years
with AOL, I've cancelled my subscription in protest of the rate increase."
(,4,18957,00.html )  C|Net notes MCI
customers can get internet access for $14.95 a month, and Reuters adds the
same rate is available from Mindspring and Erols.

"AOL is pricing themselves out of the market," Earthlink Chairman CEO
told Reuters. "They already have hundreds of thousands of people churning
off their service every I think a lot of people who are on the
fence will be pushed off by this price increase." 

There's another reason local internet services may benefit.  With the new
billing in place, subscribers will save $12 per month if they access AOL
through an ISP.  "The price will not be increased for members who are on
the 'light usage' plan ($4.95 for 3 hours per month, with additional hours
at $2.50)," Steve Case wrote -- or for subscribers on "the 'limited' plan
($9.95 for 5 hours per month with additional hours at $2.95) or the $9.95
'bring-your-own-access' plan (unlimited AOL accessed via a non-AOL
Internet Service Provider)."  Users can find a local internet service by
entering their area code in the on-line listings at

In anticipation of a negative response, AOL's billing FAQ included answer
to the most important question of all:  "What if I decide to cancel my

Its answer:  phone 1-888-265-8008.  Otherwise, customers will face a
$2.00-a-month price increase starting in April.

"Warm Regards," Case's message concluded. 


In January at least 2335 AOLers received copies of a false rumor warning
newly-announced per-month price increase will begin in April; the message
was at least partially correct. 

Ironically, one AOL Watch reader recently complained that "Steve Case's
Mailbag" hadn't been updated in nearly four months.  With Monday's price
increase, the first letter showed a remarkable synchronicity.  "Dear
Steve," it read, "I've got some questions about my AOL bill..."

  David Cassel
  More Information --


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