Copyright 2002 Business Wire, Inc



Copyright 2002 The New York Times Company  

The New York Times

August 22, 2002, Thursday, Late Edition - Final

SECTION: Section C; Page 1; Column 2; Business/Financial Desk 

LENGTH: 1183 words

HEADLINE: AOL Revives Focus on Creating Original Content

BYLINE:  By DAVID D. KIRKPATRICK and SAUL HANSELL 

BODY:

The executives assuming control of the struggling America Online Internet service are reviving a strategy the company abandoned five years ago, emphasizing the creation of original, exclusive content, said people who have discussed the matter with AOL's new chairman, Jonathan F. Miller.

AOL hopes to use the content -- from text-only chats with celebrities to more elaborate videos of movie trailers and vacation spots -- partly to sell goods and services directly to its subscribers. Five years ago, AOL virtually ceased spending money to create its own content in favor of selling and leasing the space on its service to others who wooed its members. But now AOL's formerly booming advertising business has plummeted, leaving the company hunting for new sources of revenue. At the same time, AOL is racing to update its service to attract and retain consumers who get access to the Internet through high-speed broadband connections like digital cable lines.

But Mr. Miller, who began his job this week, faces significant challenges in his efforts to remake AOL. Internally, many longtime AOL executives believe that it should focus its energies on its existing, profitable low-speed customers rather than invest in content for the still-emerging high-speed business. Many have also long argued that creating content is too expensive. Very few services have found a way to create original programming at a profit.

Yesterday, AOL Time Warner signed its first agreement to offer America Online's high-speed service over the systems of another cable company, AT&T Comcast. But AOL charges about $10 a month more than its competitors for its high-speed service, and it is struggling to justify that price to consumers.

Mr. Miller declined to comment on his plans. AOL Time Warner executives said many of the details remained to be worked out. But Mr. Miller has told friends that he believes that AOL's executives, who are rooted in the Internet, have underestimated the power of more elaborate high-speed audio and visual programming to entertain consumers and motivate them to spend.

Moreover, rather than waiting for the advertising market to rebound, Mr. Miller is said to believe that AOL can make more money sooner with its own offerings, selling tickets, travel packages or merchandise related to entertainment, sports and other subjects popular with Internet users. Over high-speed digital cable connections, subscribers might pay to participate in online video games or to post video personal advertisements. People close to Mr. Miller said he hoped attractive shopping deals would help lure subscribers.

AOL executives are already negotiating with their counterparts in the film, television and other divisions of AOL Time Warner to incorporate elements of their programs into AOL's expanded high-speed service, according to people at the company, although America Online is also seeking to put together other features on its own.

AOL executives say one model for their new approach is the AOL music channel, which provides 20-minute video segments of original performances, by artists like the Red Hot Chili Peppers. Laced through the music service are opportunities to buy CD's, sheet music and T-shirts.

AOL may also sell some commercial services to businesses, like helping companies communicate with customers over AOL's instant messaging service, as in a recent deal with Sears.

In an interview yesterday, Richard D. Parsons, the chief executive of AOL Time Warner, confirmed that the company would seek to create its own content, just as AOL Time Warner's HBO television network created its own programs like "The Sopranos" to distinguish itself from other channels and video rentals.

AOL, he said, would need to provide content from simple text to "televisionlike" video programming in order to adapt its service to the potential of high-speed cable-line connections.

Mr. Parsons, speaking of AOL Time Warner's other businesses, said: "What we do in all of these other businesses is, we make content. It only makes sense to blend the expertise in creating content with the experience in creating online communities around content."

Mr. Parsons also confirmed that AOL would seek to make more sales directly to its subscribers instead of passing them to other sites. "I do think transactions are going to be a big part of the future," he said. "People spent $54 billion online doing transactions last year, and $33 billion of that across AOL, so that means there is already a lot of activity going on out there and we should be a part of it."

America Online's new strategy fits clearly with Mr. Miller's resume. He is a former executive of the Nickelodeon television network at Viacom and of Barry Diller's USA Interactive, which combines the Home Shopping Network, Ticketmaster and the Expedia travel service.

But carrying out his plans for AOL will not be easy.

"I don't think AOL can build perceived value with rich media content," said Richard Gingras, who led the content development of the first major broadband service, Excite@Home. "As nice as it is to look at news clips from time to time, it was clear to us that people wouldn't pay extra for video programming."

When he was first hired to run Yahoo, Terry Semel, the former co-head of the Warner Brothers studio, talked about the opportunity to sell music and video clips over the Internet, but Yahoo's successes have been an enhanced e-mail offering and online personals. It sells very little music or video.

Selling goods and services may also put AOL in competition with the companies that are its advertisers, and AOL may find it difficult to create services in many fields that rival the best offerings already on the Web.

It would cost tens of millions of dollars, for example, to build an online travel agency. And it is unclear why that would be better than AOL's existing deal to promote Travelocity; AOL receives some $40 million a year from the deal.

Even before Mr. Miller's appointment, AOL acknowledged that its broadband offering was weak and that it was developing a new package of content and services that was to be introduced this fall. Much of the focus has been on the sort of interpersonal communication that AOL calls community -- new ways to share photographs, for example. And reference features were being developed that took advantage of the fact that broadband services are always connected and can be used as an instant electronic phone book or dictionary.

But AOL has been very limited in its production of original content for broadband. "We are terrific aggregators of content that is produced by others," said Lisa A. Hook, the president of AOL's broadband unit. "People say that broadband is about streaming video. But if people want streaming video, they will sit down and turn on the TV set." Instead, she said AOL hoped to bring together new sorts of programming, much of it drawn from other AOL Time Warner divisions, that use music and video but also take advantage of the interactive nature of the Internet.        

LOAD-DATE: August 22, 2002

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