Can In2TV "broadband television" fuel new growth for AOL?

Reston (VA) - Not too long ago, AOL seemed unbeatable, with hundreds of thousands of new dial-up Internet users flocking to the service every month. Today, with dial-up becoming deadweight, the former "America Online" is realizing - perhaps too late - that it has missed the broadband wagon. With a dwindling subscriber base, the company now finds itself struggling to locate new growth areas. In2TV - in effect, a rerun service for the Web - could reverse this trend.

"There are a few applications we are putting a lot of investments in," said Fred McIntyre, AOL's vice president for video services. "Video is one of them." McIntyre told TG Daily that, while Internet-based video is still in its embryonic stages as a medium, its market numbers have already become significant, and its tastes and preferences are rapidly developing. "It's already a meaningful market," he said, "and we expected it to be twice as meaningful next year."

In2TV is AOL's first serious attempt to strategically position video content as a tool for growing the company. Described as "the first broadband television network," it plans to offer "thousands of classic TV shows" to everyday Web users - not just AOL subscribers - with throughput speeds approaching what AOL claims is DVD quality (1500 kB/s). Launched just a few weeks ago, the company has a ways to go to reach that goal, with 10 episodes currently available for each of 29 different shows. In2TV repackages content from Warner Bros., AOL's sister company, that may have otherwise lost its value in traditional television markets, including shows such as Kung Fu, The Fugitive, Babylon 5, Welcome Back, Kotter and Falcon Crest. Down the road, AOL plans to expand this portfolio with new episodes on a monthly basis.

What distinguishes In2TV from AOL's traditional portfolio of services, is that its content is not restricted to AOL users only. Instead of protecting its subscriber base, AOL has decided to go after the Web as a whole, to grow its audience as quickly as possible. Instead of cross-financing the content through portions of subscriber fees or selling individual episodes, AOL believes an ad-supported distribution model holds the most potential. "The business model is heavily focused on advertising, which is the biggest opportunity for us," McIntyre remarked. "Of course we do think about premium services as well - such as the rentals that we offer today - but In2TV is intended to be a service that is available to be for free."

In2TV's ads consist of so-called "pre-rolls" prior to the start of programming, along with commercial spots in their traditional break locations. Presently, AOL limits each break to one 15- to 20-second spot. While selling spots in this day and age may sound old-fashioned, commercial breaks have the virtue of being most comfortable with viewers already familiar with broadcast TV.

Digital rights management (DRM), which is typically a major drawback for other media download services, is also apparent in In2TV, but is less of an issue for users here: While movies purchased through Apple's iTunes are restricted for play only on computer and one iPod, AOL's streaming video content cannot be recorded and stored locally. However, it can always be viewed over a live Internet connection free of charge.

When AOL founder and then-CEO Steve Case stunned the Internet and media worlds by announcing its acquisition of Time Warner five years ago, in a $160 billion deal, analysts and observers expected it to signal the convergence of traditional and digital media. The move was heralded, at the time, as a departure from the risky, high-speed, virtual business models of Internet-dedicated businesses, into the stable realm of real-world assets. The merger was expected to revolutionize the business models of Internet portals and the media industry.

The revolution did come soon enough, just not the one everyone was expecting. Time Warner, now led by former banking executive Richard Parsons, revolved back to the top of the heap, with AOL being seen today as a lesser and lesser subsidiary. No longer is Steve Case part of the company, and AOL and Time Warner have grown apart in far more ways than just semantically. To this day, AOL has never been able to take full advantage of Time Warner's wealth of content, with the small portions that Warner has doled out being made available to AOL subscribers only. Five years later, Warner's video archive is finally open to AOL, in a move that might not have required a merger if it had been conceived five years ago.

But ironically, In2TV "broadband TV" may be coming too late for AOL to adjust its ISP strategy to create a substantial broadband subscriber base. AOL's US subscriber base has dropped from 26 million in 2002 to an estimated 20 million today, as telecommunications companies and cable providers become the default broadband providers in a market where broadband has become mainstream. In2TV won't reverse this trend, as it is freely available to all Internet users, though it has the potential to make AOL more interesting to at least some new potential sources of revenue - beyond ISP, instant messaging, and entry-level e-mail.

At this time, AOL does not intend to compete with iTunes. "They are selling content, we are selling lots of ads," AOL's McIntyre told us, comparing his venture with Apple's. But he also didn't rule the possibility of a commercial video download service in the future. "Apple is very smart player in this business," he conceded. "We are trying to learn from them; in the end, commerce is what we do as well."