Will AOL Finally Go Free?

During the Web's infancy---long before Google was a site, let alone a verb--AOL reigned supreme and alone. But 17 years after modems squawked onto the debut dial-ups, competition has sped ahead, and AOL may finally be ditching its once lucrative subscription model for a more promising ad-driven approach.

Why? For AOL, for any company, fourth place just isn't good enough. With Yahoo!, Google and MSN having built better webtraps, AOL is preparing to reinvent itself to catch up. Its parent company, Time Warner (which is also TIME's parent), announced it will present a new plan for AOL on Aug. 2. The 2000 merger with AOL was supposed to be a cure for Time Warner's slow-growth old-media businesses, but it has been a financial disaster, costing Time Warner nearly $100 billion in market value. AOL's inability to remake itself into a more Google- or Yahoo!-like business has been a drag on Time Warner's stock price, which ended last week at $15.97, down 8% this year.

Since the Web's inception, Internet companies have struggled with a basic issue: Do they charge consumers for content or rely on ads? Now that PCs are ubiquitous and broadband is almost so, the free search-driven model, perfected by Google, in which advertisers are charged for the eyeballs they collect, has apparently won out.

Come August, AOL may fully embrace that strategy. To compete more aggressively for the expanding pool of Web advertising revenue, AOL is expected to throw the gates open to its previously private Web. "We'll be behaving more like a portal than ever before," says a company executive, who requested anonymity because he wasn't authorized to talk about the plans. (The company declined TIME's repeated requests for an interview.) As part of the switch, analysts expect AOL to stop charging a subscription fee to anyone who gets high-speed service from another provider and to offer free access to its content, including AOL.com e-mail addresses.

The move comes as demand for mass-market ads is heating up. Because of the limited availability of prime space on the Yahoo! home page, some advertisers who want that page are obliged to buy it as part of a package that supplies 30 million page views on the home page and an equal number of views on other Yahoo! properties. The price? A single day can cost $700,000.

Yahoo! and Google continue to give away most of their new products, banking on the robust growth of the ad market, which last year yielded $12.5 billion, up 30% from 2004, which was up 33% from 2003. By redeploying its resources toward broadening its audience, the rationale goes, AOL will be able to compete more efficiently, dropping, among other costs, the hundreds of millions it has been spending to attract new subscribers. The risk is that advertising sales won't grow quickly enough to offset the loss of subscription dollars.