AOL BUYS SOME TIME

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For standard bearers of the computer revolution, the techies who run America Online have a pretty shaky grasp of basic math. Let's see: you're the most successful online service in Internet history, with membership rolls shooting up in only three years from 500,000 to 7 million. You're about to launch a snazzy TV ad campaign built around a radical change in pricing policy: from stiff, pay-by-the-hour bills to unlimited all-you-can-eat access to the Internet for $19.95 a month. Yet you have added only a modest number of modems to the 200,000 you already need to service your teeming masses. On Dec. 1, you flick the switch on the new era.

The result? Half a million new subscribers in four weeks, twice the usage from your existing customers and countless unhappy people, such as Bill Blevins, a Springfield, Missouri, police dispatcher and AOL subscriber who spent four hours and hundreds of busy signals one afternoon last week before managing to log on. "It's got progressively worse," says a weary Blevins. "They're advertising something they can't provide."

Not anymore. Last week, after a multimedia convergence of bad publicity, customer complaints and threats of legal action from three dozen state attorneys general, America Online, the world's largest Internet and online-service provider, agreed to cancel its cool, Jetsons-themed television pitches for new subscribers while it augments its network to accommodate the 8 million members it already has. AOL is committed to spending $350 million over the next few months to add 150,000 modems. As part of the deal made with the attorneys general, the company also agreed to offer rebates of up to $39.90 for users who couldn't get what they were paying for.

And wouldn't you know it? AOL's phone lines were swamped once again, this time by users requesting refunds. Many of them were angry at being kept on hold for long periods, but state regulators pronounced themselves satisfied. Most analysts also seemed unconcerned. Said Lehman Brothers analyst Brian Oakes: "I think we've passed the peak of the problems with both the busy signals and the refund calls. There's always an initial wave."

Bob Pittman, president and CEO of AOL Networks, was quick to declare victory. "We did the right thing for the customer," he said. "We are not about computers and wires; we're about a relationship with our members."

Funny, that relationship almost came undone by a lack of computers and wires. For years the company flourished despite monthly fees of $9.95 for five hours online, plus $2.95 for each additional hour, which kept AOL's subscribers watching the clock. But the growing challenge from Internet- service providers like Netcom, AT&T and even Microsoft Network finally prompted AOL to lower its monthly fee to match the going rate of $19.95 for unlimited Internet access. For that amount, users would get not only the Internet but also AOL's own proprietary content, including games, scores of newspaper and magazine sites and special features like the popular Motley Fool investment forum.