It’s About Revenue, Not Growth

That’s the lesson I feel like screaming at all the people acting like AOL’s much anticipated decision to “go free” and to give 5GB of storage to its users is a brilliant idea.

Growth without revenue or a realistic plan to generate sustainable revenue is nothing more than a way to create additional expense. It ends up on the wrong side of the ledger. Granted, this sort of charity will generate some headlines, as Marshall Kirkpatrick points out:

“From giving away many previously paid services free to broadband users (yesterday) to hiring away top social bookmarkers (first 10 announced today) and now throwing free storage at anyone who wants it – AOL is certainly making a lot of plays to revive itself.”

But it’s a clever head fake at best. If I started a business that gives away $20 to every person who walks by my house, I too would have a fast growing business, and I too would get lots of headlines. Perhaps even a link from Om. I would also run out of money pretty quickly.

AOL hopes all those users will click on ads and buy stuff so the loss of subscription revenue will be offset by more ad revenue. Nobody clicks on ads and nobody buys stuff because of all the ads people stick in front of their face. Entire industries are being built around ad avoidance (TIVO, satellite radio, etc.) at the very same time AOL is betting its future on the success of ads.

This move by AOL smacks of desperation. It is going to stop selling its service and climb on the back of the ad dollar along with 95% of the rest of the Web 2.0 world. In effect, AOL has just become an online newspaper, fighting for the same ad dollars as the rest of its Web 2.0 brethren- and the rest of the online and offline newspapers. In an effort to be like Google, it has put itself in the same predicament Google is in- the frantic search for eyeballs in the hope that somehow a little alchemy can turn those eyeballs into cash.

The myth of the infinite ad dollar is a house of cards I tell ya. And it’s going to implode one day.

Annoyingly, existing AOL users have to navigate through a maze to find out how to turn their account into a free account, and even at the end of the maze, you’re required to make a phone call and enter an even bigger, more frustrating maze. If free is so good, why are they making it so hard for people to be free?

Ted Leonsis of AOL does his best to spin this news like its some brilliant new strategy, as opposed to a recognition of the inevitable fact that the market for AOL’s paid services is shrinking. Mr. Internet chimes in with his take as well.

I can’t blame them for trying- they’re trying to make money, after all. But let’s take a closer look.

Ted Says:

The new plan is about growth. It is about changing the focus of our teams and resources. It is about having a green thumb and showing the world that we have green arrows pointing up in all of the key metrics that are important to our business. It is about a simple and logical statement of fact – AOL should never lose another customer to a competitor, and we should be able to expand rapidly on a global basis as the high-speed free Internet gains even greater momentum.

Mr. Internet Says:

Yes, yes, yes… it is so hard to run a business that has two different focuses. In our case the focus was keeping the dialup subscribers and building free services. These collide all the time. For example, today’s free 5 GIG of storage–the boldest move AOL has done since buying Weblogs, Inc and moving Netscape to social news–would have been a service reserved for our paid members. Then Google would offer it for free and our members would be paying for something they could get for free–again (just like email and IM). This constant back and forth is really draining for the members and for the executives. Smart people can make both arguments (free vs. paid), but at the end of the day you have to pick where the ship is heading and we’re picking free.

Common Sense Says:

If Dell started giving away its exploding laptops, it wouldn’t lose many customers to competitors either. Didn’t these guys take Economics 101? Picking free is only a good choice when no one wants to buy what you’re selling. And if no one is buying what you are selling, you aren’t a business. I’d change the word boldest in Mr. Internet’s post to most desperate.

Revenue, revenue, revenue. Sustainable revenue. Say it with me.

That word revenue is mentioned a total of 4 times in Ted and Mr. Internet’s posts. Four times in 2319 total words. And except for one vague mention of multiple revenue sources, it always follows closely behind the word ad or advertising.

Speaking of multiple revenue sources, I wonder how AOL’a dial-up customers feel about the fact that they get to keep ponying up their subscription fees while broadband users get the goods for free? I understand the logic behind this, as the demand for AOL from broadband users is likely small and getting smaller. But it still sounds like AOL is sticking it to the people who, AOL believes, don’t have as many options as broadband users. Many of whom are likely some of AOL’s oldest customers.

Like most, I learned the internet on AOL. I have been a defender of AOL in the past.

But this move looks like the desperate act of a desperate company.

Update: Dwight Silverman reports that you can now switch to the free plan online. I just did it and it was very quick and easy. Now at least I’m not paying for the AOL account I never use.

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