AOL has given up its title as the leading ISP

May 3, 2007

After more than a decade connecting more Americans to the Internet than any other company, AOL has given up its title as the leading Internet service provider, a reflection of changing consumer habits and its own strategic shift.

AOL decided last year to chase advertising dollars by offering nearly all of its content and features free. Its traditional model had been eroded by the shift to high-speed Internet service from cable and telephone companies.

As a result, AT&T has become the largest Internet provider, with 12.9 million customers, as of the end of March. Comcast is second with 12.1 million, while AOL has 12 million subscribers. AOL released the numbers yesterday along with first-quarter results of its parent, Time Warner.

With an average price of about $19 a month, AOL’s remaining Internet business is highly profitable, especially since the expense of marketing Internet access has been eliminated.

But while the cable and phone companies are still expanding their Internet businesses briskly, AOL is shrinking. In the first quarter, AOL lost 1.18 million subscribers in the United States. Still, that reduction was more modest than analysts had expected.

In a conference call with investors yesterday, Jeff Bewkes, Time Warner’s president, said the company’s strategy was working. AOL’s new free e-mail and other Internet services have attracted eight million registered users since their introduction last August, he said. About half are former customers of AOL’s Internet access service.

Mr. Bewkes added that AOL customers who shift from dial-up access to registered use of its free offerings increase their time spent on AOL services by 50 percent, largely because they are doing so on higher-speed connections. This, he added, may bolster its advertising business.

“The thing is kind of stabilizing to some extent,” he said. “We have got more users. We have got registered users. We have got tick-ups in e-mail, and yet the question is how much engagement can you get out of them?”