AOL Hits 22 Million Subscribers — But How Long Can Dial-Up Last?

"You've got mail." Three words that define how most Americans experience the internet in 1999. America Online — AOL — just reported that it has surpassed 22 million subscribers in the United States alone, making it far and away the largest internet service provider on the planet. Nearly one in three American internet users connects through AOL's walled garden of chat rooms, email, Instant Messenger, and that familiar blue interface.

AOL's stock price has tripled in the last two years. Revenue topped $4.8 billion in fiscal 1999. Steve Case is building what looks like an unassailable empire.

So why are some analysts starting to use the word "vulnerable"?

The Broadband Shadow

The threat has a name, and it comes in two flavors: DSL and cable internet.

Combined, broadband connections in the U.S. have grown from virtually nothing three years ago to roughly 2.8 million subscribers by mid-1999, according to FCC estimates. That's a small fraction of AOL's 22 million — barely 10% of AOL's base — but the growth curve is nearly vertical. Cable internet alone is adding around 200,000 new subscribers per month.

More importantly, the people signing up for broadband aren't AOL's marginal users. They're the power users, the early adopters, the people who spend the most time and money online. These are exactly the subscribers AOL can least afford to lose.

The math is brutal. AOL charges $21.95 per month for unlimited dial-up access. A cable internet connection from Road Runner or @Home costs $40-50 per month but delivers speeds 30 to 50 times faster. For users who've tasted broadband, going back to dial-up feels like going back to a horse and buggy. Nobody downgrades voluntarily.

AOL's Broadband Problem

AOL's entire business model is built on dial-up. The company operates one of the largest modem pools in the world — tens of thousands of modems in hundreds of cities, all connected by a massive private network. AOL controls the whole experience: the software, the connection, the portal, the content.

Broadband breaks that model. When you get DSL from Bell Atlantic or cable internet from Time Warner, AOL doesn't control the pipe anymore. AOL becomes just another website — and a cluttered, ad-heavy one at that. AIM works fine without an AOL subscription. So does email. The walled garden starts looking like a cage.

AOL recognizes the problem. The company launched "AOL Plus" this year — a $14.95/month add-on for users who already have broadband from another provider. It gives you access to AOL's content and services over your fast connection. But there's a fundamental awkwardness to paying $15/month for an AOL interface when you're already paying $40-50/month for the broadband itself. Many broadband users simply cancel AOL altogether and never look back.

The Numbers AOL Doesn't Want You to See

Dig into AOL's subscriber reports and a few trends emerge:

Churn is creeping up. AOL has always had high churn — people signing up for free trial discs, using the service for a month, and canceling. But the company has been very good at replacing departing subscribers with new ones. The worry is that broadband defections are a different kind of churn — permanent, not cyclical.

Usage patterns are shifting. The average AOL user spends about 55 minutes per day on the service. But the most engaged users — the ones spending 2-3 hours daily — are disproportionately the ones upgrading to broadband. They're hitting the speed wall hardest.

The youth market is restless. Teenagers and college students, AOL's most active demographic for AIM and chat rooms, are the first to adopt broadband when their parents upgrade or when they get to a university with a fast campus network. Once they experience AIM at broadband speeds, dial-up AOL feels intolerable.

What AOL Is Doing About It

Steve Case isn't sitting still. AOL is pursuing broadband aggressively through several channels:

Partnerships: AOL has been negotiating with cable companies and telcos to distribute AOL-branded broadband service. The idea is that you'd get your cable internet from, say, Comcast, but the AOL interface and branding would ride on top. These deals have been slow to materialize — the cable companies aren't thrilled about giving AOL access to their customers.

DSL bundling: AOL has launched DSL service in limited markets through partnerships with Bell companies. "AOL Plus powered by [DSL provider name]" is the branding. It's a start, but availability is limited and the pricing isn't particularly competitive.

Content investment: AOL is pouring money into exclusive content, original programming, and premium services that (theoretically) justify the monthly fee regardless of how you connect. The bet is that AOL can transition from "your internet connection" to "your internet home."

Whether any of this is enough remains to be seen. AOL's 22 million subscribers represent an incredible asset — a massive, engaged audience that generates reliable monthly revenue. But assets can become liabilities if the product they're paying for becomes obsolete.

The Dial-Up Timeline

How long does dial-up have? That depends on how fast broadband expands.

Right now, DSL is available to maybe 40-50% of U.S. households, at least in theory. Actual take-up rates are much lower because many people don't know it's available, can't afford it, or live too far from the central office. Cable internet covers a similar footprint but with better actual availability in suburban areas.

Industry forecasts suggest broadband could reach 10 million U.S. subscribers by the end of 2000 and 20-30 million by 2002. If those numbers hold, dial-up's share of the internet market will erode steadily but not catastrophically over the next two to three years.

The most likely scenario: AOL's subscriber count plateaus somewhere around 25 million, holds there for a year or two as new dial-up signups offset broadband defections, and then begins a slow decline. AOL won't die — it's too big and too entrenched for that — but the era when AOL is the internet for most Americans is drawing to a close.

For now, though, "You've got mail" still echoes through 22 million American homes every day. The question isn't whether that changes. It's when.