AOL growing pains

Reimbursement OK'd after flat-rate snafu

America Online agreed Wednesday to reimburse customers in 35 states who have been unable to log on to the subscription-based service.

The agreement is the latest in a series of developments at the nation’s — and the world’s — largest commercial online service. This month, the company shifted from charging customers on an hourly basis to a flat rate of $19.95 a month.

As a result, hundreds of thousands of new subscribers signed up, jamming phone lines and making it difficult, if not impossible, for many users to log on during peak hours.

AOL is spending $350 million between now and June to upgrade its network, which includes buying modems, building a new center to house computer equipment and adding more customer support representatives.

The problems in getting online are expected to decrease as the new equipment is installed.

In Hollywood, where many entertainment companies run forums on AOL, many execs tend to view the service’s problems as temporary, though they concede that the problems are a nightmare from a public relations standpoint.

While most entertainment companies run forums within a larger area, called a channel (channels include Entertainment, Games and Learning and Culture), New Line TV operates its own channel, the Hub, a joint venture with AOL. Aimed at a demographic that New Line TV president Robert Friedman termed “young adults,” the Hub serves up original content with an edge.

Friedman said the crowds waiting at AOL’s door are proof of the service’s success. “They’ll get this fixed. But it really ratifies my belief: AOL is one other alternative to build brands.” With about 8 million users on AOL, he added, “there’s the ability today to build a property online, then grow on that brand. Not 10 years from now, or even two years, but literally today.”

But other online services — which many had all but given up for dead — seem poised to capitalize on AOL’s troubles. CompuServe, for example, ran a commercial during the Super Bowl that didn’t mention AOL by name, but played on the concept of dialing up an online service and getting only a busy signal.

Not everyone thinks competitive advertising for online services is such a good idea. “It’s very unfortunate,” said Jay Heifetz, principal of a Century City new media consulting firm. “It undermines people’s confidence about going online, and doesn’t help the industry.”

Robert Metcalfe, who in the 1970s invented computer communications network Ethernet, acknowledged that AOL has made some major missteps, but predicts a full recovery for the company once the PR debacle has passed. Met-calfe is currently VP of technology for Intl. Data Group and is the author of books and columns on the Internet.

AOL’s inability to deliver access to subscribers, he said, is analogous to “releasing ‘Jurassic Park’ and distributing it to theaters, then finding that the frames weren’t aligned so people left the theater in anger and were issued re-funds.” At AOL, he said, “marketing and engineering weren’t synchronized. They were under enormous pressure to go to flat-rate billing, but the infrastructure wasn’t there.”

But, he noted, “They’ll recover. Once the PR damage has passed, and the hassles of lawsuits and refunds are over, their basic value proposition is sound. They haven’t managed their growth properly, but they’re offering more than just Internet access. What AOL has is closer to the TV model of packaging and cross-promoting content.”

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