AOL’s rolling the retail dice

Vid, music ventures planned

This article was corrected on July 13, 2003.

NEW YORK — In search of new revenues and a lure for its fledgling entertainment offerings, America Online is venturing into the high stakes and highly competitive retail video and music biz. AOL plans to launch a full-scale online store to sell videos/DVDs and music CDs.

As-yet-unnamed service marks the online entertainment unit’s first entrance to direct retail and a potentially huge revenue stream.

Online store, skedded for a third quarter consumer push, will be available over the Web to non-subscribers as well as AOL members. It will offer up a full repertoire of film and music titles to rival any of its online competitors. AOL is testing the service and will feature free shipping on Warner Bros.’ “The Matrix” and New Line’s “The Lord of the Rings: The Two Towers.” Company sources say retail offering is the first phase of a commerce strategy that will include downloadable digital music in the future. The company is working on a possible joint effort with online DVD rental outfit Netflix for downloadable feature films.

Goal: Reduce churn

AOL is on the hot seat to reduce subscriber churn and find ways to monetize its viewing base as its core dial-up business erodes.

Bill Wilson, senior VP and general manager of AOL Entertainment, said the goal is to leverage its existing billing relationship and credit card details from some 25 million users and the Entertainment area’s estimated 30 million unique monthly viewers.

“In the past we’ve been building up audiences and sending them to third parties to make purchases,” Wilson said. Company is now banking on one-click ordering to woo AOL and Moviefone users to make impulse buys.

Pricing will be competitive with other online and brick-and-mortar stores, he said.

AOL Movies and Moviefone general manager Steven Yee is negotiating promotional deals with various studios and said their homevid divisions have been very receptive so far. “Our proposition is that we have an ideal context (via AOL Movies and ticket and review service Moviefone) from which to sell videos and DVDs,” Yee said.

Shop will become the default retail option on AOL Entertainment, AOL Movies and Moviefone and AOL Music.

All supply, warehousing and fulfillment chores have been outsourced to distributor Alliance.

The push into commerce has been expected ever since division CEO Jon Miller took the helm last year.

Street’s watching

Wall Street is keeping a close eye on the AOL unit, which is at pains to develop new revenue streams to offset a diminishing analog sub count. Yet the company, eager to prove it’s more than a mature ISP business, seems insistent on trumpeting its role as a destination for exclusive content, rather than its prospects as a commercial video hub that could rival Amazon or Barnes & Noble for the fast-growing DVD sell-through biz.

“We’re focused on the integration of the experience rather than purely the retail option,” Wilson said.

“We’re not in business of competing with B&N and Amazon. We’re looking at ways to attract audience with our programming and offer impulse buys … we think that’s our competitive advantage.”

Competitive market

Indeed, AOL is entering a busy online retail market for music and videos. While Amazon dominates in sell-through, Netflix, WalMart and Blockbuster are all offering online DVD rental services as well.

Company won’t disclose costs or revenue expectations for the service, but said it should be profitable on a stand-alone basis.

Launch will initially be for the U.S. only, with AOL Intl. subsids examining the model on a case-by-case basis.

Borrowing a leaf from sister cable net HBO, AOL also will be trying to monetize some of its original programming, starting with the upcoming release of “Sessions at AOL,” which will feature highlights of some 200 recording artists featured on the site’s exclusive online concerts. Corporate cousin Atlantic Records is producing the album.

AOL Time Warner, whose shares have been staging a comeback in recent months after a raft of upbeat analyst reports, has warned that the AOL division is losing dial-up subs faster than expected but was offsetting that partly with greater cost reductions.

Company is expected to record around 3.15 million broadband sub and 23.1 million dial-up subs for the end of the second quarter. Broadband users typically pay the reduced $15 a month charge, so new revenue streams are considered essential.

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