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Will AOL Overcome its History or Be Hobbled By It?

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Former '90s powerhouse lurches into the new decade alone.

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While the burst of the dot-com bubble wiped out many limping online businesses, one company -- predominantly known for its dial-up service and little else -- wrestled through the rampant shutdowns thanks to its sheer size, momentum, and a new brick house of a teammate. But as the initial damage wasn't kind, the oncoming years were infinitely more brutal.

What began as a massive, almost foreboding, union between two mammoths of media and tech will draw to a whimpering close this week when America Online branches off as an independent company from media conglomerate Time Warner (TWX).

And it will also bring an end to one of the most disastrous, ill-conceived, and costly mergers in recent history. The $160 billion deal in 2000 was comprised largely of inflated AOL stock.

AOL -- voted number two on the "Brands to Watch in the 21st Century" list by The New York Times in December 1999 -- bought out the larger Time Warner in a move that seemed to herald an exciting fusion of media content and the Web. The world was still reveling in the dot-com boom and AOL had convinced investors -- as well as itself -- that the company would dominate the new millennium as it had for the previous decade. With a market capitalization of $125 billion, the brand even had Time magazine positing an AOL-owned landscape.

But as the newly merged company rested on its laurels, succumbed to inner squabbles, and failed to innovate, sites like Google (GOOG), Amazon (AMZN), Netflix (NFLX), Facebook, and Twitter passed them by on a wave of forethought, novelty, and distinction.

In addition, both AOL and Time Warner were specializing in dying business models -- AOL with its dial-up service and "walled garden" of content and Time Warner with its print publications. As broadband and digital publication grew, any instance of stalling -- or worse yet, complacency -- chipped away at the once-resilient exterior of both brands.

Today, AOL has an implied market capitalization of $2.6 billion -- valued by the preliminary shares being traded prior to its official launch this week -- and a staff of 2,500. But roughly 33% of its workforce is in the process of being let go. And as for the more than five million AOL subscribers still relying on dial-up, it would be incredible if they're around much longer.

Despite having a few entertaining sites like Engadget and Joystiq under its Weblogs Inc. network, what else does AOL have going for it?

Its business relies heavily on display advertising and original content, but the recession took its toll on revenue. AOL's Google-related partnership which powers its search advertising, slipped to $422 million over this year's January-September period, from $513 million over the same time in 2008. Yahoo (YHOO), a company similar in business models, is suffering from a similar fate.

The company plans to launch a number of new sites next year that will be mostly populated by content from freelancers, who will be paid by flat rates per post or click rates. Although cheaper to produce, user-generated content comes at the expense of a seasoned staff and produces mixed reactions.

AOL faces a long uphill battle. Stuck with a brand image that generates such negative memories like dropped connections, rude customer service calls, and landfill-lined CD-ROMs, it's anyone's guess if CompuServe decides to branch off from the company as well and try its own 2010 reemergence.
No positions in stocks mentioned.
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