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Microsoft execs reunite to save AOL

Or plump it up for the spin-off?

Analysis AOL's wireless business has been meandering without direction or purpose for a long time. So long, it seems, that "AOL Anywhere" sounds less like a mission statement and more like a cry for help.

But today, in the biggest shake-up for five years, AOL has renewed its ambitions by creating a new Wireless Division. This is no ordinary shake-up. It reunites old Microsoft pals Craig Eisler and Eric Engstrom to lead the unit - Engstrom joins with AOL's acquisition of Wildseed Inc, also announced today. The 2000 start-up joins AOL's Tegic, responsible for the T9 software used by hundreds of millions of phone users, under the Wireless Division umbrella.

Like very other network provider, wireless or wireline, AOL faces the same battle: add value, or become just a "dumb bit pipe" in a commoditized industry. But AOL has two particular problems.

The first is that it is losing its customer base, the people it brought onto the net in the 1990s. AOL simply isn't moving these onto high-speed broadband in sufficient numbers. AOL lost 2.3 million subscribers in the calendar year to March, and lost over 900,000 in the most recent quarter. This isn't a new development, but the haemorrhage is getting worse: AOL had 26.5 million subscribers at the end of 2002 but this will dip below 20 million this year if current trends persist.

In addition, AOL has decided that there isn't enough value in its premium web content these days, so it's opening the doors to all. With so much valuable computer-accessible content lying off-web because of copyright concerns, and more disappearing behind registration firewalls (the New York Times this month took its Op-Ed regulars behind a pay-to-play subscription scheme) this seems an odd time to make such a decision. AOL certainly has the scale to act as an intermediary for the rights holders, who prefer to cut a deal with a walled garden, even if the wall is permeable. But this stuff is tricky, and DRM is a nuisance for all.

Wireless lucre

On the face of it AOL's Wireless Division appears to do nothing to address these two problems - but look a little closer and you can see a strategy emerging, even if it hasn't been fully articulated yet.

Engstrom's WildSeed sells a customizable UI framework to phone operators, not unlike the Trigenix operation that Qualcomm snapped up last year. Wildseed is rather more ambitious, however, positioning it as rather more than UI: the Smartskins include a DRM framework. So it isn't hard to imagine AOL selling an AOL-branded "skin" to a network operator.

But there is a lot of competition: several small vendors across Europe and Asia offer customization services to carriers. Many have a low-to-invisible profile (although Trigenix scored a major win by developing T-Zones for T-Mobile). Rather more of an issue is that network operators are loathe to yield their branding acreage, especially when the vendor has a content pitch too. Carriers have developed some experience of signing content themselves over the past few years, so it isn't clear what AOL Wireless could bring to the party.

There is a more promising path, however.

AOL has long dismissed rumors that it's to be developing an (Mobile Virtual Network Operator) service. In 2001 Lisa Hook, then AOL's head of mobile, dismissed the suggestion by explaining:

"Both MVNOs and wireless carriers focus in a very different area: the build out and operation of networks, retail distribution and complex pricing plans - instead of building these attributes, we prefer to partner."

Much of which is still true, but a MVNO may yet be more enticing route than relying on Sprint, Verizon or Vodafone to yield screen space to the ISP.

While carriers are moving away from walled gardens, the very nature of the closed mobile network makes premium content more attractive to rights holders than releasing it to the Wild Wild Web.

The problem facing MVNOs everywhere is razor thin margins: but with its content partnerships AOL already has the resources that ought to fatten its ARPUs. So the factor that makes AOL an unattractive partner to the established carriers is exactly what makes gives it an edge as an MVNO.

AOL also has another area of experience, if it can bring itself to remember it. Ten years ago AOL offered a much smoother ramp onto the internet than its rivals. Now that users are more experienced, and broadband can be self-installed (if not exactly self-diagnosed) by a novice, that differentiation is worth a lot less.

However the world of SIP still offers some of the same challenges today that configuring a SLIP connection raised ten years ago. Even Skype takes some considerable expenditure of time and sweat from the beginner. And AOL is very much aware of how VoIP could use the AOL touch.

Engstrom and Eisler have plenty of experience of taking an unfashionable giant into new waters, cutting the deals necessary and surviving the derision. Both were responsible for driving DirectX to success and in Xbox, Microsoft has its only hit outside the historic cash cows of Windows and Office. This is rather more experience than Richard Branson knew about mobile networks when he launched Virgin Mobile.

AOL the VoIP-happy MVNO looks more like a jumble of acronyms. It might just work - with or without the support of Time Warner. ®

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