Time Warner's AOL may be offering its services, including e-mail, free of charge to its users with a high-speed Internet connection, according to a news report Thursday.

According to the report, AOL stands to lose up to $2 billion in subscription revenue if it goes through with the proposed plan, banking on boosting AOL's advertising revenue.

The move, still unconfirmed by Time Warner (nyse: TWX - news - people ), could be part of a larger strategy for change at AOL.

According to Bear Stearns analyst Spencer Wang, Time Warner's strategy aims specifically at transitioning AOL's users from dial-up service to broadband, since broadband users are, on average, 69% more valuable than the net present value of dial-up subscribers.

And recent reports about developments at AOL point to such a strategy, Wang said.

First, TVweek reported that AOL pulled its upfront television advertising this week, a move that was related to a strategic review at the business unit, according to an AOL spokesperson.

Wang said AOL's advertising pullback is likely part of Time Warner's plans to cut marketing expenses at AOL in order to offset the negative impact of converting its dial-up user base to broadband.

Second, Street Insight reported AOL may lay off over half of its employees in the AOL Access business unit, which oversees acquisition marketing, member services and network management for AOL's internet-access services.

The headcount cut, Wang said, will play an important part in offsetting lost dial-up earnings.

But even though Wang said Time Warner's strategy for AOL is "wise," it is also putting AOL's profit at risk.

That risk can be offset, he said, if AOL cuts fixed costs. Specifically: subscriber acquisition costs should total around $138, call-center headcounts should be cut by 80% and all non-call center jobs should be reduced by 50%, Wang estimated.

For now, Wang has maintained a "peer perform" rating on Time Warner.

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Mary Crane

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