December 5, 1996 7:00 PM ET

AOL girds for next surge in growth
By Maria Seminerio

  The joke has circulated for years: America Online Inc., accustomed to bragging about its size but hampered by network growing pains, is dubbed "America On Hold" or "America Offline." But now, as the service blasts past the 7-million-user mark, adding half a million subscribers in October and November, many observers believe AOL's backbone is finally ready for prime time.

"They have massive amounts of data that should help them in forecasting where the demand will be," said Emily Green, an analyst at Forrester Research Inc., in Cambridge, Mass. Green and other AOL watchers believe the service's nationwide network, AOLnet, has been improved to the point of being able to handle the current boom.

Growth of less than 20 percent in a 30-day period should be no problem for AOL, of Vienna, Va., said Rob Enderle, an analyst at Giga Information Group Inc., in San Francisco.

"I'm not saying there couldn't be more technical problems, but if there were, it wouldn't have disastrous consequences for them," Forrester's Green said.

That's because AOL, the largest of the commercial online services that many analysts had expected to wither, has defied naysayers to become the key provider of Internet access, E-mail and value-added content for online consumers. AOL's sizable lead over its nearest competitor, CompuServe Inc., is even more remarkable in light of the massive service outage AOL suffered just this summer.

An unlikely mix of technical and communications snafus shut the service down for 19 hours on Aug. 7, leading some analysts to the verge of predicting its demise. The nearly day-long outage was merely the most high-profile network problem suffered by AOL; previous ramp-ups were also followed by service delays that drove some users to quit in frustration.

In the first five weeks of this year, AOL added 400,000 subscribers, and E-mail and Internet access slowed to near-gridlock levels during peak usage periods.

The company responded by doubling the number of modems in the AOLnet network, and further expansion is likely next year as AOL adjusts to accommodate this holiday season's harvest of new users.

A few observers, though, question whether AOL's recently announced $19.95 unlimited-access pricing would put a strain on its network by encouraging users to stay online for longer periods.

"AOL continues to be a nighttime phenomenon, and we'll continue to see a lot of tie-ups during the nighttime hours," said Peter Krasilovsky, an analyst with Arlen Communications Inc., in Bethesda, Md. "Now we could see a lot more people going on AOL during the day as well."

Bill Pytlovany, a software developer and onetime evangelist for AOL's development studio program who has worked with the company for many years, said he expects the next couple of months to bring continued delays for users.

"I'd expect to see some growing pains as they add new users over the holidays," Pytlovany said.

But with AOL's "churn" rate--the rate at which the service loses subscribers compared with those it gains--at its lowest level in a year, and with the $19.95 flat-rate pricing boosting its share value, AOL is poised to continue the growth it experienced over the last several weeks, said Steve Eskenazi, an analyst at Alex. Brown & Sons, in San Francisco.

The company's shares have crept up steadily since taking a dip in October on news that it was taking a $354 million accounting charge. Lehman Brothers Inc. this week reiterated its "buy" rating for AOL stock, which was at $39.75, down 3/8, in late afternoon trading today.

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