By Kenneth Li
NEW YORK (Reuters) - America Online will begin offering a free e-mail service on Wednesday tied to its popular instant messaging service, ahead of a big relaunch of its free AOL.com Web site later this year.
AOL's free Web-based e-mail service is nearly a decade behind Microsoft's Hotmail service and several years behind a Yahoo E-mail offering.
But the online division of Time Warner Inc. is betting that the combination of e-mail with its ubiquitous instant messaging software (AIM) will create a more powerful service combining all electronic and phone messages.
AOL will integrate its recently launched digital phone service this fall, when the AIM software will be rewritten, allowing users to retrieve voice mail, e-mail and instant messages from any computer.
"AOL is a bit late to the Web mail game, but it's not too late," said Joe Laszlo, a senior analyst at Jupiter Research. "It's a question of integrating different communications channels together giving them an opportunity to go a bit further than anyone else has gone."
The once prominent provider of paid online services will offer free e-mail to 20 million active users of the free AOL Instant Messenger as a test before it's final launch about a month later.
The e-mail service, which offers 2 gigabytes of free storage space, will be subsidized by banner advertisements that run alongside the e-mail screens, similar to other free Web-based e-mail services.
AOL's new AIM Mail service is part of an ambitious plan to overhaul its business model to focus on freely available services and programming from one that depends on subscription revenue.
The move is a dramatic reversal from its previous strategy, built around assembling the most compelling package of Internet programming in order to get subscribers to pay about $20 a month for dial-up Internet service.
AOL has been losing subscribers to phone and cable companies offering high speed Internet packages. At the same time, AOL's advertising revenue has exploded, jumping 45 percent in its most recent first quarter from a year ago, prompting the Internet service to rethink its strategy last year.
"It's a part of our broader 'Audience' strategy that takes advantage of the significant increases in advertising, search and e-commerce on the Internet," said Chamath Palihapitiya, vice president and general manager of AIM at AOL.
AOL will be up against Yahoo Inc., at which e-mail services accounted for 53.2 percent of traffic to all Web mail services in the week ended May 7, according to measurement firm Hitwise.
It will also be up against Google Inc. Google's e-mail service, Gmail, helps marketers target e-mail users by serving ads linked to key words in e-mail text. Google uses technology to sift through e-mail for relevant text and has said no humans actually read users' e-mail.
"That's creepy," Palihapitiya said, referring to Google's use of technology to target e-mail users with ads. AOL has a lucrative partnership with Google, which provides the search engine foundations of AOL's search site.
An AOL executive said AIM Mail will also include junk e-mail fighting features, like AOL.
AIM users will automatically qualify for an account using their current AIM user name.
Copyright 2005 Reuters Limited.
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