How AOL Lost Its Dominance

AOL to offer free e-mail service
By Aline van Duyn
August 2 2006
The Financial Times

AOL on Wednesday made its boldest effort yet to ditch its reputation as an internet dinosaur reliant on a dying dial-up connection business by making its aol.com e-mail addresses free to people signing up for high-speed broadband from other providers.

The move marks AOL’s attempt to square up to Yahoo, MSN and Google – its biggest online competitors – which have long provided free e-mail and other services and have been snatching AOL’s millions of departing customers.

This is a good example of technological progress eliminating barriers to entry. AOL established itself in the mid-1990s when the cutting-edge technology was dial-up. AOL was successful because its software was particularly user-friendly when computers were a new technology. It also provided popular services such as instant messaging, which, back in the day, could only be used to chat with other AOL subscribers. (Economists call this barrier to entry a network externality: subscribers are better off as more people join the network. Potential entrants don’t have the critical mass to compete.)

Now, the market has changed. Computer users have become more savvy. MSN and Yahoo provide free email and instant messaging services. And software such as Trillian allows users from differrent networks to chat. And, of course, along came broadband. The old, stodgy AOL is now losing customers in droves.