Time Warner is trying to split AOL's dial-up business from its Web-content operations, and running into trouble in the process, says Henry Blodget. The problem: Allocating costs. AOL can run its websites cheaply in part because it has so many servers running email and other services for subscribers; scale economics mean that servers and bandwidth cost less. A smaller, standalone Web-publishing operation wouldn't enjoy the same benefits. But I suspect the larger problem is allocating revenues, not costs.

AOL subscribers continue to visit its websites in droves; the placement of a link on its welcome page drives highly profitable traffic. Why shouldn't the Internet-access business get a cut?

There's a simple answer: AOL should put its traffic up for bid. If online ads can be sold at auction, why not pageviews, too? AOL's infrastructure, too, can charge a market rate; Amazon.com's storage and computing rental operations offer an easy proxy for these costs.

One suspects the reason why there's a holdup in splitting up costs and revenues between the businesses is not that AOL's number-crunchers haven't come up with figures similar to what market mechanisms would dictate. Rather, it's that the numbers aren't to Time Warner management's liking. Dial-up is still quite profitable; Web publishing, not to the same degree. For Time Warner, which wants to shed the former and keep the latter, that result is quite awkward.

(Screenshot by Dave Taylor)

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