America Online, the computer online network that has been staggering under the weight of its own popularity, moved Wednesday to head off a threatened wave of state consumer fraud lawsuits by offering credits and refunds to its 8 million members and taking new steps to make its network more accessible.
The company has been under siege from angry customers since December, when a new pricing plan created a surge in demand that overwhelmed AOL’s network and produced a rash of busy signals. In recent weeks, state attorneys general from around the United States have taken up the issue, and several had threatened legal action.
In reaching a settlement Wednesday with the attorneys general of 37 states, AOL agreed to offer customers one free month of service or refunds on a graduated scale. It also will make it easier for disgruntled customers to quit the service and will curtail severely its marketing efforts during February. Analysts estimated the refunds could cost AOL $65 million.
The settlement is highly unusual in that it involves such a large number of states and was put together in such a short time - just a week and a half after representatives from 19 states met in Chicago to discuss a joint consumer fraud claim against AOL.
“You cannot offer a service to someone and charge them and then not provide it,” said Illinois Attorney General Jim Ryan.
AOL’s travails highlight the volatile nature of the Internet services business today. New customers are signing up by the millions, but the technical infrastructure has not always kept pace - and the industry has not adapted itself to the demands of the non-techie consumers who expect reliability comparable to that of the telephone or the television.
AOL, which offers electronic mail, publications and chat rooms on its own network as well as access to the broader Internet network, has nearly doubled in size just in the past year. It dwarfs all of its competitors: Nearly half of all Americans who are connected to a computer network get their connections through AOL.
The company got those customers by spending heavily on marketing, and by building a service that was more consumer-friendly than most. It did, however, charge hourly fees that could add up quickly for heavy users.
But the development of the easy-to-use graphical portion of the Internet known as the World Wide Web made it relatively simple for consumers to connect directly to the Internet - which generally costs only about $20 a month for unlimited access. That forced AOL to go to unlimited access pricing too, at just $19.95 a month.
As AOL Chairman and Chief Executive Steve Case admitted Wednesday, the company woefully underestimated how well its new flat-rate pricing would go over with consumers. Not only did half a million new customers sign up in December, but the average time each customer spent connected to the network in January was double what it was in September.
That double whammy overloaded the network, and many subscribers simply couldn’t get on. Among the customers unable to connect were many business owners and professionals who rely on AOL to communicate with clients and advertise their services. America Online had previously announced it would invest $350 million to expand its network, but the capacity crunch is expected to last until May.
Under the settlement, which covers December and January, America Online customers who were connected to the network for less than two hours a month can apply for a 100 percent refund. Customers who logged on for between two and eight hours can get a 50 percent refund, and those who were connected for between eight and 15 hours may ask for a 25 percent refund. In lieu of a refund, all AOL customers can request one free month of service.
The settlement also requires America Online to make it easier for customers to quit the service. AOL will increase its customer service staff and allow members to cancel by phone, fax and online.
To curtail growth, America Online will cease nearly all advertising for the month of February. Once marketing efforts are resumed, AOL must make it clear to consumers that they might encounter delays in getting online.
America Online is still facing a legal battle directly from subscribers in California, New York, Texas and other states who are seeking approval for a class action.