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You’ve Got Ripped Off! AOL’s Scam Economics

By Matthew Yglesias on January 21, 2011 at 10:29 am

"You’ve Got Ripped Off! AOL’s Scam Economics"

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The economics of scams continues to be, in my opinion, an underexplored subject. Here Nicholason Carlson from Business Insider extracts the fact that AOL’s business at this point is mostly dependent on a pretty crude ripoff—selling internet access to old people who already have internet access:

In his big New Yorker profile on AOL this week, Ken Auletta explained that 80% of the company’s profits STILL come from AOL’s subscription business.

What’s troubling about AOL’s subscription business is who the subscribers are and why they may be sticking around – in Auletta’s words, “older people who have cable or DSL service but don’t realize that they need not pay an additional $25 a month to get online and check their email.”

A former AOL exec explains that this is AOL’s “dirty little secret” – “that 75% of the people who subscribe to AOL’s dial-up service don’t need it.”

Auletta’s piece isn’t online, so I’m going to check it out in print. But here’s an audio feature with Auletta talking about it. If we take these numbers seriously, that means 60 percent of the profits of what’s still a major enterprise are coming from a high-volume, small-scale scam.

I think this sort of issue deserves more attention in part because as the economic pie grows bigger and bigger, the number of hours in the day doesn’t grow. So in many cases the opportunity cost of taking the time to really check things out is rising. That means more and more often it’ll be the case for consumers to be rationally ignorant about what exactly they’re doing, and it’ll more and more make sense for firms to exploit that. Meanwhile, across the developed world the number of scam-prone elderly people is increasing and rapid growth in the developing world is creating a potentially giant class of marks who don’t have generations of inoculation to the panoply of modern marketing techniques.

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