July 21, 2002 By STEVE LOHR and SAUL HANSELL 

Even before it bought Time Warner two years ago, America Online had ambition to spare - a sense that history,  technology and markets were all going its way. It was a corporate attitude that often bordered on arrogance.

 The goal was nothing less than to "establish AOL as the most valuable and respected company, " declared Stephen M.  Case, then chairman of America Online, in 1999. "We won't settle for just one of them. "

 As last week's management shake-up showed, America Online,  once seen as proof that Internet companies would take over the economy, has been humbled a lot lately. With the dot-com collapse, advertising has dropped sharply at America Online. The flight from Internet companies has battered AOL Time Warner shares, down 75 percent since the merger was completed in January 2001, a slide worsened by questions about the company's accounting practices. Hopes that the new-economy company would bring added sales,  synergy and a faster pace to Time Warner have long faded.

 The resulting turmoil led to the departure under pressure on Thursday of Robert W. Pittman, the chief operating officer, who returned to AOL this spring to make the promises of the merger a reality.

 Now more than ever, reviving AOL Time Warner, whose shares fell an additional 87 cents on Friday, to $11. 58, means finding a way to reinvigorate America Online. The most pressing task, , Mr. Case, chairman of the combined company, said in an interview on Friday afternoon, is to "bring stability to the management team. "

 "I am confident that AOL will re-emerge as the key driver of growth for the whole company, " he added.

 As times have changed, though, so has Mr. Case's tone. Mr.  Case recalled how it took a decade of struggle against indifference and skepticism before the online service finally became popular in the mid-1990's. "We just go in cycles, " he said, "good days and bad days, and mostly bad days recently. "

 Over the years, Mr. Case said, he has been alternately hailed as a genius and dismissed as an idiot. "Maybe it's perverse, " he said, "but it's more comfortable to be in the idiot zone and know the pendulum will swing your way. "

 That pendulum of business and investor opinion has swung hard against America Online since the merger. It is the laggard in AOL Time Warner. Its weakness is a source of corporate dissension, as Time Warner executives watch the value of their shares plummet. There have been a host of management changes and departures, culminating in Mr.  Pittman's. As America Online's stature fell within the combined company, so did his star.

 America Online's immediate challenges include calming the management storm and reversing the steep fall in advertising revenues and the slowing growth of its subscriber membership. Longer term, it must confront the fact that more and more households are moving to high-speed Internet access through faster telephone lines or through cable television systems, shifting from slower dial-up,  telephone access, America Online's stronghold. To date, the company's progress in signing up subscribers for high-speed service, analysts say, has been disappointing.

"That is a big problem for AOL, " said David B. Yoffie, a professor at the Harvard Business School. "And its traditional, dial-up service is less compelling than it was a couple of years ago, when AOL had a big lead in features like instant messaging and parental controls. It all adds up to more competition for AOL, and that is only going to get worse. "

 As chairman of the parent company, AOL Time Warner, Mr.  Case will play an oversight role. But the direct responsibility for America Online will fall to Don Logan,  the Time Warner magazine executive who was chosen last week to head the company's media and communications group, which includes America Online.

 Mr. Case called Mr. Logan a "steady hand" who may not be an online veteran but whose magazine experience gives him a firm grasp of businesses that depend on subscription revenue, advertising and offering a product that commands a loyal audience. "He understands that the core of the business is giving people magazines they want to read and in our case giving members a service they can't live without, " Mr. Case said.

In the Internet bubble days, Mr. Case said, "we took our eye a little bit off the ball, " chasing the easy money of dot-com advertising deals instead of offering services to subscribers.

 Indeed, America Online subscribers are the foundation of the business. Its nearly 35 million subscribers worldwide - way ahead of its nearest rival, Microsoft's MSN, with 8 million, all in the United States - each pay an average of nearly $20 a month. Advertising is cyclical, but the subscription revenue flows in a steady stream. Thus American Online generates a river of cash for the combined company and is one reason that there is no obvious pressure for AOL Time Warner to try to spin off the online subsidiary.

 Mr. Case takes comfort from that fact, despite the current slump. "Every time I put my head on the pillow, knowing we have 35 million subscribers helps me sleep better at night, " he said.

 The company is conducting a search for a new executive to run America Online day to day, reporting to Mr. Logan. That search, Mr. Case said, should be completed in a month or so; interviews have begun.

 People involved in that search say AOL is looking for someone with experience in businesses related to selling subscriptions or other products to consumers. Names on that list include Marjorie M. Scardino, chief executive of Pearson; John F. Antioco, chief executive of Blockbuster;  Paul S. Pressler, chairman of Disney's theme park unit; and Stephen B. Burke, president of Comcast Cable.

 Whether any of them would want the job, however, is not clear, given the turmoil at America Online. There is another drawback: the person would report, after last week's management shuffle, not to Richard D. Parsons, the chief executive of AOL Time Warner, but to Mr. Logan, a layer down from the top.

 Still, the financial payoff for joining the big online service when the business is struggling could prove attractive, if its performance and stock price perk up.  "With the stock at 12 bucks, there is a lot of upside if it works, " said Bill Simon, head of the media and entertainment practice for Korn/Ferry, the executive search firm.

Whoever takes the job is likely to find the ranks of veteran America Online executives considerably thinned.  Recent departures include Barry M. Schuler, former chief executive of the AOL division, and Jonathan Sachs, a senior executive in the online service. And now that Mr. Pittman has departed, company executives expect that many from his close circle of advisers will leave before long. These include Kenneth B. Lerer, an executive vice president;  Michael M. Lynton, the company's president for international activities; Mayo Stuntz, an executive vice president in charge of cross-divisional cooperation; and Marshall Cohen, a senior vice president for research.

Despite its huge lead in subscribers, America Online is facing increased heat from competitors on several fronts.  Its subscriber audience has grown steadily, but more slowly than in the past, and rivals have gained some ground.  America Online's share of the online market in the United States, for example, has slipped to 37 percent, from 41 percent two years ago.

 Some rivals, like MSN, are trying to lure subscribers with features that America Online does not offer, like software that enables users to sort e-mail messages in more sophisticated ways and to filter out junk mail. Others are offering lower prices, like the $10-a-month Juno and NetZero services from United Online.

"AOL is vulnerable, " said Mark R. Goldston, United's chief executive. "What happened in long distance and in wireless will happen to Internet access. It's a commodity, and people are going to say, `Why spend more money when I don't need to? ' "

At less than 5 percent, America Online holds an anemic portion of the growing market for high-speed Internet access. "Obviously, we haven't done as much as we would have liked, " Mr. Case noted.

The shorthand term for the higher-speed data pipes into homes is broadband. The business significance of broadband technology is that it makes it much easier to supply movies, music, multimedia games and shopping over the Internet than with dial-up telephone access, where America Online dominates. Broadband could open the door to a flood of new information, shopping and entertainment services - and new revenues for the suppliers.

Yet to date, America Online's efforts to sign up broadband subscribers have gone slowly. And the merger with Time Warner, analysts say, has hurt America Online's broadband efforts more than its has helped. Suppliers of broadband Internet access - telephone companies and cable networks - suddenly began to see AOL Time Warner as a competitor instead of regarding America Online as a partner whose service might stimulate the adoption of more costly broadband access.

And America Online's reputation for aggressively pursuing new business markets may have been counterproductive. Mr.  Case spoke of the "uncertainty, even paranoia, a few years ago" among cable television operators. "There was this view, " he said, "that AOL had world-dominating aspirations that would encroach on the television business. " The perception, Mr. Case noted, was a distorted caricature. But he added: "We probably, in retrospect, unintentionally helped fuel some of it. "

Today, about 13 million of the 60 million households in the United States with Internet access had high-speed,  broadband connections. But the broadband numbers are growing rapidly, and that shift could be an important opening for America Online's rivals, including Microsoft,  Yahoo and telephone and cable companies. "Broadband is a real inflection point, " noted Professor Yoffie of Harvard.

For his part, Mr. Case called broadband "arguably the biggest opportunity for our company. " But he notes that shifting America Online's millions of dial-up subscribers will be a gradual evolution over years. Industry analysts,  however, say there is also a financial inventive for America Online to go slowly. Its estimated profit from the average dial-up subscriber is $10 a month, analysts estimate, while the profits on America Online's broadband subscribers are about half that level.

The kinder, somewhat humbler America Online is evident these days in the behavior of its advertising staff. In the heat of the Internet frenzy, America Online prospered by helping newly formed dot-coms relieve the pressure on their bank accounts, overstuffed with venture capital. Its frenzied deal makers earned a reputation as arrogant,  dysfunctional, occasionally unforthcoming, as they bid one start-up against another to sign deals that often reached the tens of millions. At the same time, they virtually ignored routine campaigns from less flashy companies - the sort that stayed in business after the market collapsed.

"If your campaign was under a couple of million, they weren't interested, " said Sharon Katz, the vice president and media director for Modem Media, an online advertising agency.

More recently, the company has become more responsive to smaller deals and has started giving advertisers more of what they want, like advertisements with sound and animation.

"They are 100 percent better than last year, but they are still only halfway there, " Ms. Katz said.

Indeed, Robert Sherman, who was appointed to head AOL's ad sales unit two months ago, said he is reorganizing the department to reduce the time it takes for campaigns to be run.

"We ought to make doing business with us a pleasure rather than the arduous experience it has been for some clients, " he said.