AOL Time Warner, the world's largest internet and media company, this week reported a first-quarter loss of $54.2 billion (€48 billion) after taking the biggest charge in corporate history.

The loss, due to accounting rule changes, reflects the dramatic decline in value of AOL's $ 106 billion acquisition of Time Warner.

But the company's revenue and cashflow beat analysts' modest projections in the first quarter, as the strong box-office performance of Lord of the Rings helped blunt the impact of a 13 per cent decrease in advertising revenue.

However, only a year ago, it looked as though AOL was immune to the economics of the internet bubble. The popular online service was gaining new subscribers at a rate of about one million every two months, and it continued to rake in advertising revenue.

Now, however, things look very different. Subscriber growth is slowing and the lucrative online advertising agreements that it signed at the height of the internet boom have run out. Worse, AOL's strategic vision of its future - that its growth would be fuelled by new, high-speed internet services - is in doubt.

Instead of being the growth engine at the centre of a new media empire at AOL Time Warner, the AOL service is now under fire from Wall Street analysts and investors.

There is even talk, inside and outside the company, that the AOL service should be spun out of AOL Time Warner. Most investors and analysts find this far-fetched.

Yet the fact that it is even a topic of conversation highlights the depth of the Wall Street concern - and indeed the sense of betrayal felt by many inside the old Time Warner.

"A year ago, the perception was that putting together such a strong company with so much clout would be bad for competition," said Mr Tom McIntyre, president of Dessauer & McIntyre Asset Management.

"Now, a year later, people say that they should reverse course and split off AOL. It's been a head-spinning 12 months," he added.

The crisis at AOL will be the primary challenge for Mr Richard Parsons, who will succeed Mr Gerald Levin as chief executive next month.

Just two weeks ago, he dispatched Mr Robert Pittman, the company's chief operating officer and master salesman, to AOL's headquarters in Dulles, Virginia, to take over the ailing division.

But beyond the numbers, investors were hoping this week that Mr Parsons would take steps to rebuild credibility on Wall Street. Investors complain that management has been less than forthcoming about crucial details of the finances, particularly at the AOL unit.

Investors say they were shocked to learn that AOL Europe lost $600 million last year, a fact disclosed only after the company was forced to buy out Bertelsmann's stake in the unit for nearly $7 billion in cash.

They were also surprised to learn that AOL would lose $400 million from the unravelling of a little-noticed venture with Sun Microsystems called iPlanet.

There are also serious concerns that AOL's strategy to migrate its current "narrowband" subscribers to "broadband" services.

But AOL Time Warner is having no success in persuading other cable companies to carry the AOL service - a fact that many analysts and investors find disturbing.

"The cable companies can smell blood," said one media investor."They're not going to make a deal with AOL while they're in such a weak position. You don't need AOL in a broadband environment."

Perhaps acknowledging the difficulty of selling AOL to rival cable companies, Mr Pittman is now emphasising that the company's transition to high-speed services - thought to be a key strategic reason for merging AOL and Time Warner - is "evolutionary, not revolutionary".

Presenting the results on Wednesday, Mr Parsons dismissed much of the concern about the AOL unit's performance as "wirl". He said he expects the worst to be over by mid-year and recovery in 2003.

He admitted that the weakness of the internet advertising business was a challenge "and we have taken decisive steps to address it". Notwithstanding measures to improve the company's performance, it appears to have a long road ahead in restoring the credibility of the AOL service, which was once thought to be the crown jewel of the group.

"I never thought it would collapse the way it has," said Mr Michael Gallant, an analyst at CIBC Oppenheimer. - (Financial Times Service)