AOL - the online division of Time Warner, the world's biggest media company - will no longer charge high-speed internet users for e-mail and other web services in a gambit to attract more viewers and boost online advertising.
The company is carrying out its fourth overhaul in five years as it competes with web search and advertising leaders Google and Yahoo.
The largest US provider of internet access - which also has millions of customers in the UK - has steadily lost subscribers to high-speed services offered by cable operators and phone companies, and hopes to counter that trend by tapping a burgeoning online ad market.
The AOL transition is set to be completed in early September.
The free services will include e-mail, instant messaging, a local phone number with unlimited incoming calls as well as safety and security features.
AOL aims to hold on to individuals who are considering moving to other Internet access services but want to keep their AOL e-mail accounts and other features, the company said.
"This is the next logical step for AOL to capitalise further on the explosive rise in broadband usage and online advertising," said Time Warner president and chief operating officer Jeff Bewkes.
AOL's future is key to Time Warner, whose share price hit a two-year low in July and faces investor pressure to extract more value out of the internet division.
AOL, which has 17.7 million US subscribers, has kept the e-mail addresses of former members from the last two years and will offer the free services to them and to new users.
The company had already made clear it sought to change into an ad-supported network providing information and entertainment as its internet access business steadily lost subscribers.
It also lost 976,000 subscribers in the quarter from the first quarter and more than three million subscribers from a year ago.
Total revenue dropped two per cent to $2 billion in the quarter, but AOL's ad revenue rose 40 per cent from a year ago.
The company's websites drew an average of 113 million viewers in the United States during that period.
"Online ad growth was strong," said Richard Greenfield, analyst at Pali Capital.
"Trying to understand what really drove that is key to the prospects of AOL's new strategy."
Meanwhile, AOL expects to to reach deals to sell its European internet access businesses by the autumn.
"The sale process, which separately covers our operations in the UK, Germany and France, is progressing well," said AOL chief executive Jonathan Miller.
"We are hopeful that we have reached agreements with the winning parties sometime in the fall."
Neuf Cegetel, France's second-largest fixed-line telecoms provider, is in exclusive talks to acquire the access business of AOL France, the two companies said.
AOL would retain its internet portal operations in France and provide them to Neuf Cegetel customers through a partnership contract.
The pair said they had entered a consultancy process with AOL's staff in France and expected to complete the deal by the end of the year.
The price is about 300 million euros, according to sources familiar with the situation.
In Britain, second-round bidders include BSkyB, Carphone Warehouse and France Telecom's Orange unit, one source said.
AOL's insistence on providing internet portal services to its former subscribers has been a sticking point for some bidders.
Bidders for the German unit include include Versatel, freenet.de, United Internet, Telecom Italia and KPN, according to several sources close to the process.
Final bids for the German and UK business are both due in mid-August.
The sale comes amid fierce competition in the European broadband market as pay-TV and telecommunications providers invade each other's territory, often offering subsidised broadband internet packages.
The selloff of the European internet access business is part of AOL's plan to draw most of its revenues from advertising rather than subscriptions.