Not that AOL was wrong in deciding to give away e-mail accounts and software once reserved for paying subscribers, analysts said. The company needed to stop its customer exodus and the defection of potential eyeballs to rivals like Yahoo Inc. (Nasdaq:YHOO - news), Google Inc. and Microsoft Corp.

Now, Time Warner Inc.’s Internet unit needs to shed its image as a has-been dial-up access provider stuck in the ’90s.

“Are they going to keep that yellow dude, whatever his name is?” asked Gartner research analyst Allen Weiner, referring to AOL’s “running man” icon. “It’s what people recognize as AOL, but to me it represents all those unwanted discs.”

In making the drastic strategy shift Wednesday, AOL executives showed a willingness to let go of the company’s legacy access business and accept larger declines in subscribers, who pay as much as $26 a month. AOL expects at least 6 million, or one-third, of its U.S. subscribers to stop paying within the year.

AOL also braced for drastic cuts in payroll — as many as 5,000 jobs — in a quest to find more than $1 billion in savings from marketing, network and other costs, such as the promotional trial CDs that AOL infamously has stuffed into mailboxes. Some were fetching $5 on eBay on Friday.

The changes will “better position AOL to fully take advantage of compelling online trends,” namely the boom in Internet advertising, Time Warner’s chief executive, Richard Parsons, told analysts Wednesday.

Only time will tell whether he’s right.

The numbers do show promise. In the second quarter, AOL saw a 40 percent jump in advertising revenue.

But that’s largely because it’s making more money per page viewed — an increase of 58 percent from last year. According to comScore Media Metrix, page views — a key figure because it reflects the number of ads displayed — decreased 26 percent in June. Subscriber defection is to blame, because they account for 80 percent of page views.

AOL believes it will stop the declines, essentially by no longer sending its subscribers to rivals with free e-mail.

The company also is counting on winning back people who have left within the past two years by letting them reclaim their old AOL.com e-mail addresses. E-mail is a particularly important driver of traffic to other ad-supported services because it’s something people check regularly.

But David Hallerman, a senior analyst with research company eMarketer Inc., doesn’t expect many returns. Former AOL subscribers, he said, already have spent the time giving friends and family new e-mail addresses when they decided to ditch AOL.

“It’s not like you look cool to have it, so you wouldn’t want to have to change it again,” he said.

Even tougher will be AOL’s ability to draw new users entirely.

Time Warner and AOL executives offered few specifics Wednesday, although Jupiter Research senior analyst David Card points out that AOL has been rolling out new services steadily, including those tied to its popular AIM instant-messaging platform.

In recent months, AOL introduced a social-networking site called AIM Pages, the ability to receive free incoming calls through AIM Phoneline and a business version of the AIM software with free Web conferences — all designed to keep users viewing AOL content and ads.

AOL also has the potential to tap the archives of other Time Warner units for video, as it already has with old Warner Bros. television shows like “Welcome Back Kotter” and “Growing Pains.”

Beyond TV, Time Warner has magazines and movie studios, and AOL’s success will be guided by “how it chooses to leverage that content,” said Jennifer Simpson, an analyst with the Yankee Group.

On Friday, AOL launched a test version of a new video portal the company envisions as a television guide for the Internet. The idea is to present dozens of video-on-demand channels, just like cable TV, while allowing visitors to search for video located elsewhere on the Internet, including rivals like YouTube.com.

AOL also is looking beyond content with free services like virus protection and parental controls. The storage service it announced Thursday beat what rivals offer, with enough room for 1,250 songs or 2,000 photos.

Executives hinted more will come.

Adam Sohn, a director in Microsoft’s online services group, acknowledged AOL’s strengths with Time Warner content and with instant messaging, particularly in the United States. But he said he’s not worried.

“They clung to the past a little longer than everyone else,” he said. “They are embracing a model that the rest of the industry has already made traction on. They have some assets, but I don’t think they have any assets that are runaway victories.”

In the all-important category of search, AOL is fourth, behind Google, Yahoo and Microsoft’s MSN, according to Nielsen/NetRatings. AOL benefits from a 5 percent ownership by Google, which provides AOL’s search results and keyword ads. But for routine searches, many users go directly to Google, denying AOL the opportunity to distract visitors with an ad-supported video or two.

AOL also trails those three in unique visitors. It held steady in June, even as its rivals all grew — Google by 23 percent.

Meanwhile, fast-growing sites like YouTube and News Corp.’s MySpace are looking to capture ad dollars, too.

AOL’s strategy shift will make it harder for rivals to pull share from AOL, but won’t necessarily help AOL grow, said tech analyst Rob Enderle.

“In this business you are either growing or shrinking,” he said. “Treading water is probably not going to cut it here.”