The news that internet service provider AOL plans to focus on free services as it responds to the erosion of its traditional subscription business model was overshadowed by the anticipated loss of nearly a quarter of its staff.

AOL chairman and chief executive Jonathan Miller told his worldwide workforce of 19,000 that within six months around 5,000 of them would no longer be with the company, which plans to cut more than a billion dollars in operating expenses in 2007.

Time Warner reported that earnings at its AOL subsidiary declined slightly to $2 billion for the last quarter, due to an 11% decrease in subscription revenues, offset in part by a 40% increase in advertising revenues.

The internet service operator has been hit by competition from other broadband providers, losing over three million subscribers in the United States over the last year, and over half a million in Europe, although it still has 17.7 million members in the US and 5.6 million in Europe.

AOL is in the process of selling its European internet access businesses, which operate in Britain, France and Germany, employing around 3,000 staff.

The company aims to focus in the future on offering free services funded by advertising.

The Time Warner business has announced the launch of a new video portal with 45 video-on-demand channels with thousands of hours of video programming. Its video search is based on technology it acquired with Truveo and Singingfish. AOL has also invested in startup online video distribution startup Brightcove.

Later this year, AOL plans to offer open interfaces to allow third-party developers to incorporate video search results. It will provide tools to enable developers and consumers to incorporate features from the AOL video portal into other web sites. AOL is also working with other broadband service providers to develop co-branded versions of the video portal.

Gold Rush, a seven-week interactive reality event will launch in September in conjunction with the CBS television network and other partners.

“AOL has long been a leader in online video and with the new AOL Video portal we have created the best and easiest place online for anyone on the Web to find, watch and share the videos they’re looking for,” said Kevin Conroy, executive vice president of AOL.

Free email, instant messaging and social networking features will also be offered to anyone with an internet connection, and AOL is offering to re-instate the screen names of anyone that has left the service in the last two years.

AOL also plans to offer up to 5GB of free online storage available to anyone with an AOL or AIM screen name, with the ability to upgrade a premium service with 50GB per user. It follows the acquisition of online storage company Xdrive.

The new strategy places AOL in direct competition with Google, Yahoo! and MSN, all of which are developing video services.