Here's where I think AOL went wrong.  First, they got out-priced by other ISPs (often dramatically).  AOL was $20/month for dial-up right before broadband became widespread, when you could get often more reliable service for half that.  I seem to recall their DSL being way overpriced too.

<queue old-man voice>
That said, I do have some very fond memories of AOL back in the days of version 2.0-3.0 or so.  At that time we'd use a local BBS or two combined with AOL.  AOL had a built-in web browser, but there wasn't a whole lot on there other than universities and, of course, porn (but there were places on AOL that were better for that anyway...same thing for warez).  That was how I was introduced to those bastions of the Internet: porn, warez, script kiddies, and of course pretending to be a 12-year-old girl to troll pedophiles.  A bunch of my friends were on it, and I was in the odd online RPG (which was the main reason I joined to begin with, come to think of it).  This was back in the days when they charged by the hour, too, and I definitely ended up with some huge bills for my parents trying to d/l warez weighing in at the then-monstrous size of 50MB.  

Eventually I quit because it was cheaper to be elsewhere, and when things like ICQ (which ironically got bought out by AOL IIRC) became more ubiquitous, AOL stopped being able to justify charging what they did.  Everything that used to be on AOL was on the Internet, ICQ took over as the preferred chat protocol (well, that and we decided to set up our own IRC channel).

So basically AOL became obsolete, and now they're trying to use ads which everyone hates to fund a program that doesn't do anything you can't already do with a web browser.  The only thing they still have that's useful is Instant Messenger, and a lot of people still use it (which I don't understand, given how many better, ad-free alternatives there are out there), but at this point there's no way to charge for it, and only the official client actually has any ads built-in.

Q: What do you think of western civilization? Gandhi: I think it would be a good idea.

I never used AOL and distinctly remember when AOL connected it's network to 'net and what a disaster all the n00bs were.   From my perspective, AOL was always a transient business until it's users could figure out how to get a better 'net connection, but then again, I've had a dedicated, high-speed line since 1995 and the same email address since about 1993.

Chris.