"This is the next logical step for AOL to capitalize further on the explosive rise in broadband usage and online advertising," said Time Warner President and Chief Operating Officer Jeff Bewkes.
The AOL transition is set to be completed in early September, and the services to be offered for free include e-mail, instant messaging, a local phone number with unlimited incoming calls as well as safety and security features.
AOL had already made clear it was interested in changing into an ad-supported Internet network providing information and entertainment to users, migrating away from an Internet access business that continues to lose subscribers.
In the second quarter, AOL's ad revenue rose 40 percent from a year ago, Time Warner reported on Wednesday. AOL also lost 976,000 subscribers in that period compared with the first quarter.
AOL said it would continue to offer its slower dial-up Internet access but will not aggressively market the service.