Seidman's (AOL) Online Insider - Vol. 5, Issue 7
============================================================================
Seidman's (AOL) Online Insider - Vol. 5, Issue 7
Visit the Online Insider on the Web for additional content and access
to the Insider Talk discussion forums. A new Seidman's 25 is now up!
< http://www.onlineinsider.com >
============================================================================
Copyright (C) 1998 Robert Seidman. All rights reserved. May be
reproduced in any medium for noncommercial purposes as long as
attribution is given.
IN THIS ISSUE
- Editor's Note
- AOL Raises Rates and Eyebrows
- Why The Telcos Don't Play
- AOL Announces Reorganization
- CompuServe AOL-Style
- Can AOL Have Its Cake and Eat It Too?
- Stock Watch
- Subscription Info
Editor's Note
=============
One of the disadvantages of my shift to biweekly publication became
evident when America Online made a slew of announcements on Feb. 9.
Most notable, at least in terms of coverage, was its plan to raise the
rate for flat-fee service from $19.95 a month to $21.95 a month
beginning in April.
Based on what I read and heard, I thought this was the most fun news
that's happened in a while. You've got Prodigy's new chief, Russ
Pillar, sending out a press release saying, in effect, that given AOL's
service levels, it's unbelievable that the company would raise its
rates. You've got Sky Dayton at EarthLink (which subsequently announced
a significant arrangement with Sprint that I'll get to later) saying:
"AOL just raised the price of inferior service." Then I read some
Associated Press coverage of the story, quoting David Trachtenberg,
director of marketing for MCI Internet. His comments criticized the
price hike. "It seems they're going to penalize all their users,"
because the company spent more than expected to develop its own content,
he said, according to AP. Not since Dave Garrison of Netcom fame was
pummeled into near-anonymity by AOL have I heard such trash-talk. Very
cool! And while I like Sky and Russ, I expect they'll meet with a
similar fate (though, like Mr. Garrison, they're gonna make a buck or
two along the way).
I'm not so sure about Trachtenberg, though. It's sort of interesting.
Oh, sure, Trachtenberg himself may wind up among the littered remains of
former Internet executives looking for that next big thing to do. MCI
might have to counsel Mr. Trachtenberg about speaking to the press,
because things are going to get very, very tricky if the proposed
MCI-WorldCom merger goes off without a hitch. AOL is the biggest single
data company IN THE WORLD! How do you compete with your biggest
customer? With WorldCom in the picture, the proposed MCI-Yahoo!
arrangement -- with some marketing bucks behind it -- just might be the
sleeper here.
AOL Raises Rates and Eyebrows
=============================
Did AOL need to raise its rates? Need is such a relative thing. AOL's
story is pretty much this: "We had forecast growth correctly, but not
usage, so usage is costing us more than we thought. Though we cut a
very favorable deal for access via WorldCom when we traded ANS to it for
CompuServe's interactive services and $175 million, we will not break
even on access. Since flat fee was implemented, average usage per month
has more than tripled -- from around seven hours per subscriber to more
than 21 hours per subscriber."
The only problem I have with the story is in believing that AOL didn't
correctly forecast usage. I think that's a cop-out of, say,
medium-sized magnitude. I think the real story on that is this: "Well,
OK, at the time, we NEEDED to set the flat fee at $19.95. We knew we
would lose money but we thought that's what we needed to do at the
time. We've now re-evaluated and decided that because of pressure from
Wall Street, we need to begin breaking even on access. We feel at this
time we can sustain the impact of any churn resulting from the
$2-a-month increase to our flat-fee subscribers." (Note: According to
AOL chairman and CEO Steve Case, about 75 percent of U.S. subscribers --
roughly 10 million excluding CompuServe -- are on the flat-fee plan.
There is no flat-fee access plan available in the international markets
AOL serves).
If that was indeed AOL's real plan, I'd have to say AOL has executed it
perfectly. CNET's weekly dispatch (which summarizes what's on its site)
comes with its own top 10 list. The theme of a recent list was why AOL
raised its rates. The No. 1 answer, while perhaps meant
tongue-in-cheek, was spot-on. "Because it could."
My analysis is that AOL is placing two bets. The first is that, in the
near term, it will lose less in revenue from churn over the price hike
than it will gain as a result of the increase. The second is that
despite all their talk, the competitors -- who will clearly attempt to
take advantage of this -- won't spend the bucks they'd need to spend in
a bid to unseat AOL from its dominant position. It'll be a war of words
without marketing power. The other side to that bet is that by the time
someone begins to infringe on AOL, AOL hopes to be in a position with
commerce and advertising revenue where it can look at cutting rates to
be price-competitive.
These are not sure bets by any means, but I'm coming around to thinking
the bets are pretty safe for reasons I'll detail as I go along. There
was one safe bet: AOL bet that its advertising and commerce revenue
would not ramp high enough to subsidize the access losses anytime soon.
Sort of a no-lose bet.
I think AOL will lose some people over this, but people won't leave in
droves. Inertia is a very powerful thing. Note that customers didn't
leave en masse when they experienced horrible access problems with AOL.
You could poll people, and many -- I'd guess a majority -- would tell
you they'd leave for a cheaper provider, a la EarthLink, which promises
better-quality access. But I'd bet that this time last year, if you'd
polled AOL users, they'd have told you they would've left AND paid MORE
to avoid getting busy signals. But they didn't leave. I don't think $2
is a powerful-enough reason to leave. There's some basis for this
premise: the long distance phone companies.
The $2 argument is essentially what leaving AT&T for MCI, Sprint or one
of the others meant. Yet even after 13 years of equal access for long
distance companies, AT&T still holds the predominant market share. The
truth is that at this point, relatively speaking, the major long
distance companies offer similar quality at similar prices. So $2 isn't
going to get you to move. As far as quality goes, I've been with Sprint
for about 12 years. I can't remember the last time I had a problem with
a long distance call. So, you might say, "But you switched to Sprint
for some reason!" Yes, because I worked there and got $30 a month in
free long distance calls. By the way, I haven't worked there in almost
nine years, I lost the free monthly stipend, and still I've never
switched, not even with MCI constantly pounding on me via direct mail to
switch for American Airlines frequent-flier miles. Inertia is a
powerful thing.
That said, there's a powerful difference between the long distance
industry at the time of equal access and the online-Internet-access side
of the world. At the time of equal access, pretty much everyone who
made long distance calls already had phone service. It was a pure
market-share grab, and it's worked out well for everyone because less
cost equated to more calls, so AT&T, even with its reduced market share,
is bigger from a volume-of-calls perspective than it was at the time of
divestiture. In the online world, most people who will ever be online
are not here yet. So for all of those first-time buyers, pricing may
well be an issue. But I don't see anyone coming out with any real
marketing clout to capitalize on this.
David Simons, managing director at Digital Video Investments, pointed
out in the Insider Talk discussions (available via the Web site) that
"WebTV services may take special advantage of this -- capturing newbies
undecided about whether to begin via PC or WebTV." Regarding the
responses of competitors, Simons wrote, "It's likely that many will
heavily promote price advantage at least through April 30. As to
possible hikes thereafter, ISPs are as much competing with each other as
with AOL," Simons added.
Some analysts would have you believe the phone companies will really
capitalize on this news. I used to believe such things, but now I
don't. AOL's long-term bet here has been that the value of its
relationship with subscribers will ultimately yield a tidy sum of
money. How much is anyone's bet, but it puts a lot of emphasis on ease
of use, and a lot of emphasis on brand. Even though AOL is now eking
out a profit, cumulatively it's probably lost more than $1 billion.
That's not really bad if you think about it. If Microsoft could've
started from scratch by paying $1 billion to be the market leader, the
only real online franchise, would it have paid that price? I'm betting
it would've.
For the telcos, the future value of customer relationships is still
somewhat uncertain. Also, there isn't any real money in Internet access
at $19.95 a month. Before you go firing off an e-mail, let me just say
that, sure, I understand some companies can make a profit by doing that
-- but I'm talking REAL money. Nobody is making real money at it and
none of the bigger players (AT&T, EarthLink, Prodigy, telcos, etc.) are
making ANY money at it. And even for the guys who can make money, if
the WorldCom-MCI deal goes through, who knows what will happen to ISPs
in terms of their charges for Internet service?
Why the Telcos Don't Play
=========================
Today, providing Internet access is either a high-volume,
low-to-no-margin business or a low-volume, low-to-no-margin business.
Of course, WorldCom, MCI, Sprint and the rest make out on providing
access to businesses and access providers, but they have REALLY HIGH
volume, relatively speaking. I think what happened is this. The telcos
had a little swagger in their steps. "We've got the brand, we've got
the relationship, we're gonna wipe out AOL!" But a funny thing happened
on the way to the information superhighway. These companies found out
what their existing brands meant in terms of providing Internet access:
DIDDLY-SQUAT! These companies are going to have to spend a lot if they
want to want to grow anywhere near as quickly America Online.
The telcos must look at AOL and think, "OK, if we're unsure about
whether the value of the potential opportunity to be customers' portal
to the Internet is worth the investment ... AOL is bragging because it
brought marketing down to $96 million this quarter, only 16 percent of
its revenue. Well, $592 million in revenue, $96 million in marketing and
$20 million and change in profit. Would we have to spend that kind of
money -- more? -- to build our online brands to compete with AOL? For
margins like that? Yuck."
AT&T's WorldNet service has grown at a relative snail's pace. It added
a scant 47,000 new subscribers between Sept. 1 and Dec. 31. During that
same quarter, AOL added 1,267,000. It took AOL just over three days to
add as many subscribers as AT&T added for the whole quarter. Sprint?
Well, Sprint and EarthLink just did a deal where Sprint gave EarthLink
its Sprint Passport customers, about $24 million in cash and $100
million or so in debt financing in return for a 30 percent interest
(though only a 10 percent voting interest) in EarthLink. Sprint also
will make a tender offer for 1.25 million EarthLink common shares at $45
a share. So, all in all, it's a deal worth about $180 million plus the
value of the added subscribers.
I kept reading analysts' commentary that said this is great for Sprint
and EarthLink. I'm on the fence. Great for EarthLink in the sense that
it doesn't have to worry about cash so much. And Sprint has the option
to acquire the majority of the company later. But I'm still not sold on
this being "great." Why? Because Sprint has had a real
"toe-in-the-water" approach to the Internet so far. Now, you might say
$180 million is a whole lot more than a toe! Not for Sprint it isn't.
No way. It's maybe the big toe, but it's just a toe.
EarthLink will get Sprint's Internet Passport customers, about 130,000,
and Sprint is guaranteeing EarthLink an additional 150,000 customers a
year for the next five years. Kind of interesting, especially
considering it took Sprint about 18 months to get to 130,000 (more
evidence of the toe-in-the-water approach).
Simply put: If you don't shell out huge bucks for marketing, you don't
build large subscriber bases. Sprint is outright admitting (by the
150,000-subscribers guarantee) that it isn't willing to bet a lot on the
future value of relationships. In the past four months, AOL added
roughly the same number of subscribers Sprint is committed to add to its
alliance with EarthLink in the next 10 YEARS. So, Sky and Russ can have
these great leave-AOL programs, but if they're not willing to spread the
word, it won't make much difference.
To date, what the telcos have shown is that consumer access is sort of
interesting to them, but not all that interesting. And looking at the
current AOL revenue vs. profit, it's easy to sympathize with the
telcos. I think they'll be sorry, but, I can't say I blame them.
AOL Announces Reorganization, Names Pittman Its President and COO
=================================================================
AOL also announced that it's reorganizing its operations into three
brand groups, AOL Interactive Services, CompuServe Interactive Services
and AOL Studios. In addition, AOL announced that Bob Pittman, president
of AOL Networks, becomes president and chief operating officer of
America Online Inc., responsible for overseeing the entire company's
day-to-day operations. From pretty much all accounts, a well-deserved
"attaboy."
Barry Schuler will run AOL Interactive Services, formerly AOL Creative
Development. Mayo S. Stuntz Jr., a longtime colleague of Pittman's,
will run CompuServe Interactive Services. And Ted Leonsis will continue
to run AOL Studios. All three will report to Pittman.
The reorganization makes some sense in that it does allow AOL to
leverage some synergies. Examples: combining customer service for AOL
and CompuServe, and combining some content production and advertising
sales between AOL Studios and AOL Interactive Services. The cost here,
as is usually the case in gaining efficiencies, was jobs. More than 500
CompuServe employees were laid off (though apparently they got some
sweet severance packages), along with 105 AOL Studios employees.
CompuServe AOL-Style
====================
In only one calendar week after closing on the deal that allowed AOL to
acquire CompuServe's interactive services, AOL has made sweeping
changes. Layoffs, a new president, and suspending the Web-based "C"
service CompuServe recently launched. The "C" technology, according to
AOL, would be folded into the forthcoming CompuServe 5.0 software --
leaving many to ask why AOL would focus on the proprietary service when,
other than AOL, nobody has had much success at this. One answer might
be "because it's AOL!" But I think it has more to do with attempting to
stabilize the revenue on CompuServe. AOL wanted CompuServe for its
roughly $500 million in annual revenue. All of that is coming from the
proprietary service, so it isn't surprising AOL would put emphasis
there.
As for whether CompuServe will remain a separate brand, a lot of
discussion has gone on about this. Ron Luks, who is an outside forum
manager for both CompuServe and the Microsoft Network, likes the brand
arguments AOL president Bob Pittman has given. "General Motors has a
Cadillac division and a Chevrolet division and it's worked out pretty
well for them," Luks says in the Insider Talk discussions.
My response was something like this:
The AB, GM and other metaphors are based on physical dynamics, not
virtual ones. Shelf space and all that. I can't think of one single
parallel on the access side of the world. Pittman will talk about MTV,
VH1, Nick and so on, but these are content choices, not access choices.
MCI, AT&T and Sprint offer different plans, but not different brands;
likewise Cablevision, TCI, Comcast, Cox, Bell Atlantic, PacBell and
others.
I'm reading between the lines here. The CompuServe deal, to me, is
about AOL's milking the base of subscribers as long as it can until it
can switch the customers over to a common infrastructure (even if via a
separate brand). If it was purely a content-brand (separate from access)
play, you'd almost think AOL would've kept "C," renamed it CompuServe,
and forced all CompuServe users to switch. It didn't for several
reasons, I suspect. Chief among them, as Prodigy found with its 500,000
Classic subscribers, is that customers just don't want to switch. But
sooner or later, unless something major happens, Prodigy Classic's
numbers will dwindle to the point, or Prodigy Internet will grow to the
point, where Prodigy says, "It's no longer worth maintaining two
separate systems." It will hit that point (not soon enough for its
liking, I imagine). I can't imagine it will be any different with AOL
and CompuServe.
Long-term, I can buy into the separate-brand theory, but not the
separate-architecture theory.
Can AOL Have Its Cake and Eat It Too?
=====================================
Yeah, I know, MORE AOL. Just what you wanted.! If you've read this far,
I imagine, some of you might feel like reading more about AOL as much as
South Park's Eric Cartman felt like eating more pie at his birthday
party. You can hear how he felt (if you're able to play WAV files) at:
< http://www.execpc.com/~justsew/sounds/epi_108/108_nomorepie.wav >.
But for those of you interested, for some insight into AOL's recent
real-estate and content deals, check out this week's "Side Track"
at: < http://www.onlineinsider.com/html/sidetrack.html >.
Stock Watch for the Week Ended Feb. 20, 1998
============================================
Courtesy of InfoBeat's CLOSING BELL < http://www.infobeat.com >.
52 Wk 52 Wk P/E Week
SECURITY CLOSE HIGH LOW Ratio CHNG
---------------------------------------------------------------------
AT&T Corp................ 62 66 1/2 30 3/4 22 -1.9%
Amazon Com Inc........... 63 1/4 66 15 3/4 +1.6%
America Online Inc....... 119 7/16 117 7/8 33 7/8 459 +4.5%
Apple Computer Inc....... 20 29 3/4 12 3/4 +2.5%
At Home Corporation Ser A 29 1/8 30 5/8 16 5/8 +7.6%
C/Net.................... 37 1/2 46 1/2 15 3/4 +28.7%
CMG Info Svcs. Inc....... 43 1/2 43 1/2 10 7/16 +5.9%
Cendant Corporation...... 37 3/4 37 1/2 19 1/4 629 +3.4%
Cmp Media Inc Cl A....... 23 5/8 29 3/8 13 3/4 32 -3.5%
Concentric Network Corp.. 12 1/8 16 7 7/8 -16.3%
Cybercash Inc............ 12 3/16 24 1/4 10 1/8 -7.5%
Earthlink Network Inc.... 50 1/4 50 8 5/8 +5.5%
Excite Inc............... 42 1/2 49 3/4 7 1/2 -5.0%
FTP Software Inc......... 1 11/16 8 1 1/2 -5.2%
GTE Corporation.......... 54 1/8 55 3/4 40 1/2 19 -1.5%
H & R Block Inc.......... 45 3/16 46 28 5/8 50 -0.6%
Hewlett Packard Company.. 64 15/16 72 15/16 48 1/8 22 +4.9%
IBM...................... 102 5/8 113 1/2 63 9/16 17 +0.2%
ICG Communications Inc... 26 5/16 29 1/8 8 5/8 -1.4%
Individual Incorporated.. 4 49/64 8 5/8 2 5/8 +23.3%
Infoseek Corporation..... 13 3/4 14 1/2 4 3/8 +1.3%
Lycos Inc................ 39 3/8 43 3/4 11 3/16 -6.2%
MCI Communications Corpor 48 1/4 48 5/16 27 5/16 48 +0.9%
Mecklermedia Corp........ 28 5/8 30 16 1/2 53 +4.5%
Microsoft Corporation.... 155 1/8 160 1/16 87 1/2 53 -1.5%
Mindspring Enterprises In 45 3/4 51 1/4 6 5/8 -6.7%
Netmanage Inc............ 2 13/16 5 1/4 2 3/32 -4.2%
Netscape Communications C 19 7/8 49 1/2 14 7/8 -8.0%
Network Solutions Inc. Cl 19 3/8 26 3/4 11 3/4 63 -7.7%
Onsale Inc............... 23 5/8 35 1/4 4 5/8 -10.0%
Open Market Inc.......... 15 3/8 17 3/8 6 1/2 -1.6%
Oracle Corporation....... 25 1/8 42 1/8 17 5/8 35 -5.1%
Psinet Inc............... 7 5/8 9 3/4 4 1/4 -6.1%
Quarterdeck Corp......... 2 3/8 4 5/16 1 3/16 0.0%
Realnetworks Inc......... 14 3/4 19 3/8 13 1/2 -9.5%
Security First Network Ba 10 1/4 14 5 1/4 -4.0%
Silicon Graphics Inc..... 14 1/16 30 5/16 10 15/16 88 -6.6%
Sportsline Usa Inc....... 19 1/4 25 7 +0.6%
Sprint Corporation....... 61 62 3/8 41 7/8 28 +3.5%
Spyglass Inc............. 7 1/8 12 4 1/16 +26.6%
Sun Microsystems Inc..... 46 1/4 53 5/16 25 7/8 25 +4.2%
Vocaltec Communications L 19 3/4 33 1/4 5 1/4 +4.2%
Worldcom Inc............. 39 39 7/8 21 1/4 98 +2.8%
Yahoo Corporation........ 64 1/8 71 14 41/64 -0.9%
Dow Jones 30 Industrials. 8,413.94 +0.5%
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<FONT COLOR="#0f0f0f" BACK="#fffffe" SIZE=3>
Seidman's (AOL) Online Insider - Vol. 5, Issue 7
Visit the Online Insider on the Web for additional content and access
to the Insider Talk discussion forums. A new Seidman's 25 is now up!
< http://www.onlineinsider.com >
============================================================================
Copyright (C) 1998 Robert Seidman. All rights reserved. May be
reproduced in any medium for noncommercial purposes as long as
attribution is given.
IN THIS ISSUE
- Editor's Note
- AOL Raises Rates and Eyebrows
- Why The Telcos Don't Play
- AOL Announces Reorganization
- CompuServe AOL-Style
- Can AOL Have Its Cake and Eat It Too?
- Stock Watch
- Subscription Info
Editor's Note
=============
One of the disadvantages of my shift to biweekly publication became
evident when America Online made a slew of announcements on Feb. 9.
Most notable, at least in terms of coverage, was its plan to raise the
rate for flat-fee service from $19.95 a month to $21.95 a month
beginning in April.
Based on what I read and heard, I thought this was the most fun news
that's happened in a while. You've got Prodigy's new chief, Russ
Pillar, sending out a press release saying, in effect, that given AOL's
service levels, it's unbelievable that the company would raise its
rates. You've got Sky Dayton at EarthLink (which subsequently announced
a significant arrangement with Sprint that I'll get to later) saying:
"AOL just raised the price of inferior service." Then I read some
Associated Press coverage of the story, quoting David Trachtenberg,
director of marketing for MCI Internet. His comments criticized the
price hike. "It seems they're going to penalize all their users,"
because the company spent more than expected to develop its own content,
he said, according to AP. Not since Dave Garrison of Netcom fame was
pummeled into near-anonymity by AOL have I heard such trash-talk. Very
cool! And while I like Sky and Russ, I expect they'll meet with a
similar fate (though, like Mr. Garrison, they're gonna make a buck or
two along the way).
I'm not so sure about Trachtenberg, though. It's sort of interesting.
Oh, sure, Trachtenberg himself may wind up among the littered remains of
former Internet executives looking for that next big thing to do. MCI
might have to counsel Mr. Trachtenberg about speaking to the press,
because things are going to get very, very tricky if the proposed
MCI-WorldCom merger goes off without a hitch. AOL is the biggest single
data company IN THE WORLD! How do you compete with your biggest
customer? With WorldCom in the picture, the proposed MCI-Yahoo!
arrangement -- with some marketing bucks behind it -- just might be the
sleeper here.
AOL Raises Rates and Eyebrows
=============================
Did AOL need to raise its rates? Need is such a relative thing. AOL's
story is pretty much this: "We had forecast growth correctly, but not
usage, so usage is costing us more than we thought. Though we cut a
very favorable deal for access via WorldCom when we traded ANS to it for
CompuServe's interactive services and $175 million, we will not break
even on access. Since flat fee was implemented, average usage per month
has more than tripled -- from around seven hours per subscriber to more
than 21 hours per subscriber."
The only problem I have with the story is in believing that AOL didn't
correctly forecast usage. I think that's a cop-out of, say,
medium-sized magnitude. I think the real story on that is this: "Well,
OK, at the time, we NEEDED to set the flat fee at $19.95. We knew we
would lose money but we thought that's what we needed to do at the
time. We've now re-evaluated and decided that because of pressure from
Wall Street, we need to begin breaking even on access. We feel at this
time we can sustain the impact of any churn resulting from the
$2-a-month increase to our flat-fee subscribers." (Note: According to
AOL chairman and CEO Steve Case, about 75 percent of U.S. subscribers --
roughly 10 million excluding CompuServe -- are on the flat-fee plan.
There is no flat-fee access plan available in the international markets
AOL serves).
If that was indeed AOL's real plan, I'd have to say AOL has executed it
perfectly. CNET's weekly dispatch (which summarizes what's on its site)
comes with its own top 10 list. The theme of a recent list was why AOL
raised its rates. The No. 1 answer, while perhaps meant
tongue-in-cheek, was spot-on. "Because it could."
My analysis is that AOL is placing two bets. The first is that, in the
near term, it will lose less in revenue from churn over the price hike
than it will gain as a result of the increase. The second is that
despite all their talk, the competitors -- who will clearly attempt to
take advantage of this -- won't spend the bucks they'd need to spend in
a bid to unseat AOL from its dominant position. It'll be a war of words
without marketing power. The other side to that bet is that by the time
someone begins to infringe on AOL, AOL hopes to be in a position with
commerce and advertising revenue where it can look at cutting rates to
be price-competitive.
These are not sure bets by any means, but I'm coming around to thinking
the bets are pretty safe for reasons I'll detail as I go along. There
was one safe bet: AOL bet that its advertising and commerce revenue
would not ramp high enough to subsidize the access losses anytime soon.
Sort of a no-lose bet.
I think AOL will lose some people over this, but people won't leave in
droves. Inertia is a very powerful thing. Note that customers didn't
leave en masse when they experienced horrible access problems with AOL.
You could poll people, and many -- I'd guess a majority -- would tell
you they'd leave for a cheaper provider, a la EarthLink, which promises
better-quality access. But I'd bet that this time last year, if you'd
polled AOL users, they'd have told you they would've left AND paid MORE
to avoid getting busy signals. But they didn't leave. I don't think $2
is a powerful-enough reason to leave. There's some basis for this
premise: the long distance phone companies.
The $2 argument is essentially what leaving AT&T for MCI, Sprint or one
of the others meant. Yet even after 13 years of equal access for long
distance companies, AT&T still holds the predominant market share. The
truth is that at this point, relatively speaking, the major long
distance companies offer similar quality at similar prices. So $2 isn't
going to get you to move. As far as quality goes, I've been with Sprint
for about 12 years. I can't remember the last time I had a problem with
a long distance call. So, you might say, "But you switched to Sprint
for some reason!" Yes, because I worked there and got $30 a month in
free long distance calls. By the way, I haven't worked there in almost
nine years, I lost the free monthly stipend, and still I've never
switched, not even with MCI constantly pounding on me via direct mail to
switch for American Airlines frequent-flier miles. Inertia is a
powerful thing.
That said, there's a powerful difference between the long distance
industry at the time of equal access and the online-Internet-access side
of the world. At the time of equal access, pretty much everyone who
made long distance calls already had phone service. It was a pure
market-share grab, and it's worked out well for everyone because less
cost equated to more calls, so AT&T, even with its reduced market share,
is bigger from a volume-of-calls perspective than it was at the time of
divestiture. In the online world, most people who will ever be online
are not here yet. So for all of those first-time buyers, pricing may
well be an issue. But I don't see anyone coming out with any real
marketing clout to capitalize on this.
David Simons, managing director at Digital Video Investments, pointed
out in the Insider Talk discussions (available via the Web site) that
"WebTV services may take special advantage of this -- capturing newbies
undecided about whether to begin via PC or WebTV." Regarding the
responses of competitors, Simons wrote, "It's likely that many will
heavily promote price advantage at least through April 30. As to
possible hikes thereafter, ISPs are as much competing with each other as
with AOL," Simons added.
Some analysts would have you believe the phone companies will really
capitalize on this news. I used to believe such things, but now I
don't. AOL's long-term bet here has been that the value of its
relationship with subscribers will ultimately yield a tidy sum of
money. How much is anyone's bet, but it puts a lot of emphasis on ease
of use, and a lot of emphasis on brand. Even though AOL is now eking
out a profit, cumulatively it's probably lost more than $1 billion.
That's not really bad if you think about it. If Microsoft could've
started from scratch by paying $1 billion to be the market leader, the
only real online franchise, would it have paid that price? I'm betting
it would've.
For the telcos, the future value of customer relationships is still
somewhat uncertain. Also, there isn't any real money in Internet access
at $19.95 a month. Before you go firing off an e-mail, let me just say
that, sure, I understand some companies can make a profit by doing that
-- but I'm talking REAL money. Nobody is making real money at it and
none of the bigger players (AT&T, EarthLink, Prodigy, telcos, etc.) are
making ANY money at it. And even for the guys who can make money, if
the WorldCom-MCI deal goes through, who knows what will happen to ISPs
in terms of their charges for Internet service?
Why the Telcos Don't Play
=========================
Today, providing Internet access is either a high-volume,
low-to-no-margin business or a low-volume, low-to-no-margin business.
Of course, WorldCom, MCI, Sprint and the rest make out on providing
access to businesses and access providers, but they have REALLY HIGH
volume, relatively speaking. I think what happened is this. The telcos
had a little swagger in their steps. "We've got the brand, we've got
the relationship, we're gonna wipe out AOL!" But a funny thing happened
on the way to the information superhighway. These companies found out
what their existing brands meant in terms of providing Internet access:
DIDDLY-SQUAT! These companies are going to have to spend a lot if they
want to want to grow anywhere near as quickly America Online.
The telcos must look at AOL and think, "OK, if we're unsure about
whether the value of the potential opportunity to be customers' portal
to the Internet is worth the investment ... AOL is bragging because it
brought marketing down to $96 million this quarter, only 16 percent of
its revenue. Well, $592 million in revenue, $96 million in marketing and
$20 million and change in profit. Would we have to spend that kind of
money -- more? -- to build our online brands to compete with AOL? For
margins like that? Yuck."
AT&T's WorldNet service has grown at a relative snail's pace. It added
a scant 47,000 new subscribers between Sept. 1 and Dec. 31. During that
same quarter, AOL added 1,267,000. It took AOL just over three days to
add as many subscribers as AT&T added for the whole quarter. Sprint?
Well, Sprint and EarthLink just did a deal where Sprint gave EarthLink
its Sprint Passport customers, about $24 million in cash and $100
million or so in debt financing in return for a 30 percent interest
(though only a 10 percent voting interest) in EarthLink. Sprint also
will make a tender offer for 1.25 million EarthLink common shares at $45
a share. So, all in all, it's a deal worth about $180 million plus the
value of the added subscribers.
I kept reading analysts' commentary that said this is great for Sprint
and EarthLink. I'm on the fence. Great for EarthLink in the sense that
it doesn't have to worry about cash so much. And Sprint has the option
to acquire the majority of the company later. But I'm still not sold on
this being "great." Why? Because Sprint has had a real
"toe-in-the-water" approach to the Internet so far. Now, you might say
$180 million is a whole lot more than a toe! Not for Sprint it isn't.
No way. It's maybe the big toe, but it's just a toe.
EarthLink will get Sprint's Internet Passport customers, about 130,000,
and Sprint is guaranteeing EarthLink an additional 150,000 customers a
year for the next five years. Kind of interesting, especially
considering it took Sprint about 18 months to get to 130,000 (more
evidence of the toe-in-the-water approach).
Simply put: If you don't shell out huge bucks for marketing, you don't
build large subscriber bases. Sprint is outright admitting (by the
150,000-subscribers guarantee) that it isn't willing to bet a lot on the
future value of relationships. In the past four months, AOL added
roughly the same number of subscribers Sprint is committed to add to its
alliance with EarthLink in the next 10 YEARS. So, Sky and Russ can have
these great leave-AOL programs, but if they're not willing to spread the
word, it won't make much difference.
To date, what the telcos have shown is that consumer access is sort of
interesting to them, but not all that interesting. And looking at the
current AOL revenue vs. profit, it's easy to sympathize with the
telcos. I think they'll be sorry, but, I can't say I blame them.
AOL Announces Reorganization, Names Pittman Its President and COO
=================================================================
AOL also announced that it's reorganizing its operations into three
brand groups, AOL Interactive Services, CompuServe Interactive Services
and AOL Studios. In addition, AOL announced that Bob Pittman, president
of AOL Networks, becomes president and chief operating officer of
America Online Inc., responsible for overseeing the entire company's
day-to-day operations. From pretty much all accounts, a well-deserved
"attaboy."
Barry Schuler will run AOL Interactive Services, formerly AOL Creative
Development. Mayo S. Stuntz Jr., a longtime colleague of Pittman's,
will run CompuServe Interactive Services. And Ted Leonsis will continue
to run AOL Studios. All three will report to Pittman.
The reorganization makes some sense in that it does allow AOL to
leverage some synergies. Examples: combining customer service for AOL
and CompuServe, and combining some content production and advertising
sales between AOL Studios and AOL Interactive Services. The cost here,
as is usually the case in gaining efficiencies, was jobs. More than 500
CompuServe employees were laid off (though apparently they got some
sweet severance packages), along with 105 AOL Studios employees.
CompuServe AOL-Style
====================
In only one calendar week after closing on the deal that allowed AOL to
acquire CompuServe's interactive services, AOL has made sweeping
changes. Layoffs, a new president, and suspending the Web-based "C"
service CompuServe recently launched. The "C" technology, according to
AOL, would be folded into the forthcoming CompuServe 5.0 software --
leaving many to ask why AOL would focus on the proprietary service when,
other than AOL, nobody has had much success at this. One answer might
be "because it's AOL!" But I think it has more to do with attempting to
stabilize the revenue on CompuServe. AOL wanted CompuServe for its
roughly $500 million in annual revenue. All of that is coming from the
proprietary service, so it isn't surprising AOL would put emphasis
there.
As for whether CompuServe will remain a separate brand, a lot of
discussion has gone on about this. Ron Luks, who is an outside forum
manager for both CompuServe and the Microsoft Network, likes the brand
arguments AOL president Bob Pittman has given. "General Motors has a
Cadillac division and a Chevrolet division and it's worked out pretty
well for them," Luks says in the Insider Talk discussions.
My response was something like this:
The AB, GM and other metaphors are based on physical dynamics, not
virtual ones. Shelf space and all that. I can't think of one single
parallel on the access side of the world. Pittman will talk about MTV,
VH1, Nick and so on, but these are content choices, not access choices.
MCI, AT&T and Sprint offer different plans, but not different brands;
likewise Cablevision, TCI, Comcast, Cox, Bell Atlantic, PacBell and
others.
I'm reading between the lines here. The CompuServe deal, to me, is
about AOL's milking the base of subscribers as long as it can until it
can switch the customers over to a common infrastructure (even if via a
separate brand). If it was purely a content-brand (separate from access)
play, you'd almost think AOL would've kept "C," renamed it CompuServe,
and forced all CompuServe users to switch. It didn't for several
reasons, I suspect. Chief among them, as Prodigy found with its 500,000
Classic subscribers, is that customers just don't want to switch. But
sooner or later, unless something major happens, Prodigy Classic's
numbers will dwindle to the point, or Prodigy Internet will grow to the
point, where Prodigy says, "It's no longer worth maintaining two
separate systems." It will hit that point (not soon enough for its
liking, I imagine). I can't imagine it will be any different with AOL
and CompuServe.
Long-term, I can buy into the separate-brand theory, but not the
separate-architecture theory.
Can AOL Have Its Cake and Eat It Too?
=====================================
Yeah, I know, MORE AOL. Just what you wanted.! If you've read this far,
I imagine, some of you might feel like reading more about AOL as much as
South Park's Eric Cartman felt like eating more pie at his birthday
party. You can hear how he felt (if you're able to play WAV files) at:
< http://www.execpc.com/~justsew/sounds/epi_108/108_nomorepie.wav >.
But for those of you interested, for some insight into AOL's recent
real-estate and content deals, check out this week's "Side Track"
at: < http://www.onlineinsider.com/html/sidetrack.html >.
Stock Watch for the Week Ended Feb. 20, 1998
============================================
Courtesy of InfoBeat's CLOSING BELL < http://www.infobeat.com >.
52 Wk 52 Wk P/E Week
SECURITY CLOSE HIGH LOW Ratio CHNG
---------------------------------------------------------------------
AT&T Corp................ 62 66 1/2 30 3/4 22 -1.9%
Amazon Com Inc........... 63 1/4 66 15 3/4 +1.6%
America Online Inc....... 119 7/16 117 7/8 33 7/8 459 +4.5%
Apple Computer Inc....... 20 29 3/4 12 3/4 +2.5%
At Home Corporation Ser A 29 1/8 30 5/8 16 5/8 +7.6%
C/Net.................... 37 1/2 46 1/2 15 3/4 +28.7%
CMG Info Svcs. Inc....... 43 1/2 43 1/2 10 7/16 +5.9%
Cendant Corporation...... 37 3/4 37 1/2 19 1/4 629 +3.4%
Cmp Media Inc Cl A....... 23 5/8 29 3/8 13 3/4 32 -3.5%
Concentric Network Corp.. 12 1/8 16 7 7/8 -16.3%
Cybercash Inc............ 12 3/16 24 1/4 10 1/8 -7.5%
Earthlink Network Inc.... 50 1/4 50 8 5/8 +5.5%
Excite Inc............... 42 1/2 49 3/4 7 1/2 -5.0%
FTP Software Inc......... 1 11/16 8 1 1/2 -5.2%
GTE Corporation.......... 54 1/8 55 3/4 40 1/2 19 -1.5%
H & R Block Inc.......... 45 3/16 46 28 5/8 50 -0.6%
Hewlett Packard Company.. 64 15/16 72 15/16 48 1/8 22 +4.9%
IBM...................... 102 5/8 113 1/2 63 9/16 17 +0.2%
ICG Communications Inc... 26 5/16 29 1/8 8 5/8 -1.4%
Individual Incorporated.. 4 49/64 8 5/8 2 5/8 +23.3%
Infoseek Corporation..... 13 3/4 14 1/2 4 3/8 +1.3%
Lycos Inc................ 39 3/8 43 3/4 11 3/16 -6.2%
MCI Communications Corpor 48 1/4 48 5/16 27 5/16 48 +0.9%
Mecklermedia Corp........ 28 5/8 30 16 1/2 53 +4.5%
Microsoft Corporation.... 155 1/8 160 1/16 87 1/2 53 -1.5%
Mindspring Enterprises In 45 3/4 51 1/4 6 5/8 -6.7%
Netmanage Inc............ 2 13/16 5 1/4 2 3/32 -4.2%
Netscape Communications C 19 7/8 49 1/2 14 7/8 -8.0%
Network Solutions Inc. Cl 19 3/8 26 3/4 11 3/4 63 -7.7%
Onsale Inc............... 23 5/8 35 1/4 4 5/8 -10.0%
Open Market Inc.......... 15 3/8 17 3/8 6 1/2 -1.6%
Oracle Corporation....... 25 1/8 42 1/8 17 5/8 35 -5.1%
Psinet Inc............... 7 5/8 9 3/4 4 1/4 -6.1%
Quarterdeck Corp......... 2 3/8 4 5/16 1 3/16 0.0%
Realnetworks Inc......... 14 3/4 19 3/8 13 1/2 -9.5%
Security First Network Ba 10 1/4 14 5 1/4 -4.0%
Silicon Graphics Inc..... 14 1/16 30 5/16 10 15/16 88 -6.6%
Sportsline Usa Inc....... 19 1/4 25 7 +0.6%
Sprint Corporation....... 61 62 3/8 41 7/8 28 +3.5%
Spyglass Inc............. 7 1/8 12 4 1/16 +26.6%
Sun Microsystems Inc..... 46 1/4 53 5/16 25 7/8 25 +4.2%
Vocaltec Communications L 19 3/4 33 1/4 5 1/4 +4.2%
Worldcom Inc............. 39 39 7/8 21 1/4 98 +2.8%
Yahoo Corporation........ 64 1/8 71 14 41/64 -0.9%
Dow Jones 30 Industrials. 8,413.94 +0.5%
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