AOL Ups Subscriber Base With Gateway Deal

Do you opt for the free trial whenever you get a new computer? Do most
people? Apparently, some pretty smart people think so as evidenced by Wednesday’s deal between America Online Inc. and Gateway Inc.

The two late Wednesday announced an $800 million strategic alliance.

In exchange for a cash and stock investment in Gateway (GTW) worth $800
million, AOL (AOL) has taken over Gateway.net, the internet service provider
that comes pre-programmed into each new Gateway computer. Now, AOL will
be able to call Gateway.net’s 600,000 subscribers its own.

This whopping $1,330 per subscriber deal looks expensive in an industry
that typically spends $200-$500 to acquire each account. But AOL
figures it is worth it: Gateway claims to have 5 million customers (but
note that only a fraction use Gateway.net), and Gateway has agreed to
spend $85 million marketing its products on AOL.

Of course, the opportunities are a little overstated, since Gateway gets
nearly 60 percent of its revenues from businesses — which are less likely to
be interested in the AOL brands. Nevertheless, AOL has significantly
raised the valuations of ISP’s.

Or has it? While AOL and most ISP’s hold to their dial up model, growth
has been in the faster cable and Digital Subscriber Line markets, and
there is a growing move toward wholesale ISP distribution — instead of
paying for access, it is provided in exchange for something else. The
brokerage firm A.B. Wately, for example, will give you dial up access in
exchange for a $2,000 account.

The future of dial up is shaky at best, and ISDEX members like EarthLink Network Inc. (ELNK), Mindspring Enterprises Inc. (MSPG) and Prodigy Communications (PRGY) will
ultimately see their markets proscribed by consumer juggernauts like AOL
and business providers like MCI/Worldcomm (WCOM).

Did AOL just raise the value of ISP’s. I don’t think so.


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