Dear Steve:
People forget that AOL’s more than a decade old now, went public at about a split-adjusted $1 a share when browser wunderkind Marc Andreessen was still in high school, fended off an unwelcome takeover attempt from Microsoft co-founder and gazillionaire Paul Allen.
AOL also came on the scene long after CompuServe and Prodigy commandeered many of those service’s subscribers, and even managed to outwit Microsoft’s ambitiously bundled MSN, which was joined at the hip to Windows95 amid much furor and fanfare.
Of course, we recall signing on light years ago when you still read your e-mail sent to SteveCase@aol.com, interactive TV and the cable gurus like John Malone were on the cover of all the appropriate business and technology magazines, and your new competition, Jerry Yang and David Filo (co-founders of Yahoo!), were still eating burritos at Taco Bell near Stanford, turning down job offers from Oracle, officious or not.
AOL today now has 11 million members, absorbed CompuServe’s consumer subscribers, Prodigy gave in to Excite and now does dial up only, and MSN has had more makeovers than Tammy Faye at a Revlon convention. In spite of its closed software, proprietary platform, difficulty of signing in during evening hours, lawsuits from many States because of the lack of dialup support, and more Spam filling e-mailboxes than anything else, it remains number one.
Wall Street has mostly been a believer, although AOL shares traded as low as $33 and change the past year. Trades at about 5x trailing revenue of $1.8 billion. With a market cap of $9.7 billion there’s no other company in the Internet industry that comes close (not counting 3COM, Ascend or other “network” stocks).
There’s a lot of challenges ahead, however. How do you maintain the closed
“Rainman” (AOL’s name for its platform) while rivals come at AOL from the
Web and cherry pick the best you’ve developed?
AOL paved the way for channels aggregation in an easy navigation format,
made the online experience “fun,” marketed it like mad (a disk in every
home, airline and
pizza box), brought chat into its own as a key Web feature and revenue
producer, and perceived that the online experience was somewhat akin to TV
programming long before anyone else.
Now Yahoo-MCI comes straight at AOL. SNAP from CNET does the same/
Earthlink and Mindspring have targeted AOL’s dialup angle. iCHAT
“Internet-ized” chat software. Microsoft launched Web sites such as Expedia
and CarPoint, and on and on. AOL is proxy for good ideas that can be made
into standalone businesses.
There’s a lot under the hood at AOL, and many ambitious ideas turned
success stories
(so far) including Motley Fools, Digital City, Love@AOL. Yet dialup access
is the largest recurring revenue producer AOL has. Sure, the marketing
deals with Tel-Save, CyberMeals, and others pump up the top line and may
prove the best revenue source period. But $19.95 all you can dial into is
AOL’s bread and butter.
The future may see an AOL broken up in parts: Studios, Access, Ventures,
Commerce Services, and more. Digital Cities could be capitalized on its
own. A recent analysis we did in ISR showed the average value of a Web user
at about $115 a piece. Investors value AOL users at about $800 to $900
each, or more than 600% more than their Web counterparts.
Some of that is the “captive audience” value (estimate about $150)–they’re
using AOL software and are on the AOL service (store). Some of that (we
estimate about $150 per member) is the “marketing” or “commerce” value per
member.
Some is the “content user value” (using the Web as benchmark let’s
say $115 per), brand value may perhaps be $100 per, ad value of $150 per,
barrier to entry value = $100 (if MSN couldn’t duplicate AOL, nobody can),
and the remainder may be filed under “glue value,” combining these
elements into a fairly friendly experience and Wall Street’s lack of
homework on Internet stocks in general.
AOL’s made the shifts over the years and beaten its foes at every turn.
We believe the Internet and Web are now the greatest threat and opportunity
AOL has ever faced.
How do you go from being a closed service with your own software to an open
Internet-based one? Maybe it’s as easy as doing it. Why can’t AOL.com be
AOL.period? You can still sell dialup but don’t have the heavy burden of
maintaining a closed software platform. Go Web 100% Steve. Go Web.
