Because the bearish argument is a compilation of the great thoughts of all contributors, we have broken the Duel into several parts for you and given credit to the proper Fools.
The Business
On lack of quality: I can not tell you how many times it takes long periods of time to connect (it took ten minutes last Sunday night @ 11 p.m.), constantly getting disconnected, unknown errors, message boards that do not seem to work, sluggish connects to www sites, sometimes long periods of no connection at all, etc. etc. etc.) . These problems occurred recently, this is tame compared to the problems this Winter. It is my opinion that AOL will get hammered by quality internet providers, quality telephone companies and other such companies with a commitment to the highest level of service and quality products. There will be joint ventures between the Microsofts, AT&T, etc. etc. AOL is not even remotely close to the leader in internet technology. "I have seen Microsoft, Intel, Compaq, Iomega, Netscape, you AOL, are not even close. Cash out of AOL and invest elsewhere. This party will come to a crash soon enough. Thank god I can still get to Motley Fool after I terminate my membership. [Editor's Note - We didn't pay CROESE to say that :)]
On the threat of Microsoft: Microsoft is going to pose a threat that AOL must react to, and the threat isn't MSN buying Compuserve. It is the new version of their browser. The browser will offer channels much like AOL's startup screen, but unlike AOL these channels can be assimilated to the users preferences. The best of the best web sites will be able to be accessed much easier than. The WWW will become a better organized database that can be set up specifically according to ones needs. This is the new threat to AOL's enclosed database. With the fear of losing market share to Netscape behind it, Microsoft will be able to advertise much more within its browser alone. I haven't seen AOL's version 4.0 yet, but I hope it gives users the versatility that the Explorer 4.0 will. (Trezius)
On advertising agreements and lack of profit: AOL loses money, yet the stock goes up. They sign a widely touted agreement with amazon.com, which has NEVER made a profit, and the stock goes up. Will these advertising agreements be renewed? Not if the advertisers don't start making big profits from their association with AOL. There's no question many have made alot of money on this stock, but at some point you have to wonder if it isn't all smoke and mirrors, folks. (Howstovall)
On the problems of premium services: In an interview with CNET, Pittman explained how from all the bad associated with the pricing move came one massive positive: people didn't leave AOL. They simply demanded it be fixed. They demanded access to the product. Pittman drew the comparison to KO's introduction of New Coke, where folks didn't split to Pepsi, but rather, demanded that the old product be returned to shelves...
...In the wake of the AOL pricing change, folks didn't bail out for cheaper internet access providers, who had counterattacked the only way they could -- by dropping pricing to $9.95/month. Customer loyalty in the face of price competition led Pittman to the following conclusion: that what people liked about unlimited flat rate pricing was the "unlimited." They didn't care nearly so much about HOW MUCH they had to shell out for the flat rate (after all, these families already had enough to buy a computer, a second phone line, a modem, etc.), but they didn't like being on the meter every time they signed on. Pittman went so far as to call the "unlimited" portion of the deal "the secret sauce."
So why would you then take some of your biggest backers, your most avid users, and put them back on the clock? And why would game companies go along with it?
AOL execs are not stupid people. They have certainly studied the pricing models. But it sure seems to me that a flat rate -- no matter how high -- stands to make customers happier over time. (E Rydholm)
The Valuation
On cash flow multiples: The latest Barron's (7/21) points out that whereas AOL's PE may be a squishy measure, more meaningful is CASH FLOW multiple, which is now 40 times 1998 concensus projections.
Barron's observes that by contrast Time Warner paid 20 times EBITDA for Turner Broadcasting; Disney paid 14 times for Cap Cities/ABC; and Microsoft's investment in Comcast was at 8.7 times estimated 1998 cash flow.
The programming assets of Turner, for example, include the entire MGM film library, and Seinfeld (produced by Turner's Castle Rock). With all respect to AOL and MF, AOL's greatest hit is 20% stake in MF. [Editor's note: We DID pay MATtheMEGA $5 to say that :)]
The MSFT/Comcast deal is interesting because of the observation some express that AOL's valuation of $1,000 per sub should approach cable's $2,000. But value-per sub is just a shortand for underlying value consisting mainly of cash flow.