The Bear's Growl
Regarding unlimited pricing: Regarding under or over valued AOL, in my opinion, it is way over valued. AOL service, simply put, sucks. My service is lousy to non-existant. [From] the start, I couldn't log on to AOL. Their response was to add hardware to the service needs. Now I can log on, but I am constantly dropped from AOL because "the server is not responding." They promote unlimited use. I don't know how they get away with that, because I am constantly dropped off line regardless of the time of day I use it.
AOL service is bad and getting worse (DPratt9520)
Regarding premium games: In other real life experiences, people are simply not used to entertainment by the minute. This is more like Chinese water torture. We are really at a loss to find any everyday models that we pay by the minute, except long distance calls, and that is not entertainment. (Peep shows in New York's Times Square, maybe?)
CompuServe's model, i.e., charging by the minute, is failing miserably. And let me emphasize that they are doing it with "just about the most affluent segment of the society". AOL crowd who frequent the game channel are by all accounts mostly young and not financially very able people.
This experiment, which is a failure waiting to happen, is going to demoralize AOL for a long time in developing its other "premium" concepts, e.g., real time quotes.
And it's going to punish us investors, as we'll certainly pay for this mistake with reduced share prices. (BKhozai)
On valuation: I've never been comfortable with the comparison to valuations in the cable industry. The differences in economics are too many. Cable has higher revenues per subscriber, lower acquisition costs, longer expected longevity of customers (or less churn), less direct competition (where satellite service is available, it is often at a significant premium), less price pressure, proven and stable revenue streams, and arguably, less ongoing investment to maintain existing services (more of cable's existing revenues are supported by previous investments in infrastructure, whereas AOL will need to continually upgrade indefinitely). On the other hand, AOL does have greater potential revenue growth, but along with that comes the uncertainty, which the market discounts heavily.
It doesn't make sense to arbitrarily say that value per subscriber will rise to $1000 because even the $903 has built into it expectations of growth in both subs and rev/sub. $1000 per sub seems no more rationally justified than $800 per sub -- even after AOL achieves subscriber and revenue growth expectations.
More on valuation: At the risk of bickering about details...
<<Cable has higher revenues per subscriber,>>
I don't believe this is necessarily true, depending on what region you are in. In Williamsburg, cable costs $25 a month, plus whatever advertising on a per viewer base the system can generate. With the average AOL subscriber generating $7 last quarter alone and change in merchandise and advertising revenues on top of their $20 flat fee, the revenue picture seems equal to me right now with AOL having the upside potential to generate much more in the way of revenues.
AOL revenue per subscriber per month is less than $22 total. I believe that the $7 other revenue figure you cite is for the quarter. And since not all subscribers are on the flat fee plan, the average monthly bill is less than $20. (This can be confirmed in KW: Full Disclosure. Analysts revenue estimates range $470m - $550m. Divide by 8.5m customers and 3 mos.)
I believe the $25 cable bill you cite is for basic service. (In NYC, it's $31.) Premium channels add $10 to $20 to that bill. After adding in other revenues, I would guessthat average cable revenue per month is more than $30 per subscriber.
<< lower acquisition costs>>
Since the conversion to flat fee, customer acquisition is in the $50 to $55 range. The cable company has to pay the fellow to come out to your house (buttcrack showing). All AOL has to do is mail a disk to your door and man some telephones.
Time Warner in NYC charges $62.75 for cable installation, offsetting the cost of the house call. Even NYNEX charges $55 for "installation" when it's a "flip of a switch" at a central office and no house call. AOL does not have the luxury of passing on the acquisition costs to new customers.
<<longer expected longevity of customers (or less churn)>>
I would actually verify this one before I would assume it. Cable churn is higher than most people think. In the two systems I have checked, it is between 20% to 33% a year because of moving, etc.... not much different than AOL.
Actually, I'm confortable assuming it. In retail banking, customer turnover is roughly 20%, a lot of which is driven by people moving, dying, marrying, etc. Since bank competition is greater, I have to believe that cable churn is about the same or less. (I'd like to know where the 33% came from. Perhaps a specific product, or special market factors?) AOL's churn is driven by different factors, including customer experimentation, system abuse, customer service problems (okay, cable and banking have some similar issues here), price competition, etc. As best as I can recall, AOL's churn is much greater than 20%.
<<less direct competition (where satellite service is available, it is often at a significant premium)>>
Well, there is that entrenched free competition we call NBC, ABC, CBS, Fox, UPN, WB and PBS :). Seriously, though, satellite is not that much of a premium to cable. Fool HQ just chose DirectTV over our local cable provider because it costs less and we get more (on both's business rates). The consumer rates were comprable and you actually saved a bundle if you use the movie channels (getting much more selection on the satellite, as they have three HBOs, three Showtimes, etc.).
In the Internet access business, consumers can switch to same or lower cost providers at no cost (or negative cost, in the form of a free month) and get (in many people's opinions) pretty much the same or better service. I call this competition. You cannot make the same statement for most cable markets. (I agree that satellite tv costs less for those who need 20 premium channels.)
BTW, does watching HBO in the office help you with your analyses of the entertainment industry? :)
<<proven and stable revenue streams, >>
Given the slow growth cable has seen over the past 18 months, I am not sure this can be said.
It's because of the slow growth of cable that I say this. Their revenue is stable and predictable -- more like a utility than an online service.
<<less ongoing investment to maintain existing services (more of cable's existing revenues are supported by previous investments in infrastructure, whereas AOL will need to continually upgrade indefinitely). >>
AOL makes money after expensing everything. Most cable companies do not. This is because they are much more capital intesive. With only 10% of cable feeds wired for 2-way to support additional services, it ain't gonna get any less capital intensive anytime soon.
Cable will have to upgrade to build new services, and my superficial understanding of the cable industry tells me that it's this long-term investment in new services that is turning some income statement line items red. Correct me if I'm wrong, but I believe that aside from relatively small "maintenance costs," cable companies don't have to invest much to support existing customers on existing services.
My point here was that AOL needs to keep investing in order to support existing revenue streams -- by upgrading more modems to 28.8, 56K, and by installing more hardware to keep up with increasing demand for multimedia (sound, phone, video, 3D, animation) and more time online (greater utility for e-mail and WWW; auto-logins with "push" technologies; etc.) from existing customers who will continue to pay a flat fee.
<<On the other hand, AOL does have greater potential revenue growth,>>
The ACTUAL revenue growth ain't bad, either. AOL grew revenues by 50%+ last year and made money on gold standard accounting. The average cable company grew revenues by 7% and is cash flow negative. Which has the better business model?
I'm not saying that the cable company business model is better -- just different enough to argue that a comparison could be misleading.
<<Is there a price at which AOL would be overvalued?>>
Yeah. If the valuation per sub got to the point where they were being valued at a premium to other forms of subscription entertainment, I would get worried. Given the uncertainly, I think $1000 per sub is far and see subs growing 20%ish.
When AOL was in the $20s and $30s, target prices from MF and from other analysts were in the $40-$60 range. Now that it's in the $60s, the target is in the $75-$90 range. How long can a company remain so much "undervalued"?
(S Kim XX)