The Bull's Horns

On lack of quality access: The problems you experience on AOL or not unique to AOL. The following are excerpts from news stories just from just the last two days:

July 16, 1997, 5:45 p.m. PT A spammer who has clogged AT&T WorldNet customers' outbound email for the past few days has been shut down. One AT&T customer complained he had to use another service to send email. "My AT&T outbound email has been delayed (or lost) now for over 36 hours."

07/17/97; 3:30 p.m. EDT) Computer Reseller News- Corrupted data programming by Network Solutions, the sole company responsible for handling and processing Internet domain names, is wreaking havoc Thursday on the Internet. According to ISPs and backbone providers whose servers are maintained by Network Solutions, addresses are being routed incorrectly or not at all as a result of corrupted information being installed to the root server's database by Network Solutions officials Wednesday night.

Netizens have been encountering widespread difficulty reaching Web sites, sending email, and using the Internet in general today due to the ripple effect of a database problem combined with "human error" at the InterNIC.

July 17 saw another major systems failure as Worldcom lost 496 T-3 circuits between St Louis and Los Angeles due to a 'back-hoe' incident, and Worldcom had another major fiber cut on the East coast.

July 17, Sprint lost 280 DS-3s on the East coast on the same day and further problems at Sprint also caused disruption on the US West coast. As a result of these crises, .com and .net sites were, for some users, unavailable and few users will have been unaware of a general overall slowdown of transmission.

As I said, this is just a sample from the last two days. Two weeks ago UUnet had major outages ( UUnet is the provider for The Microsoft Network) UUNet repairs Net outages (MarionsutS)

On advertising deals: TEL-SAVE HOLDINGS: $100 million in cash, warrants for 12 million shares of Tel-Save at strike prices between between $14 and $15 1/2 per share, and profit-sharing above certain stipulated levels;

CUC INTERNATIONAL/HFS: $50 million -- primarily to be credited against future transaction and membership commissions to AOL -- plus the potential for additional amounts based on a revenue-sharing agreement.

1-800-FLOWERS: $25 million plus a limited revenue share over the four-year agreement

AMAZON.COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>: $19 million over three years plus part of the revenues if they go above certain pre-set amounts

Clearly, this flurry of deals and the real cash that is being handed to AOL in these deals indicates that the company's value is in the subscriber base. (TMF Templr)

On valuation: Estimatesof $0.87 cents per share put the stock at 73 times expected EPS ending in June of 1998. Estimates on this company are like groping for a lightswitch in the dark, but the next quarter -- reported around August First -- should give us another "lightbulb flash" as to where AOL is headed. After last quarter's surprise profit, $0.07 per share is expected for this quarter. But this is probably all "small-talk" -- quarterly estimates, even 1998 estimates -- compared to what's to come in 1999, 2000, and beyond. For one, what company is behind the gate and about to burst forward and surpass AOL? (TMF Jeff)

More on valuation: <<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.

<< 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.

<<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.

<<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.).

<<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.

<<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.

<<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?

<<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.>>

I think that AOL subs are worth less than average cable company subscriber and worth more than a cell phone subscriber. This puts it between $800 and $2000 and I took the low side. You can do some revenue over lifetime numbers to come up with a similar number, but I did not want to crunch those numbers the other night :).

<<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.

EPILOGUE

Over? This curtain never drops.

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