Dueling Fools
America Online?
The Bull Rebuttal
By
Rick is skilled at painting a dark picture for America Online, but he is painting with too wide a brush. A person only needs to add a little paint thinner to Rick's arguments in order to see the white canvas of possibility beneath his deliberately bleak landscape.
Taking his arguments in order, Rick's first point is that the gist of AOL's content is duplicated on the Internet. My response: AOL is the Internet for a large number of subscribers who rarely go beyond its blue and white speckled empire. Why should they wander? Content on AOL is presented in a friendly, easy-to-find manner --especially on the 5.0 version of the service. For the average AOL consumer, anything less than AOL content is uncivilized mayhem, so the fact that the Internet has content, too, doesn't matter to them.
Rick's second argument involves broadband Internet access. He claims that AOL has missed the boat, even though the boat hasn't yet left the dock. It is estimated that a mere 1.4 million people will use cable modems by 2000, while only about 700,000 people will be using high-speed DSL access. The stage is only set for growth to begin. Within five years, subscriber bases at both high-speed platforms will jump several-fold. And after researching for and writing a Motley Fool Internet Report on broadband access, I'm of the opinion that DSL will surpass cable modem access as the leading broadband technology (by subscriber numbers), and AOL will lead the charge. AOL can place a simple button on its mainscreen: "Click here to consider high-speed access."
Nineteen million members will see that link when they log onto AOL. How many will click it? AOL can offer DSL access to a majority of the country via its Bell Company partnerships. In doing so, America Online will receive a percentage of subscriber revenue, just as it does now under its dialog access partnerships. High-speed access will not be an either/or game anyway. (Again, Rick painted too wide a stroke.) The market is large enough for both cable and DSL access to succeed. As for prices and performance: DSL will likely offer more competitive prices because it has more supporters and therefore competition than cable, and it may also outperform crowded cable lines that slow with increased traffic.
Next, Rick said that AOL pays $0.35 in network fees for every hour that a subscriber stays online, while other ISPs pay $0.25 per hour. Other ISPs, however, don't typically have in-depth proprietary content and online technology offerings such as AOL's instant messages, and AOL's proprietary real estate is responsible for most of its ad and commerce revenue. Besides, if a customer spends 10 hours per month online and thereby costs AOL $3.50, the typical customer is still paying $21.95 per month in fees, leaving AOL a fat margin.
To wrap-up in three fell swoops: The fact that ad backlog is outstripping available eyeballs on AOL is a good thing. AOL should be able to manage its subscriber growth well enough to take advantage of every cent in ad and commerce revenue that continually falls into AOL's lap like giant diamonds. The amazingly high demand to advertise on AOL is a tremendous long-term indicator of surging, attractive cash flow.
As for ICQ and instant messages: About 80% of Internet users touch AOL property, many of them using AOL's instant messenger services. If this wasn't an attractive niche, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> wouldn't try to copy it. AOL is letting its ICQ user base expand exponentially. When the time is right, management has said that it will leverage this giant customer base in several ways. Finally, free PCs -- hitches and all (you must view this many ads, or be a subscriber for three years, and so forth) --appeal to a significant yet modest niche market. This approach to the Internet has profit potential, however, or the big names wouldn't jump on it. AOL is smart to experiment with it.
Rick is correct: "Incremental" is a great word. It is best when used before the word "value." Incremental value. This is what AOL is building for shareholders, block by block, step by step. As the number one Internet service provider in the world, without a close second place in sight -- even though I admit that the competition is everywhere -- AOL is increasingly in a position to expand its already profitable empire.
1992 to 1999 was only the beginning. The Internet should climb from 142 million users to 500 million by 2003. About as certain as anything in this medium is the likelihood that America Online will continue to be a leader due in part to its market position, barriers to entry, strong balance sheet, switching costs, and leading brand name. By continuing to profitably lead the industry, America Online will increasingly benefit as the Internet grows.
Next: The Bear Responds