Dueling Fools
America Online?
The Bear Rebuttal
By
As Jeff ponders the future, I have a question: When exactly is tomorrow? I mean, how many times must the sun set and rise again before tomorrow arrives? Jeff has some pretty lofty valuations for AOL based on that pending day, but I don't think his tomorrow will ever see the light of day.
Why? Let's get into his valuation metrics. Jeff is projecting a figure that even he finds to be "inconceivable" -- 73.5 million subscribers in four years. This is based on a dangerous assumption. I won't argue IDC's estimates, yet. Let's assume that the wired community is going to grow by that huge amount, three and a half times what it is today, by 2003. Are we going to assume that there will be no new entrants in the field of access and that each player will maintain market share?
The Internet is new media but let's take a look at old media for perspective. As television became a more viable medium, the competition grew. We went from three networks and local independents to an explosion of cable programming and set maker alternatives. Don't cut the 2003 pie into 1999 pieces, folks -- it just don't slice right.
But let's assume I'm wrong. Many of you have been leaning that way from the beginning anyway. Let's give AOL those 73.5 million users. Where does Jeff go about figuring an $1,800 price tag per member? A cable subscriber is rarely valued that richly, and let's not forget that your cable bill is probably twice as high as your Internet access tab. More importantly, your cable company owns you. Sure, you can opt for a dish or for rabbit ears, but odds are you will be tied to your cable company for a long time. They own the cable itself. AOL doesn't own the telephone line. The next time a tempting free trial offer comes from a competitor, or you are upgrading your system and swayed by a $400 rebate, your loyalty will be tested.
Jeff is assuming that the average AOL user -- paying $21.95 a month -- will stay faithful for 82 months. That's a seven-year itch that any skeptic should be scratching -- off. Besides, if the penetration of online services is going to continue at IDC's cheery clip, trust me, it won't be at $21.95 a month. Those yet to be wired are waiting for fiscally feasible price points that AOL will have to deliver sooner rather than later.
Jeff's other measuring stick was based on AOL's advertising and commerce revenues. He expects $7 billion in annual sales by 2003 for our online giant. What is that worth? Hmm, if only there was some gauge available. If only there was an ad-intensive entertainment company, with $7 billion in revenues, for us to compare. Oh, that's right, CBS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> -- recently bought out by Viacom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VIA)") else Response.Write("(NYSE: VIA)") end if %> for $35 billion.
Like AOL, CBS also has stakes in some pretty interesting Internet content players. But, wait a minute, why are we comparing the tube to the monitor? During peak usage there are only 1.2 million AOL users logged on. Prorated to Jeff's 2003 master plan and that prime time audience grows to 4.2 million in four years. Well, sorry, in the broadcast world that show would get ditched for a midseason replacement. NBC's ER regularly pulls in close to 30 million viewers.
But, even if I concede the $35 billion -- and settle for valuing the member-based-valuation method at half of Jeff's ambitious $1,800 target -- that leaves AOL worth 25% less than it is today based on figures that are four years away. Yikes, Jeff, better hope tomorrow never does arrive.
Also Check Out the Duel Flashback: Network Solutions
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