HEROES
Database heroes CLARIFY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLFY)") else Response.Write("(NASDAQ: CLFY)") end if %> and ARBOR SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ARSW)") else Response.Write("(NASDAQ: ARSW)") end if %> both reported solid earnings and rose smartly today, as Clarify closed up $6 1/4 to $48 1/4 and Arbor added $5 1/8 to close at $36 1/8. Both companies create software packages that do the same work which 15 years ago either required a room-sized computer and its cabalistic staff or which could not even be done, in the case of "data mining." Using such software, a company is able to tell if location "X" is profitable or if brand "Y" should be stocked next to brand "Z" or elsewhere in the store. Clarify's customers use the software to track customers, service their needs, and elicit additional sales. Arbor's newest products boast of offering the first full-package On-Line Analytical Processing capability over the World Wide Web. While operating margins are within a few points of one another's, Clarify achieved much larger sales and sales growth in the quarter and sports a market cap about $1/2 billion higher than Arbor's. While it would be hard to make a snap judgment on the valuation of either, since software companies can pop up out of nowhere and grow to earn their markets caps, one thing to emphasize is that such companies need to earn their market caps. Valuations of 20 times revenues don't last forever.
PROGRESSIVE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %>, the Bizzaro-world equivalent of Geico, added $4 to close at $59 5/8, after the higher-risk auto insurance company reported estimate-stomping third quarter EPS of $1.08. One of the reasons to like Progressive is that the drivers it insures are almost every bit as predictable as the low-risk drivers in the Geico pool. Such drivers might have had fender-benders or might be successful older people who enjoy stepping on the gas pedal of their luxury sedan a little too much. Placed in a risk pool large enough to smooth over any individual irresponsibility, the company that writes premiums for these drivers can make out pretty well. Progressive has been on a roll doing this and providing other insurance policies. Through the first six months of 1996, the company's return on equity ran at an annualized rate of approximately 20% in a competitive insurance market. At the same time, Progressive's claim costs fell as a percentage of earned premia and its discretionary costs have both been decreasing. These two combined make for a potent earnings formula.
QUICK TAKES: TJ INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TJCO)") else Response.Write("(NASDAQ: TJCO)") end if %>, an engineered lumber concern, lumbered up $2 1/16 to $21 1/16 per share today on achieving higher market share, sharply higher earnings, and high capacity utilization in its third quarter... Software company VANTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTV)") else Response.Write("(NASDAQ: VNTV)") end if %> jumped $8 to close at $42 1/4 after confirming that it had completed its 2-1 stock split. The company celebrated by ordering out for a large pizza with 12 two-inch slices instead of the usual large with 6 four-inch slices....
GOATS
SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> plunged $6 7/8 to $63 1/8 today after reporting 50% higher EPS and 25% higher revenues. The $0.63-per-share earnings beat the average of all the analysts' estimates, which was $0.61 per share. However, these estimates ranged as high as $0.70. For an earnings performance to really surprise the market and justify a month-long run-up before the press release, it must clear the higher hurdles. The company is hitting a stride with server systems and other high-growth areas such as Java (the company announced today early progress in its Java Beans effort). However, the earnings multiple might be a little large for some, since net margin usually dwells in the single-digit range. In the company's first quarter, though, gross, operating, and net margins were higher. As a result of extensive R&D efforts, which reach 10% of sales, the company may be moving more of the business toward higher-margin software sales, which would drive down the 22 P/E and increase the company's already-robust rates of return on equity and capital.
Though the conditions which drove down WACKENHUT CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHC)") else Response.Write("(NYSE: WHC)") end if %> earlier this week looked less significant than the stock's plunge would have suggested, AMERICAN SERVICE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASGR)") else Response.Write("(NASDAQ: ASGR)") end if %> plummeted $4 7/8 to $7/8 on a much more substantial hit. The company announced last night that the State of Georgia had chosen a Georgia medical school to provide healthcare services for its inmate population. ASG's Prison Health Services will lose the 35,000-inmate contract with the state. In American Service Group's standard press release description of the company, the firm says "Its 36 contracts cover more than 80,000 inmates in 150 facilities located in more than 14 states." Just doing some quick math, it looks like it will be losing 44% of its customers in one fell swoop, which would make any investor think about selling first and asking questions later, especially when prison-outsourcing/privatization companies often carry such rich valuations.
STRUCTURAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDRC)") else Response.Write("(NASDAQ: SDRC)") end if %> skidded $3 7/8 to close at $19 3/8 after Goldman Sachs analyst Laura Conigliaro recommended that the shares be removed from her firm's "recommended list" and rated them "market outperform." The market cap of the Computer Aided Design/Manufacturing/Engineering company has gone almost nowhere in the last year after the firm won an exclusive world-wide contract with Ford Motor Company. Rumors have wafted through the market, encouraged, some say, by a major competitor and its investment bankers, that the contract has alternately been in jeopardy or is low-margin. At the same time, frustrated shareholders have complained that the company's Chair and CEO, with his engineering background, does not understand how the market works and is too afraid to promote the stock. After being sued for promoting its stock, the company's shares hit a nadir around $4 per share two years ago, which has prompted the company to adopt a more conservative stance on public relations. The company doesn't look grossly under- or overvalued at the moment, so shareholder energy is probably better spent on learning more about their company and less on paying attention to analysts' ratings or the market's actions.
VERIFONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VFI)") else Response.Write("(NYSE: VFI)") end if %> dropped $7 3/8 to $33 1/2 after reporting third quarter earnings that just didn't do it for investors. While the transaction processing software/hardware company expanded operating margins above year-ago levels and above trend for the year, sales growth must have been the sticking point for the market. Prescription for a higher market cap: Emphasize the Internet aspects of the company, minimize references to transaction terminals in pharmacies or gas stations, and call all currency exchanged "cyber"-something.
QUICK CUTS: OLYMPIC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLM)") else Response.Write("(NYSE: OLM)") end if %> dropped $3 3/8 to close at $17 after indicating this morning that a party formerly interested in the auto finance company is no longer looking to take any action on the matter. The company also stated that it expects to meet earnings estimates for the third quarter... After pre-announcing third quarter results which will not match "Street" estimates, BT OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTF)") else Response.Write("(NYSE: BTF)") end if %> fell $3 7/8 to $9. The company said, though, that EPS will come in above last year's numbers.
FOOL ON THE HILL
An Investment Opinion by MF Templar
The AOL Media War, part 2 of 2
ALIENATING PARTNERS COSTS NECESSARY ALLIES
Many writers often compare America Online to Apple Computer, although often for all of the wrong reasons. Apple Computer's stubborn refusal to see the market reality of Macintoshes piling up in the warehouse because of a price point almost two times that of a comparable (albeit inferior) IBM-compatible was simply symptomatic of the hubris that blinded the company's management. The desire to make both the hardware and the software, not to license the operating system, to keep high margins over high volume -- all of these were human decisions made by a management too blinded by pride to confront market realities. Anecdotal incidents of similar management bullheadedness at America Online continue to pile up, mainly centering on the widespread unhappiness of the company's Information Providers (IPs). These reveal a company that seems to want to fail in spite of itself.
Stories abound through the rumor mill. Frustrated content providers gather monthly in New York to compare AOL horror stories. America Online has begun to systematically insert itself between its partners and their advertisers, sometimes attempting to take the advertiser completely away. A recent pitch to an AOL Channel to offer a premium service that would review user-supplied writing for a fee met with skepticism from the channel head who stated that AOL did not do stuff like that. Until the presenter pointed out a service already online in that channel head's area which already had the service. Whether or not these and dozens of other IP gripes are legitimate or not, by poisoning relationships with dozens of so-called partners, America Online has unfortunately lost a legion of potential supporters who could assist it in spreading its message. Already suffering from the "57 channels and nothing on" syndrome, AOL has disincentivized IPs from concentrating on making their daily AOL content fresh and new over just focusing on their Web business.
America Online's business model depends on maintaining a growing base of happy subscribers that it can leverage in all sorts of other realms beyond simply charging them usage. By allowing the media free reign to spread blatant misinformation and by disenfranchising a crucial group of potential proponents, America Online has effectively allowed its enemies to conduct an anti-AOL marketing campaign that has gotten more attention than any efforts that the company has attempted in recent months. That a multi-billion dollar business could be brought to its knees because of a perverse combination of pride and poor marketing is a potential reality.
WHAT DOES AOL NEED TO COMMUNICATE TO ITS CUSTOMERS?
America Online's current advertising campaign, although snappy enough, lacks the crucial focus which the company needs to bring to the current Internet-versus-AOL debate. Although the company believes that this is a false comparison, it is one that the media insists on making nonetheless, and in the end it will simply be something they will have to confront head-on. "The Internet and a whole lot more" communicates the message that America Online is the Internet with value-added. Unfortunately, the ads that go with this message rely on hip graphics and professional camera angles to communicate this message, failing to actually clarify what it is that America Online has to offer beyond Internet access.
The problem is a relatively simple one. It ultimately does not matter whether or not America Online's interface is actually superior to the standard ISP-browser arrangement. What matters is whether or not people believe this is the case, and the media war that America Online is losing has people convinced that America Online is nothing more than another way to access the ultra-hip Internet. America Online has to convey the superiority of its interface in their marketing, something all of its commercial ad campaigns have failed to do. The first set of ads that took a user through the basic functionality of the system had the person performing functions you could do just as well on an ISP -- send e-mail, go to EasySABRE, look up information on dinosaurs. The second ad campaign simply tried to make AOL seem cool. The current ads have changed the tagline but again have succumbed to hip visuals over communicating what truly differentiates the service.
When I talk about why I think America Online is a better interface, sometimes I feel like someone defending the beauty of the Macintosh operating system. I really believe that rather than fear the "Internet on training wheels" label which Internet proponents give to America Online, they should rather embrace it wholeheartedly. Most things in life are done on training wheels. For some reason, the peculiar culture of technophiles that has grown around the Internet resists this wholeheartedly, but frankly Windows is DOS on training wheels, Jiffy Lube is oil changes on training wheels, and bottled water is your faucet on training wheels. Time and time again, people have proven that they will pay for convenience and brand if the price point is right. This means that America Online has two primary tasks at hand -- communicating that it is more convenient and working on the price point issue.
Communication is the ad campaign, the price point is simply coming up with something that will stop half of America from believing (mistaken or not) that they are getting ripped off. I think $9.95 for 5 hours, $20 for 20 hours, $30 for 30 hours and somewhere between $40 to $50 for unlimited flat fee access would present a nice tiered system that would give everyone what they want without overloading the network capacity, but this is all a guess on my part. The thing is, $20/20 helps but is clearly not enough -- the darn media articles still have not stopped. Like it or not, AOL might be being bullied into providing a flat fee by the frenzy of mass opinion, in spite of the fact that for many lower price points a fixed number of hours is really cheaper. I am reminded of a friend of mine who told me about an acquaintance who was switching to an ISP from AOL. She had used AOL for fewer than five hours a month for e-mail for $9.95 and was going for the $20 monthly flat fee to do the same thing. Why? Because she thought she was being ripped off. When confronted with the economics, she recanted... but somebody had to make her think about it. She would have otherwise made a decision that made no economic sense because of the existing climate of public opinion. AOL needs to face this irrationality head on, rather than reasoning it away.
THE AD CAMPAIGN THAT SHOULD HAVE BEEN
A much better ad campaign would feature two people using online services, one on AOL and one on an Internet provider. The scenario would be simple -- Joe Internet has just signed up with his ISP and wants his friend Jack AOL to come over and check it out. From this one general scenario, all sorts of humorous opportunities to distinguish AOL's ease of use over the Internet arise:
- Joe Internet goes to get stock quotes and starts to type in an url, turning to Jack AOL halfway through to ask, "Which way do the slashes go?" Jack AOL simply smiles and the commercial cuts to him going to keyword: quotes or simply hitting the darn button on the function bar.
- Joe Internet says, "Hey, on the Internet I can communicate with people from all over the world! I just have to download this application and install." When Joe is done, he turns to Jack and asks if he thinks he knows anyone who might be online. Jack mentions one name and Joe eagerly types it in, but halts confused. "What is the IP address? What's an IP address?" Then you cut to Jack happily checking his buddy list, seeing that "JacksDad" is online and sending his father and instant message in a few quick keystrokes.
- Joe Internet goes to the latest hot Web site, only to learn that the server is down. Cut to Jack AOL happily accessing the Motley Fool with a voiceover saying that on AOL, an individual site's server is never down because it is an integrated network.
- Joe Internet smiles and says, "I can send e-mail... look!" Jack AOL says, "That sure doesn't look like my e-mail." Joe says, "Yeah, 'cause it is the Internet and it is better." Then Jack shows Joe his rich-text enhanced e-mail, pointing out how he can even include a hypertext link if he finds something real cool. Needless to say, Joe is bummed when he looks back on his plain-text little ISP e-mail package.
Other spots could point out the limitations of Internet Relay Chat, point out the difficulty of downloading various add-on applications to your browser and successfully installing them and so on. The point is that America Online needs to embrace the ease of use in its ad campaign, not the World Wide Web. Frankly, most people don't even understand the distinction, with half of the population not understanding the difference between a closed, hybrid and open architecture and the other half, like Mr. Pizzo mentioned yesterday, believing that for some reason AOL has to put its content on the Web and destroy its exclusivity to survive -- a questionable argument that fails to grasp the fact that you can get on the Web via America Online and still view the proprietary content.
CONCLUSION
It is my personal belief that there are two reasons to use online services: communication and information. The World Wide Web, the world's largest library, is all about information. In order to communicate via the Web outside of e-mail, you have to download all sorts of confusing applications that need to be installed. America Online makes it simpler to communicate. America Online also in many ways makes it simpler to get to information -- although it has not done quite as good a job of this as it will ultimately need to. For instance, it is great that I can get to urls by typing them in the keyword screen. But why should I need to type in http://? The Netscape browser is smart enough to fill this in for you, for AOL it should be a snap. America Online's marketing money is better spent on making the service easier to use and adding sound before Web Radio completely takes off, not throwing tailgate parties and renting out Planet Hollywood in a perverse attempt to appear hip. As one person said to me in an e-mail yesterday, AOL needs to have more sound than just "Hello!" and "You have mail!"
Ultimately, I am probably the biggest America Online bull on the planet. But more and more I look at all of the times I have made fun of people who used the Macintosh -- and who said it was easier and more fun -- and I have an eerie sense of de ja vu. The point of the Apple Computer comparison is not to say that the Web is Microsoft. It is not. Rather, it is to say that the Web is like the IBM-compatible personal computer -- no one really owns it so everyone ends up championing it. Because one person does not own it, there is a lot more competition and the price per PC becomes lower. Apple failed to communicate that its computer was easier to use in a believable way, instead relying on self-congratulating ego and snazzy ads in order to carry the day. I think the key points that America Online needs to address are communicating the ease of interactivity and convincing people that whatever pricing strategy they choose is really a value. If AOL cannot win this media war, you can almost throw all of the business fundamentals out of the window.
(SEE Part I, from the October 15th, 1996 Evening News)
FOOL FEATURES
Today's Lunchtime News featured a look at Gaylord Entertainment, a country music giant that was left on the dance floor today.
Earnings Central is chock full of new calls, featuring offerings from Sallie Mae, Canandaigua Wine, Intel, Chrysler, Texas Instruments, Sprint and more. We're also working on adding synopses from Pepsi, Sun Microsystems, Ford, and Computer Associates.
Warm up those TV sets, there are going to be Fools on CNBC! That's right, David and Tom will appear tonight at 7:00 pm EDT on CNBC's The Money Club to discuss Dow Dividend approaches and take caller questions. Pretty keen, eh?
CONFERENCE CALLS
FEDERAL HOME LOAN MORTGAGE (FREDDIE MAC) <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>
3:00 - 5:00 p.m. EDT only
1-800-633-8284 (code: 2033203)
COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
8:30 a.m. EDT
1-800-839-3013 (code: 3276)
AVALON PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVN)") else Response.Write("(NYSE: AVN)") end if %>
after 5:00 p.m. EDT
(402) 220-6039
ARVIN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARV)") else Response.Write("(NYSE: ARV)") end if %>
1-800-633-8284 (reservation # 2003100)
after 11:00 am EDT
APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AAPL)") else Response.Write("(NASDAQ: AAPL)") end if %>
after 6:00 p.m. EDT
1-800-633-8284 (reservation # 1952915)
HARLEY DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %>
after 11:00 a.m. EDT
(402) 220-1031 (confirmation # 277475) -- replay
ATLANTIC COAST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACAI)") else Response.Write("(NASDAQ: ACAI)") end if %>
after 3:00 pm ET
1-800-453-0024 (identification # 2025438)
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats