Yes, the possibilities are endless. But the pitfalls are bottomless.
Imagination can conjure all sorts of potential. The issue is valuation
of AOL stock, which is mainly function of judgment about realization of potential by translation to profit and the timeline you want to put on it. 1 year, 2, 3, 5 ??
So far AOL has had `potential' for five years and viritually no profit
to show for huge growth of subs and revenue. Yet each year since 1993
analysts have forecast big earnings for the next year,
Focus on notion of AOL as invincible is a big minus. When investors
don't think at all about what could go wrong -- and things will --
negative surprises can bite very hard.
What could go wrong with AOL/CSi? How? Don't count your subs before
they're hatched -- especially when the deal won't close for six months. Few are discounting best-possible expectations for the possibilities.
The CSi buy is being blown out of proportion. Much of the impact is
symbolic. CSi was neuter as competitor anyway and losing subs and
MONEY. There's good odds that there will be less over the next 6-12
months -- just on basis of anti-AOL sentiment. What will AOL spend to
try to keep them, and to rejigger CSi overall? How will that impact
earnings? Maybe that's short term stuff. But an earnings disappointment would real fast focus attention from the glorious future to the real present.
Europe? Relative to AOL's size, Europe has long to go to meaningfully
impact AOL profit. As example, for the entire continent, advertising
is barely $10m. Potential/timeline again.
And with AOL, investors and analysts are uncritical ostriches about
current weak spots, totally ignoring them in favor of focus on
`potential'. For example. AOL's Premium game attempt is sucking wind.
Many providers have left for the Web. And on the Web most of what AOL
offers for $1.99/hr is available for less or for free. What's up with
Digital Cities? Check it out. And so on.
That points to a crucial issue. Ultimately, AOL is competing on basis
of content. What matters more than subs is what they do when they log
in. When they are attracted to stuff on the Internet, they leave space
controlled by AOL. In terms of who develops killer content, it's AOL
against thousands, many of whom are large mass media companies. Notion
that AOL can dominate Internet content is as far fetched as idea that
any company can dominate in any medium. Sure AOL can have big share.
But not as much as implicit in current visions.
You speak of monopoly. A side effect of buying CSRV is is that AOL
will have to tread far more carefully. For example, even tho it
probably will get anti-trust approval, it would be difficult to lead
in raising prices, which would attract the Feds again. IOW, right off
the bat, one of the bull arguments -- that AOL can raise prices and
carve out more of the exisitng service into premium (which equals the
same thing), is shot down.
AOL also has to be super careful about how it leverages its size in
dealings with content providers and others; and no matter how careful
it is, cries of `foul' now will come out of the woodwork and get lots
more media attention.
Ditto stuff like "targeted advertising." Remember the big fuss in
August? AOL will be under even bigger scrutiny and target for
criticism about user tracking, privacy etc.
Sure, most of all of the above may be just scare-mongering. But it
touches big nerves and the reaction from politicos et. al. can slow
progress markedly. Timelines again.
More importantly, as Steve Case notes incessantly, more than 80% of
homes still are not online. IOW, AOL's current `monopoly' is only 55%
of 16%. AOL's stated `big payoff' aim is to join the ranks of true
mass media, which Ted Leonsis says is at least 20m and probably 30m
subs. In many industries the early leader was an also-ran by time the
main market had developed.
In sum, the current valuation of AOL is founded on vision of
unencumbered `potential' that won't be realized for some time, during
which a lot can happen, and almost none of which is being considered;
or is just discounted as irrellevant, Because AOL after all is
invincible. In investing as in life, hubris begets downfall. |
