Point well made on costs of network ownership, Harry.
With ownership, your cost become fixed only until capacity is overrun. Then comes another chunk of cash flow requirement to add more capacity. It also brings risk, in the event usage drops off. The costs keep on rolling, no matter what the usage.
Case is playing a juggling game with AOL cash flow: Network capacity needs, marketing expenditures, additions to staff for customer service, etc. They are leasing to hold down some network related outlays, and also offering the prepaid subscription fee option as a form of financing and to aid member retention. This prepaid option is very expensive financing for AOL, as the implied interest rates are 19.966% APR for the 1 year deal, and 29.395% APR for the two year deal...No kidding. I took the two year deal, expecting it to be one of my higher yielding investments in the 1997-1998 time frame. :-) Of course, if AOL tubes it, my yield may be somewhat lower....I do believe that if the stock should get to single digits, somebody will scoop them up, and have to honor my deal.
So, is AOL a permanent cash drain or not? CFO says they will go cash flow positive in the March quarter. This without considering the effects of member prepayments. Early results on member upgrade from $9.95 + hourly charges to $19.95 flat rate are encouraging. Estimates from Alex Brown say 75-80% of existing subscribers have opted for flat rate already. Prior average monthly subscriber service fees were around $16.85, so 25% at $9.95 + 75% at $19.95 = $17.45. No too bad!
Alex Brown went on to estimate that if 3-4% adoption of prepayment occurs, it willl lead to a one time bump in cash flow of near $100 million (yes, this does rob from tomorrow's cash flow).
The negative side lately is that average usage has jumped 20%. Lots of busy signals in some markets, no problems in others. (Michael from Ventura Bay will probably be giving us an update on S. Cal. market. It seems he can NEVER sign on thru AOLNet, according to his posts over on the Motley Fool....he comes in thru PacBell, instead, I think...but he does keep on logging in....) As for Tampa, Florida, very few problems....
Final thoughts: the main reason I believe in AOL's future is my own experience. My kids (11 and 14) and lots of their friends are on AOL. And now some of our out-of-state relatives are getting on. They all like the "Buddies" feature that lets you know when one of your circle is on, so you can conduct private chat. AOL telephony is coming next to add to that experience. Once formed, these habits become entrenched. And if your intention is to make connections with other people, you go where the people are....
Here's the crux: Yes the web will offer all these features and more some day. But probably not in one package. Many users that could not find their way out onto the web are paying customers on AOL.
And now an open question to the board: What are the reasons for the vitriol underlying so many posts about AOL? Not just here. ISP users and Net fans seem to really pour on the animus toward this company, its management, its business model, and maybe toward AOL users. It does not appear that this is done with MSN or CSRV or Prodigy to anywhere near the same degree. Comments???
No kidding, I wish you all much success with your investing in 1997.
Brian
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