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Technology Stocks : AMERica on-Line, Another over valued company?
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To: Frank Chen who wrote (100)5/27/1996 1:13:00 PM
From: Jeff Olson   of 222
 
A differential analyses of AOL's new price structure. (more detail than the last one we did)

I printed out their 10Q for the latest quarter ending March 31, 1996 and did a prelimary look at the numbers. In the first quarter of this year their on-line service revenue was $285,481,000. If you assume 6 million users that means each user is currently spending $15.86 a month. This is not correct because most people use only the 5 hours for $9.95 and do not get charged the additional $2.95 for each hour over that. If you assume 90% are using 5 hours or less, then the other 10% are being charged $69 a month. For this 10%, that comes out each using 20 hours more than the first 5 hours (for a total of 25 hours). If this 10% can get 20 hours for $19.95 a month, they would only have to pay that amount plus 2.95/hr for the other 5 hours that they are using. This comes out to a total bill of $34.70 vice the $69 that they were getting charged, leading to a savings of $34.30 a month.

This savings of $34.30 a month for the 10% (or 600,000 users) will then end up costing AOL $61,740,000 a quarter (based on current 6 million users). A loss of this amount would erase the profit that they are currently showing and would lead to a loss of $46,613,000 for the next quarter. This calculates out to a loss of (0.43) a share in the next quarter (assuming 108 million outstanding shares).

I hope to do a more detailed analyses that will take into account AOL's fixed and variable costs as well as increasing membership (to 10 million) and changes in user usage (80% < 5hr, 10% < 20hr, and 10% > 20 hr).
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