Is Satellite the Solution for AOL?
By Alec Appelbaum
WE ALL KNOW America Online (AOL) has been a great stock for the past three years, albeit something of a thrill ride. Every time it looked in peril, CEO Steve Case would pull some kind of savvy deal -- a sale of equipment assets, a purchase of Netscape -- to keep his stock price comfortably aloft.
As long as subscriber and revenue growth have defied gravity, the shares have done likewise. But a whiff of slowing growth can harsh an investor's mellow -- this month, after Merrill Lynch analyst Henry Blodget warned that subscriber growth might hover in the low range of estimates, the stock lost 18.5% in a heartbeat.
Will Case's latest deal -- a $1.5 billion investment in Hughes' (GMH) satellite Internet business -- be the helium AOL needs to recover its buoyancy?
Probably not. The Hughes deal, announced Tuesday, most certainly shows Wall Street how fanatical Case is about growth. But to many investors, it also has the scent of desperation, and it didn't keep the stock from falling 6.9% by midday Wednesday. The concern is that AOL is chasing satellite Internet delivery because it fears getting aced out of the cable modem game. Case insists this isn't true, but you know investors.
The fact is, AOL's satellite blueprint is not really as space age as it sounds. It promises fast downloads of Web pages and multimedia, but a user will still have to rely on plain old Internet service to talk back to the system. The result might add up to be faster than a traditional connection, but only strong doses of AOL marketing mojo can make it as compelling as either of two simpler alternatives.
As a platform for high-speed Internet access, satellite runs a distant third to cable modems and a system called digital subscriber line (DSL) that allows traditional phone lines to carry more data. Jupiter Communications analyst Joe Laszlo says two-way satellite won't hit the market until these other two options are well-established and cheap.
It's true that AOL has agreements with phone companies Bell Atlantic (BEL) and SBC Communications (SBC) to sell DSL connections with its service for around $40 a month. But Jupiter Communications expects seven million cable modem subscribers and 3.5 million DSL subscribers in the U.S. by 2002. Case's real headache is that a coalition of cable companies led by AT&T (T) is trying to bar AOL from hawking its service over cable.
What does AOL get from Hughes? Direct PC, Hughes' satellite Internet service, has 100,000 subscribers and CEO Mike Smith only expects 1.5 million subscribers by 2003. But Case predicted Monday that satellite service will reach the 33% of households that the cable-modem and DSL vendors can't. Jupiter's Laszlo projects only 10% to 20% of the nation will be satellite dependent, but the idea is that AOL will use its marketing muscle to make satellite more attractive.
Direct PC's big problem has been that consumers resist the idea of paying Hughes for downloads and another provider for uploads, says Strategis Group senior consultant Brice David. "Now AOL hopes that with one AOL account, adoption will go more smoothly." But questions about whether AOL/Hughes will absorb the cost of installing the dish remain unanswered. "If they're able to eliminate the hassle factor, it's a new ballgame," says David. Since rigging satellite dishes isn't AOL's forte, Hughes (which has roughly 5.5 million satellite TV subscribers), will run the maintenance side of things. AOL spokeswoman Tricia Primrose explains that AOL is counting on customers to be patient until 2003, when Hughes' two-way service, dubbed Spaceway, will be available.
Patience, of course, is not exactly abundant on the Web. So AOL is also hyping another service made possible by the deal that may make its satellite offerings more distinctive. If users can be convinced to install a special $200 "duo-dish," which splits signals between a user's TV and computer, AOL and Hughes can sell them a supplemental service called AOL TV. No, the company isn't talking about 24-hour screenings of "You've Got Mail." As interactive honcho Barry Schuler describes it, AOL TV will operate as an enhanced version of Hughes' 96-channel satellite TV service that incorporates AOL features.
For example: A user could be watching a music video and order a CD by the artist using an AOL credit account (and conferring revenue to AOL's critical e-commerce division). Or a user could make a "buddy list" appear on-screen during a ballgame, then send messages to others watching the action. "Consumers have all sorts of rituals [associated with watching TV] that we don't want to muck with, but we want to make it more fun," says Primrose.
Why does AOL need to be on TV? In part, to keep driving revenues up from AOL's traditional business. "At big television events, you'll see usage levels dip down, and then as soon as the show is off, the user is back online," says Primrose. More broadly, the company knows it must mine new veins for revenue everywhere it possibly can -- the so-called AOL Anywhere strategy. It's no accident that 3Com (COMS) announced an agreement to put AOL service on its Palm VII handheld device the same day Case unveiled the Hughes deal.
But the real issue is that AOL needs to be on cable. And cable probably needs AOL for access to its 17 million members. Case and AT&T CEO Mike Armstrong often go out of their way to impress upon reporters how eager they are to strike a deal for AOL cable modem access. Despite lobbying aggressively for open access to cable equipment, AOL isn't anywhere near negotiated access at the moment.
But it's still early. Steve Case has, after all, survived more reports of his imminent demise than Fidel Castro.
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