Who's Worth More? AOL vs. MSFT
Keith Benjamin, Robertson Stephen's Internet analyst, hosted a conference call for institutional investors this week covering developments in the America Online story.
Throughout the call, Keith drew many comparisons between AOL and Microsoft. The most valid of these comparisons was that Microsoft has grown to be a $500 billion company because it was in a position with its operating system business to then move into every other area. America Online is in a similar position today, as its platforms (the AOL service , the Internet, and Netscape) become market dominators. However, AOL has two huge advantages over Microsoft. First, Microsoft has almost made a policy of making enemies in its quest for power, while AOL has offered potential "enemies" partner-like status. Microsoft also alienated the public with poor customer service and bug laden products. America Online has strove for excellence in its relationships with customers, from free telephone support to self-updating software.
America Online is now approaching the 100 million desktop customer mark, counting AOL, Compuserve, ICQ, Netscape.com, and Winamp. Microsoft has 160 million desktop customers across all of its product lines. Mr. Benjamin did not go into this detail, but if America Online could derive a dollar amount of profit per desktop customer similar to Microsoft's $57.50, and grow at the same rate, AOL would deserve a valuation around $300 billion.
How close is AOL to $57.50 of profit per desktop customer? For 40 million of those users (those using the America Online and Compuserve services) that number is not far away. According to Mr. Benjamin's estimates these customers currently provide around $30 of profit for AOL each year. He believes that this number could reach $100 from rent alone within the next few years, which is plausible given the ever increasing rent that AOL charges advertisers and merchandisers. Ancillary services, including wireless AOL access, AOL TV, broadband, and others could also provide significantly more revenue per user. The 40-50 million unique users of America Online's web properties are where there is a lot of room to be made up. Currently, Mr. Benjamin estimates that each user produces $2 of revenue, a far cry from $57.50 of profit. However, he sees this number increasing to $30 per user in the next few years. Finally, with the recent acquisition of Winamp and Spinner.com, Mr. Benjamin anticipates that AOL will dominate the online music market. Quite simply, AOL has the market (100 million users) and the technology to coax major music labels online. These products could provide significantly more than $60 in profit per user per year.
Is an AOL that produces as much or more revenue per user than Microsoft possible? In short, yes. Within 5 years the AOL model will most likely be producing profits of at least $50 per user each year. With even the most conservative growth estimates AOL's desktop user base will reach 150 million. That means that the online giant could rake in $7.5 billion each year in profit, and make my trillion dollar company argument look a lot more likely.
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