What else do we have to do other than get excited over Barron's Alan Abelson's col. He couldn't go two weeks without some mud slinging ..
Response was so positive well, let's rephrase that there was so much
response to our recent squib on America Online -- that we can intuit
massive, albeit silent, demand for a reprise. What follows then is by popular
request (in other words, don't blame us, and in any case, if you do, please
remember we were a child once and we're but a poor orphan now, so this
time, please, hold the vulgarities).
After our last piece on the company, the stock went down like a stone only
to bounce back with a vengeance, featuring a smashing 10-point jump a
week ago Friday. The heroic recovery was sparked by a combination of
fact and fancy.
One hard fact was the company's disclosure of bullish news, notably that its
CompuServe unit had added some 300,000 subscribers in the latest quarter
(a sizzling 17.6% gain, compared with the more modest 4% posted by
parent AOL, on a tenfold bigger base, in the same stretch). Another was
that rival Microsoft boosted its charge to $21.95 a month, bringing it in line
with the industry standard, an action that made hash of our conjecture that
Microsoft might intensify the competitive heat by lowering fees.
The less substantial stuff fueling the stock's rebound consisted of a bit of
misreporting and a couple of rumors, one silly, the other murky. The
misreporting was that America Online had raised its own subscription price;
untrue. The silly rumor, courtesy of the usual suspect online chat rooms, was
that AT&T was preparing a takeover bid for America Online. The murky
rumor concerned a deal between AOL and Telephone, involving the latter's
interest in Excite@Home.
As to the rumors, mum's the word here, since we wouldn't dream of
trespassing on the private preserve of Tout TV and the Wild Web, which
offer such lush and fertile turf for planted rumor. The hard facts cited above,
however, merit comment. And just such comment, as it happens, is
forthcoming from Alan Newman, of HD Brous, a bright and seasoned
observer of the investment scene we've quoted from time to time, in his most
recent advisory.
Alan drily notes that the official news release trumpeting CompuServe's
sparkling performance somehow neglected to mention that no small part of
that performance was the result of CompuServe's new offer of a $400
rebate in return for a 36-month commitment to use its Internet service at the
prevailing $21.95 a month rate.
What this means, Alan points out, is that CompuServe "has thus contracted
to pay as much as $120 million for the 300,000 subscribers." It also means,
he goes on, that the company's actual take from those subscriptions over the
36 months works out to $10.84 per subscriber per month.
And while we must confess that we've never quite been able to grasp some
of the more subtle economic concepts of the Internet -- like the more money
you lose, the better off you are -- we can't escape the conclusion that
$10.84 a month is less than $21.95 a month.
Since Microsoft is now aggressively playing the same game with the same
rebate (its program, one of its executives publicly reckoned, effectively gives
customers access for only $7 a month), and at least a half-dozen other
outfits, including NetZero and Altavista, are offering access for nothing,
clearly, the pressure on prices is hardly lessening. In fact, Alan asserts, the
very success of CompuServe's plan assures continuing rebates and price
cuts.
What will happen to America Online's stock, he wonders, when the folks
finally wake up to the ugly truth that "Internet provider revenues are really
being slashed"?
Let's not even think about it. |
