Attached are excerpts from the $100m shareholder suit filed in
February against AOL by the infamous king of shareholder suits
Bill Lerach. The excerpts relate to AOL handling of counts of
subscribers and of churn.
The suit may have difficulty even getting into court. However,
Lerach is known for exhaustive investigation -- important to
establishing proof of claim and to defense against convincing
refute of facts, which can damage a case.
The language of the attachments, as the entire suit, obviously
is colored to invoke conspiracy and nefarious intent. I'm not
adjudging the claims to be true, certainly as regards AOL intent
and data not in the public domain. However, as posted on this
board, over time there has been what may be some corroberation of
certain of the activities noted.
At the least, the excerpts suggest questions that may be
appropriate when AOL announces earnings and subscriber counts
on May 8 -- most importantly, what percentage of subs are
on paying basis versus trial subs and those extended free time?
By the way, the suits' main complaint about deferral of subscriber
acquistion costs is not that the practice per se is improper, but
that AOL did not engage in it in conformance with Generally Accepted
Acounting Standards and thereby commited fraud.
Pages 50-102 of the suit are a detailed compendium of media coverage,
research reports, and other documentation that have value alone as
historical record, albeit incomplete and biased.
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download full document at:
securities.stanford.edu
- AOL was concealing its true increasingly high "churn" rate and
falsifying its average subscriber life and lifetime revenue through
various secret practices. AOL allowed thousands of subscribers to
remain subscribers even though they were delinquent in paying their
accounts or had established "free" accounts through improper and
fraudulent practices. Also, when trial subscribers notified AOL they
wanted to cancel the service at the end of their free "trial period,"
AOL permitted them to take additional free trial period and offered
various other incentives, including, among other things, extending free
usage time, even if as a result of the incentives AOL would make no
money on a particular subscriber -- practices which were inconsistent
with the representations AOL made to justify AOL's deferral (and
capitalization) of hundreds of million in subscriber acquisition costs.
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16. Total membership figures were constantly misstated by at
least 500,000 subscribers. Revenue projections were also inflated
as a result of projecting membership rates based on current
membership numbers which included free trial members and
cancellations. Similarly, raw subscriber usage data indicated that
the publicly touted 40+ month average subscriber life had to have
been based on skewed data and projections taken from selected
slices of the subscriber usage reports, and that the actual average
subscriber life, based on the raw data, was substantially shorter.
Subscriber usage reports went to Accounting only after having been
manipulated to include projections based on unsupported expected
future revenue, rather than an historical actual revenue; moreover,
as defendants knew, any revenue projections were especially
sensitive to churn rates, and AOL had no reliable consistent data
on actual churn rates.
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In order to promote the offering, AOL's top officers,
including defendants Stephen M. Case and Lennert J. Leader,
conducted a "roadshow" in late September and early October, 1995,
with representatives of the lead underwriters. They met with
institutional investors, security analysts and brokers in major
cities throughout the country, where they repeated their false
representations about a 40+ month average subscriber life and
average lifetime membership revenue of $700+, and also represented,
among other things, that AOL's retention, or "churn," rate was
stable or improving. The defendants were careful, however, not to
disclose internal AOL information and statistics about retention
rates and churn. Internally, churn data was analyzed by category,
i.e., retention rates for subscribers who had been members 90 days
or more, 45 to 90 days and 30 to 45 days. Disclosures to
outsiders, including on AOL's roadshow for its October 1995 public
offering (as well as in AOL's periodic conference calls with market
analysts), about the churn rate never included explanations about
such distinctions and were instead based on misleadingly
incomplete, partial information. |
