AOL's deal with China's Legend
Just five years ago AOL (NYSE: AOL) was supposed to be road kill on Al Gore's information superhighway, a victim of faster, more nimble firms based on nothing but Web protocols.
So far Yahoo is the closest any of them have come to AOL's dominance, but even Yahoo is a distant second.
Part of the reason AOL won in the consumer ISP arena was the carpet bombing of sign-up disks for new subscribers.
The still proprietary AOL leads in consumer subscribers -- 29 million -- and is the largest on-ramp for consumers to the Web.
This guppy-turned-orca whale gobbled up Time Warner and on June 11 set its sights on China with the planned announcement of a $200 million joint venture with China's leading PC maker, Legend Holdings (which trades on the Hong Kong stock exchange, ticker 0992.HK).
Most of the Internet start-ups in Asia are taking on water fast (we're in Asia now and have seen how the market here is slowly developing) so AOL's moves with Legend speak volumes.
First, why didn't AOL acquire one of the existing portals? Some trade or are valued at less than cash value.
Second, the leader in cash reserves, Chinadotcom (Nasdaq: CHINA) has about $433 million cash while its market cap is $269 million. Go figure. Buy it and have cash to spare.
But the fact that AOL bypassed the existing portals says the market in China is probably much more nascent than many marketing campaigns would have us believe.
Cutting a deal with Legend logically puts the AOL-Legend venture on millions of PCs at almost zero cost in terms of bundling and marketing. That presence is something start-up portals simply cannot afford over time.
According to The Wall Street Journal, NetEase may be sold to a Hong Kong conglomerate, Wharf Holdings, for $85 million, slightly more than its cash value.
Rivals Sina.com and Sohu may also have to scramble to find buyers in the new longer-term battle played out in Asia's largest market.
It reminds me of AOL in the days when rivals Compuserve and Prodigy were one and two ahead of AOL in the U.S. online race. Compuserve began in 1969 and had a huge time lead on everyone in the market but still ultimately lost. Prodigy became an ISP after blowing its lead in online services in the mid-1990s.
For just as AOL outlasted its stronger competitors, the new landscape seems even more weighted in AOL's favor: no huge dominant companies in online services in China relative to the total population base and future customer sell-through potential. That said, in the short term AOL's moves may spark News Corp. into action. The Australian media conglomerate likely will not enjoy having AOL Time Warner cherry-picking China’s online access in what it considers its own territory of Australasia and the Pacific Rim.
That could mean Chinadotcom, Sina or Sohu being acquired by News Corp. or one of the other large conglomerates in Hong Kong.
In terms of earnings or revenue we don't see AOL's forays as material to its balance sheet for quite some time. While the Chinese Internet market is growing relatively fast, the current advertising market in China for Internet is far from mature.
In addition, although they are growing, disposable income levels and media appetite in China are a long way from U.S. levels or percents.
Bottom line: it's a marathon in Asia for digital media. The seeds AOL is planting today are more about the company’s cash flow and earnings a decade from now rather than what they are today.
Concerns about censorship, privacy, security, and control pose a risk for AOL's venture, especially since Legend may own 52 percent of the venture. AOL may find China more difficult than it thought. These are not small risks for the company or investors to overcome.
But if AOL's steady marketing march continues, maybe we'll even have to stop calling it America Online in 2011.
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