MW, The Big Picture about AOL
Being one of the bears I appreciate your messages. I can certainly understand your annoyance on being called a "fool" and "greater fool". Stereotyping is never a good thing. Nonetheless I have been waiting a long time for the bulls to explain to me why AOL is worth so much, except for the "potential" of AOL. While I don't deny the great potential for Internet, I can't see the transfer from Internet to AOL. I will try once more to explain my position and as always, we bears welcome your counter-points.
Let me begin with some hard data from the US Census Bureau:
census.gov
census.gov
Extrapolate the census data from 1990 and 1980, there will be approximately 100 million homes in the US by the year 2000. The income level is reported by each fifth portion. In most recent data year, 1994, the lowest fifth has income up to $13,000, the second fifth has $25,000, the third $40,000, the fourth $62,000, and the highest fifth has $132,000. It would be safe to assume that the percentage of home equiped with Internet access increases with income. First they must have money to buy a computer or WebTV device. (But WebTV connects to MSN, not AOL.) I estimate the percentage to be 0%, 30%, 60%, 80%, and 90% from lowest to highest fifth. So the total number of households that will have Internet connections by the year 2000 will be approximately 50 million. (By the way, Internet surfing is an active entertainment, unlike TV which is passive, that is why Internet will never be as popular as TV. And unlike TV, each home only needs one Internet connection.)
Out of the 50 million Internet connections, how many will be AOL? First, there are free or low-cost ISP services offer by Universities in each city for their students and staff (I am using one right now). Higher income household will opt for higher speed connections, ADSL, satellite, ISDN, cable, or even dedicate T1's. Cable modems are being offered right now at $39.95 per month. That's only twice more than the $19.95 AOL charge but 100 times faster than 33.3K modem. Even though they still require a modem ISP, it wont' be AOL because the client must send modified TCP/IP packets. Same goes for satellite. So out of the 50 million, AOL could possiblely claim up to 80%, or 40 million. But there will be fierce competitions.
There are local ISP's, AT&T, MCI, Sprint, GTE, PacBell, Earthlink, Netcom, and etc. Oh, and don't forget MicroSoft! If GTE offers ISP service as a add-on feature to local phone service like call waiting, for a few dollars cheaper (say $14.95), then you bet people will switch. (Witness how often people switch long distance companies.) Or waive the installation of new phone line if the customer signs up with GTE's ISP for a year. And how about $10 rebate on Windows98 if you sign up for MSN? You see, AOL's service isn't anything terribly unique. It doesn't have one single patent. There is no secret formula like Coke, or product differentiation like sneakers. More and more, everyone is offering content for free. Netscape, CNN, MSNBC, AnchorDesk, ZDNet, C|net, tv.com, thesite.com, gamecenter.com, and so on. Out of the 40 million potential subscribers, AOL will be lucky to get 30%, or 12 million.
The closest analogy I can think of is sun-glasses. Yes, sun-glasses. Almost everyone needs them, but they all serve the same function and perform equally well except for the really inexpensive knock-offs. When they first came out, you can only get them at the doctor's office. But soon, you see them being sold in drug stores, department stores, sporting goods stores, and grocery stores. Because there is nothing special about different pairs of sun-glasses which is perceivable by the consumer (except how they look). One good pair is as good as another. One brand is as good as another brand. The market is not dominated by one brand. The ISP and content service will eventually reach the same state. AOL has brand appeal in teh US because its name and claimed simplicity so far. But is it really something fundamentally different? No. It will also have a hard time penetrating to other countries. Unlike "Coke" or "Nike" which have more *generic* names. "America OnLine" won't fly in many countries.
Given the 12 million subscriber number, how much is each subscriber worth? Scroll back and read my previous messages. I don't think it's worth $1,000 as valued by the current stock price. I predict a dive to low $40's by the first quarter of 1998. It may be sooner. Or I may push back a few quarters, just like AOL pushing back their profit predictions. :-)
Yikes |
