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Technology Stocks : America On-Line: will it survive ...?
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To: John Albert Moro who wrote (6297)12/10/1997 8:36:00 AM
From: John Kratus  Read Replies (2) of 13594
 
Built into AOL's stock price is the assumption that ad revenues will grow dramatically as more and more advertisers use AOL as an advertising medium. The problem with this strategy is that AOL must attract an ever-increasing number of subscribers in order to generate new advertising revenues.

Granted, that new computer owners are attracted by AOL's brand name. But I think that it's safe to assume that there will be more of AOL's current subs that will be switching to other ISPs (as they become more sophisticated) than there are non-AOL internet users that will be switching to AOL.

Long-term, AOL is going to have to figure out how to attract more experienced computer users to its service. Given AOL's strategy to try to make most of its money from advertising to its captive audience, I don't think that AOL has a prayer of doing so.

Brokerage analysts are using the metaphor of television to estimate AOL's future earnings (subs plus advertising). I think that a better metaphor is Apple Computer. (Even though I love my Mac, I think the metaphor fits.) Apple was the "computer for the rest of us" at a time when using a personal computer was considered to be too complex for most people. Apple initially pitched its computers to the uninitiated: school children and homes. And Apple initially had the lion's share of the personal computer market.

But it didn't take long before Microsoft and others imitated Apple's ease of use and stole the market Apple created. In the late '70s and early '80s, no one could have predicted the success of competitors like Compaq, Gateway 2000, or Dell. And no one could have predicted that Apple, whose Apple II was once the best-selling personal computer in the world, would fall on such hard times. Similarly, I think that AOL's ease of use for the newbies will only take it so far, and other new competitors will come and eat AOL's lunch. Watch out for companies like Hot-mail, who are on track for beating AOL in number of e-mail users.

Just a few morning thoughts from a disgruntled bear. Any responses?

John
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