You are correct. It does seems clear that MSFT is moving in on content/communications by selecting key partners (Dreamworks, NBC). Their online service, at a minimum, will allow them to turn their on-line advertising efforts from an expense into a profit center. I think the bigger goal for their on-line service is to show that they don't go home when they are whipped by little guys like AOL. I mean, didn't MSFT get to their reported 1.5 million users by giving the service away? Does ANYBODY pay for it, today?
The biggest new players coming to the online access game have another reason for wanting to be there, other than the pure online business: AT&T is selling excess copper line capacity, and setting up for service bundles for wireless/long distance/net access. MSFT wants into online services for name recognition, lower cost for their own web advertising, future software delivery capability, and a stake in on-line commerce development. Both of these players have the financial depth and name recognition to pull in users, and succeed in getting advertising $ to support the cost of providing the service at these low monthly rates.
The NETCOM and local access providers look to be the ones who are whistling in the dark. Not enough users or geographic range means no national ads. No national ads means no revenues other than flat rate access charges. Not a good trend. I believe the last time I saw NETCOM's income statement their net loss as a percent of sales was about 40%. Ouch. Their stock is close to book value, and a trip to the capital markets is out of the question. The are not going to survive as an independent.
And then there is AOL. My bias? I like their all-in-one area convenience. I like one sign in per visit. I am lazy... Another confession: just about everything the short sellers and doom predicters have to say about AOL has a kernel of truth. Negative cash flow, deferred costs that must roll to future expenses, pricing pressure on access fees, and some management turmoil. So what's to like about this as a service? Look for telephony 4th quarter. "Buddy Lists" are very cool for helping locate your online friends, and the early beginnings of interactive gaming look promising. Another smart move was the AOL Guarantee program. Ensures satisfaction and credit card integrity with an online purchase or your $ refunded. Vendors will be AOL qualified. Smart. Necessary to lift consumer confidence.
The biggest, baddest, and loudest criticism of AOL is price. Dead on target, and deserved. Case has sat on his lead way too long. He is awake and scared now, IMO. We will see with the pricing announcements coming this month. I hope they do a preemptive strike, and set a new low price for unlimited net access at a national (international?) level. Trash the stock the last 25% and get on with the market share grab.
One other observation. Why does AOL position have to be either/or? They will be an advertising supported, subscription based web destination for any one that has an ISP and wants to drop in for a visit. OR, they will serve as a one stop solution for those who want a way to get online and get at their content through their front end. I see room for beginners, middle market users, and some dedicated heavy users that like pieces of their proprietary content to coexist nicely.
Now, how about AOL the investment? Beats me. I am holding my small position. I guess we are closer to a bottom, what with all the recent bad news and impending price cut announcements. I could be wrong.
Good luck,
Brian
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