Browsing thru Investors Daily this AM and came upon this tidbit:
< Inteco Corp surveyed 2660 households in Sept 96. Estimates current US online users at 15.2 mill. (Lessee, AOL share would be 6/15...) >
< 13.5 mill households plan to sign up for online services within the next year. >
< 42% of those expecting to sign on DO NOT YET OWN a computer > .... (emphasis mine)
< Surprising finding: For households with incomes above $25,000 online usage is dropping. This group totaled 8.7 mill users, down from 9.8 mill a year ago. >
My interpretation and other rambling observations: Early adopters and high incomers are well into online services usage, but their growth rate is stable to down. This type user was first to migrate off the far more expensive AOL pricing plan to a flat rate ISP, once they learned what was out there on the Net.
The next wave will include a lot of beginners to computing and online services. Online services optiions will be preloaded on their new computers. They will try out whichever name brand seems recognizable and affordable.
AOL will be offering them a $4.95 + hourly after 3 hours price, a $9.95 + price, and a $19.95 unlimited ($14.95 for a year paid in advance) plus a new twist: $9.95 unlimited AOL access thru the ISP of YOUR choice. The signup/churn cycle will begin again, with the beginners learning their way around the Net, and exploring their options for connecting and trying to keep their connectivity/entertainment costs in line.
This go-around, the glaring difference in pricing between the ISP's and AOL is gone. There will be some minor differences and bundled deals, but I interpret that AOL is signaling that they will match ISP pricing going forward. The shakeout really begins.
The company will be cash flow positive. per their recent pricing announcements. They will NOT be generating significant net earnings at these access prices, and won't until advertising and transaction based revenues pick up. Nor will any other online service competitor.
So what are you buying with a share of AOL? The closest analogy that comes to mind is Craig McCaw and his McCaw Communications. It was all market share grab in an emerging market. Never any significant profits. Just cash flow balancing and run like crazy to get there first before Ma Bell and her sisters woke up and came after you.
AT&T bought McCaw.
AOL price should, over time, follow its buyout value. Some multiple of subscribers, or a multiple of revenues. The ANS network they are building has value on its own, regardless of subscriber counts.
It will be great not having to discuss deferred subscriber acquisition costs any more. That one was "plumb wore out".
The price comparisons of a plain vanilla ISP connection to AOL is only partially valid. It is apples to oranges. There IS more offered at AOL along with the same things offered by the ISP. We can debate browser connection throughput rates in milliseconds, or megs of RAM for your WEB page, or the quality of the E-mail software, but they are side issues to the main distinction: AOL is an internet access provider with greater added content and more network investment than any other. Only Microsoft is in a position to challenge that, IMO. The Bellcos have the network , but they don't, and won't, have the content. They will be content to be wholesale connection providers, and yes they will probably be cheap(er).
Would like to see discussion of possible valuations based on subscribers at the new service pricing points. The Motley Fool site has a discussion of AOL value that concludes a fair value in the 40's is warranted. I belive that AOL will easily reach 10 million subscribers in 1997. The aggressiveness of their pricing came as a very pleasant surprise to me. I will be enjoying that as a user of the service, and hope to see it return some momentum to the stock.
Good luck to all.
Brian
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