OT Internet info, Joe. This is also a good site for prelim. info on a range of stocks.
jhg
Irv, what's your view on this?
jhg
ÿ
The Fabulous Market Babe
Stock of the Day
6/15/98
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America Online/AOLÿ vs. Yahoo!/YHOO
I don't know about you, but I have always thought that competition was a
good thing.
Particularly in the Internet space. After all, wouldn't it just bite to
be stuck roaming around in one space, with your only navigational option
being what someone else had picked out for you beforehand?
That's about as exciting as turning on the TV and having the only option
be watching Engelbert Humperdink ALL DAY LONG FOR THE REST OF YOUR LIFE.
Yikes.
Which brings us back to our column. In this piece I will highlight the
on-line rivalry between AOL and YHOO, how it curiously resembles another
well-known technology battle back in the 1980's, what I expect the
competitive fallout to be as a result, and finally, what it means for
the stocks.
When I first became familiar with the Internet, I, of course, became an
AOL member. After being bombarded with free disks in everything from my
cereal box (imagine my letdown, no cool plastic toy) to my newspaper, I
gave in. After all, it was the easiest thing to do, and, after receiving
my first email, I felt so incredibly special.
Funny how things can change.
Given that AOL tends to confine its members within the AOL space, I didn
't venture out onto the web for some time. When I finally did, I was
astounded. So much was available, all at my fingertips, all under my
command. All I had to do was ask for it.
Much different than AOL, where my "options" were programmed in, not to
mention skewed towards advertiser's whims.
Then I discovered the YHOO search engine.
First of all, it was free (very cool), very well organized (very, very
cool) and offered content, that if anything else, rivaled AOL's (very,
very, very, cool).
Given I was paying 30% more for AOL, my email was becoming overloaded,
and I had lost that incredibly special feeling, what do you think I did?
You got it. I shopped around, found a reliable, yet cheap, ISP and began
to use YHOO as a gateway to a world where I chose when and most
importantly, where, I wanted to go.
Then I got to thinking. It all seemed so clear. The AOL/YHOO battle was
a distinct parallel to a classic battle in the 1980's between AAPL and
MSFT. Not exactly the same, but quite similar.
Obviously, we knew who won that one.
In case there is some doubt, let me whisper it in your ear..
MSFT has a slightly higher stock price.
Let's take a quick trip back into the past to clarify this point.
Back in the 1980's when AAPL was king and MSFT was hot on its heels,
AAPL, with their cool icon-based system, believed people wanted
everything self-contained. So to get everything up and running
AAPL-style, you had to buy their hardware, their software etc., etc.
MSFT on the other hand, decided they could grab share with their
operating system by having an open systems concept, that is, licensing
their technology to many manufacturers, not just one. This enabled
customers to have a base from which to start with, yet have the
flexibility to build and adapt to what they wanted, as opposed to
adapting to what they had been given.
The nail in coffin came in 1989 when MSFT introduced Windows 3.0,
virtually disabling AAPL. With this product, MSFT had made their system
look and feel more like a Mac, but gave people the choices of open
architecture. MSFT was not necessarily better than AAPL, but they had an
AAPL feel, with the option to modify as needed.
Beginning to sound familiar?
For anyone who has used AOL, as well as navigated the web via YHOO, the
bells in your head have got to be going off big time. After all, AOL
initiated and continues to offer a "content rich" service within a
confined space, just as AAPL had offered rich content within their
space. But YHOO, like MSFT did with AAPL, has caught up with AOL,
offering not only a content rich service, but an immediate gateway to an
unlimited environment.
In addition, YHOO has guessed correctly that for those familiar with the
net, the only issue of importance is reliable Internet service. While
AOL might profess superior content, YHOO has caught on by offering
email, chats, customized boards etc., in short, features that used to be
unique to AOL. Just as MSFT realized that the minimum they had to do was
give their customers icon-based systems combined with the flexibility
for users to customize their needs, YHOO allows its users to freely
navigate throughout the web while offering a content rich experience.
This is, of course, opposed to AOL which largely confines its users
within its space, subjected to programming that is, in terms of
flexibility, limited, to say the least.
Plus, of course, if one chooses YHOO as their ISP, the price is 30%
cheaper.
So of course the key question remains: Why go to AOL when you have YHOO
which is AOL plus all the flexibility you need for a cheaper price?
Chew on that for a while.ÿ
Now on to the stocks.
We all know that the Street is programmed to be forward looking. At
least it professes to be. However, in one of the most technology
important battles of our lifetime between MSFT and APPL, the Street didn
't catch on until about two years after the winner was declared.
Why was that?
Simple. Not a lot of people on the Street are familiar with the
technological landscape, yet alone the issues and subtleties that
support it.
Plus, of course, they get paid for bringing in business. And overall,
tech brings in A LOT of money to the Street.ÿ This, believe it or not,
tends to cause those getting to paid to turn the other way, so to speak.
Funny how that works.
In case you are wondering, I expect this scenario to be played out again
with AOL and YHOO, but in a slightly different fashion.
But don't get me wrong. AOL is not an obvious short right now. Not by a
longshot. The dynamics of the market, coupled with the demographics that
support it, realize that the Internet is the greatest opportunity out
there. By comparison, the majority of corporate America, with a top line
growing on average in the single digits, doesn't stand a chance.
But the game won't last forever. As AOL's members get more comfortable
with getting outside of the AOL space they are confined to, and start
getting a feel for all that is out there on the web, they will start
wondering the now familiar question:
Why am I paying 30% more for content that is not all that much different
than anywhere else?
That, in case you are wondering, is how membership levels start
dropping.
But it will take a while and AOL knows it. The education process in
technology is slow at best, with development being light years ahead of
adaptation.
But this is also where the similarities between AOL and YHOO and MSFT
and AAPL become more diluted. Unlike AAPL, and the bit player that it
was reduced to, due to its battle with MSFT, AOL will definitely be
around in five years, but forced to change to be more like YHOO.
This is how I think it will pan out.
First of all, AOL will be forced to lower their prices within a year.
The competition is just too stiff, whether it be from YHOO, AT& T, or
other large providers, all undercutting AOL.
Secondly, if you want a longer-term prediction, AOL is going to have go
to a two tiered system, especially if they want to maintain an overall
premium price tag for their services. The top-tier will involve AOL
becoming more like an on-line magazine, with format that includes
premium features such as real time quotes and/or specialty downloads
such as real-time broadcasts of live international sporting events, plus
additional "extra content" and, of course, the internet connection.
What about the current content? It will be relegated to the lower tier
at aol.com, which will become somewhat YHOO-like and rely on advertisers
for revenue.
So what about the fact that AOL is viewed as eventually being taken out
by a much larger corporate entity, as a new source of growth?
It's not unfounded by any means. But take a step back and think about
it. AOL, in its current form, is just too expensive. As evidenced by the
WFC and NOB deal, companies are attempting to get smart with what they
buy, so that the acquisition becomes, as intentioned, a contribution to
revenues, not a drag.
Plus, why not kill two birds with one stone and buy a HotBot and Excite
or Lycos and Excite for roughly the same price?
So in AOL's case - fair warned is fair armed. The stock will continue to
be a winner, given the only source of growth these days is perceived to
be on the net. But don't be surprised when AOL members start wising up.
And, as mentioned previously, don't expect the Street to be the first to
recognize it.
As for YHOO - do you think the runÿin the stock is over? Not by a
longshot. YHOO has wised up quickly in a rapidly changing market and
shown it is not just a company founded by a bunch of 20 something-year
olds, but a solid player in the most exciting industry of our lifetimes.
Obviously, almost all three digit stocks will be volatile, given market
conditions, but, as recently indicated, investors have continued to
point out that this is a place to bring money, not withdraw money, in
volatile times.
Here's something else to chew on. A company like MSFT comes around once
in a generation. Think about YHOO as the MSFT of the next generation. If
you think it's expensive now at $113, just wait for a couple of years
and check back with me. I'll definitely be here, but something tells me
you'll be kicking yourself quite painfully.
Call it my "virtual" crystal ball.
Remember, the price of a stock is determined not by the company itself,
but by what someone is willing to pay for it, at any point in time.
Let the games continue!
ÿ
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