Grabbed from Yahoo: Merryl Lynch comments on AOL and broadband; seems like a fair comment.
The Big Issue: Broadband
AOL is accessed primarily over copper telephone wires
into the home; the company buys carriage in bulk from the
major telecom companies. Over the next decade, however,
many of the country's Internet users will upgrade to
broadband access, which will likely be delivered with four
different technologies: the same old telecom lines (using a
new high-speed technology called xDSL), cable lines,
wireless services, and satellite services. The threat to AOL
is that it won't be able to acquire carriage on broadband
networks at a favorable economic rate—and that as a result
it will either experience declining margins or gradually
lose its subscriber base to broadband providers.
We believe that for the next few years anyway, the
broadband “threat” to AOL is largely one of perception,
not reality. The number of households connected to the
Internet via any broadband technology is still less than 1
million—and AOL has 16 million subscribers and
counting. If broadband adoption accelerates over the next
two years, the number of broadband households might
increase to 3-5 million at the end of 2000—and at that
point, AOL's subscriber base should be approaching 25
million.
Perception is reality, however, and if investors believe that
AOL's franchise is in danger over the long-haul, the
stock's multiple will contract. For several reasons detailed
in our longer note, we are comfortable about AOL's
broadband strategy.
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