jhg,
I'll take it chunk by chunk.
1) That Siegel compares the Internet stock craze to the Dutch tulip and Florida land crazes and that tulips and land are hard-assets while AOL is a "revolutionary business model" is a distinction without a difference. A craze is a craze, at bottom, irrational. Read the AOL thread (as you probably do already) and you'll notice a mindless enthusiasm bordering on religious zeal, an enthusiasm so rabid no hint of critical thinking is permitted.
2) AOL's market cap. About a billion shares, a current price of 130--voila, about 130 billion, or something near that of IBM or maybe Ford and GM combined, in any case, big. Someday it might actually be worth that. AOL's sales growth is actually higher than Prigel's 62% but earnings less than his 414%. A more important number is the valuation per customer. Prigel, complaining about Siegel's revenue number of $15,000 per subscriber number, omits AOL's "other lines of business" and comes up with a per subscriber number of $6,350. Let's see, $22 a month not counting "other lines of business" times 12 months per year (I'm fairly sure there are still twelve in a year) equals 23 years! Siegel's number actually makes more sense. "Other business" is where they keep telling us AOL will make its money. Margins on the ISP business are less than 5% whereas advertising brings 95% margins. Still, the question relative to AOL's growth is whether it is growing linearly or exponentially. So far, the answer is that AOL grows in a linear fashion, that is, revenues grow proportionally to subscriber growth. Though the argument for years has been that AOL will leverage its growth, there is no evidence yet that they can actually do that. (It is true that a linear growth in advertising increases cash flow exponentially due to advertising's higher margins.)
3)Prigel's analogy between AOL and MicroSoft is ludicrous. MSFT is a software developer. No matter what Prigel says, MSFT's business model is nothing like AOL's. AOL can only dream about margins and cash flow similar to MSFT's margins and cash flow.
Using Prigel's number of $1300 per subscriber, that means a bit over $1000 per subscriber above the monthly subscription fee. Since AOL gets most of its revenue from other "partners" who sell through AOL, thereby cutting down on the revenues obtained from each subscriber's purchase, I would guess each subscriber would have to purchase $10,000 worth of goods to get $1,000 to AOL. Does this mean we all buy everything from AOL?
There are other errors large and small in Prigel's response to Siegel (including grammatical errors--it's not "professors unenlightened argument" but "professor's," possessive), however responding to them is too much like work. I think I'll go buy some Florida land and raise tulips.
Best,
--Steve |
