07:09am EDT 28-Apr-99 Morgan Stanley\DW (Meeker, Mary (212)761-8042) AOL
AMERICA ONLINE: GROWING STRONG AND BREAKING RECORDS/P2
CONTINUATION
Bell Atlantic plans to make DSL service available to 7.5MM homes by
the end of 1999; SBC to 8.4MM homes. AOL subscribers among the homes
passed would be able to access the DSL service for an approximately
$20 additional monthly charge. If demand for @Home's offering is any
indication, demand among AOL members for higher-speed access is likely
to be strong. And given AOL's pop-up success is converting over 1MM
subscribers into Tel-Save customers in 18 months, conversion rates to
the premium service should be respectable. But as with @Home, the
gating factor will be the actual rate of broadband capacity (in this
case, DSL) installation, and this is hard to anticipate and really
depends on the telcos.
AOL 4.0 now accounts for 85% of all usage -- AOL officially launched
the CD-ROM version of AOL 4.0 last September, with a multi-million
dollar ad campaign. AOL has reported a dramatic reduction in the rate
of technical support calls to customer services compared to AOL 3.0.
AOL 4.0 for Macintosh became available for download earlier in
January.
Usage climbed across all metrics - Total AOL usage jumped to 380MM
hours per month in CQ1, up from 305MM hours per month in CQ4. Average
daily sessions increased during the quarter to a total of 41MM, up
from 29MM in CQ4. And the average minutes per member per day
increased to 55 minutes, up from 48 minutes in CQ4. (When the average
usage per AOL member per day reaches 1 hour, that will be a milestone.
However, with the average person currently watching around 4 hours of
TV a day, we believe there's plenty of vacuum for AOL usage to
continue filling up.) Peak simultaneous users crossed the 1MM point
during the quarter, up from 914K in CQ4.
AOL CQ1:99 - Usage Metrics
CQ2:98 CQ3:98 CQ4:98 CQ1:99
Member Hours/ Month (MM) 242 274 305 380
Avg. Daily Sessions (MM) 27 28 29 41
Avg. Minutes/ Member/Day 44 47 48 55
Peak Simultaneous Users (K) 689 789 914 1,095
Web Hits Per Day (MM) 900 1,250 1,700 2,600
Usage has continued to ramp steadily since the introduction of
unlimited pricing. According to AOL, this puts pressure on the gross
margin because of network expansion costs, but it bodes well for the
company's ability to pull in more advertising and transaction
revenues.
Network capacity climbs -- AOL subscribers now have access to 1.1MM
AOLNet modems, up from 975K at the end of CQ4.
Advertising/commerce deal flow continues - AOL increased its backlog
of advertising and commerce contract revenues from $804MM in CQ4 to
$1.3B in CQ1:99. During the quarter, AOL signed 21 multiyear
advertising/commerce deals each in excess of $1MM. The company now
has close to 100 partners with whom it has multi-year advertising and
commerce agreements in excess of $1MM.
AOL BRANDS UPDATE:
AOL International membership grows - AOL and Compuserve membership
outside of the U.S. reached 3.2MM in March, with non-U.S. subscribers
to AOL nearly doubling over the past year to more than 2MM members.
In December, AOL announced a JV with the Cisneros Group to develop and
market AOL services for Latin America. AOL plans to launch this
service later this year as well as a AOL-branded service in Hong Kong
this summer.
AOL Web properties gain even higher reach - According to Media Metrix,
AOL Websites had the highest reach of all Web properties in March in
all three categories - At Home (63%), At Work (62%), and Combined
(69%). With the addition of Netscape Web properties, this was the
first month in which AOL had the highest reach in the At Work
category, an example of the symmetry created by AOL bringing in
Netscape's business-oriented customer base.
Metrics for Top Web/Online Properties
AOL Yahoo! Excite Lycos Go Network
Dly. Page Views (MM) 1,140 235 77 50 45
Unique Visitors (MM) 43 31 21 32 24
Pages/User/Month 28 65 25 18 24
Minutes/User/Month 27 68 33 19 26
Source: Company reports, Media Metrix (March 1999)
YHOO, XCIT, and Go Network Page Views are for CQ1:99, for Lycos
CQ4:98.
AOL data: Dly. Page Views derived from company reported member usage;
Unique Visitors, Pages and Minutes per User are for AOL/Netscape
Websites only.
CompuServe maintaining its 2MM subs - CompuServe appears to have
stabilized its subscriber base at 2MM. During the quarter, CompuServe
reached an exclusive agreement to provide MCI WorldCom with a
customized portal including content and programming.
ICQ continues to grow - ICQ registrations have now reached 32MM, a
nearly 170% increase in registrants since June. The service now
supports 13MM active registrants - those who have used it in the last
30 days - with more than 7MM people using ICQ everyday.
Digital City expanding its presence - Digital City currently offers
localized content in over 60 U.S. markets. During the quarter,
Digital City announced an agreement with MCI WorldCom to become the
local content provider on MCI WorldCom Internet.
Netcenter's registered users reached 15MM - AOL reiterated its
commitment to using Netcenter to expand its reach among business-
oriented users.
AOL ORGANIZATIONAL CHANGES
AOL announced on March 24th that it would reorganize into four product
groups. The Interactive Services Group will include the AOL and
CompuServe services, Netscape's Netcenter and browser packages, and
will be responsible for broadband development and AOL devices like AOL-
TV. AOL veteran Barry Schuler will be president of the group.
The Interactive Product Group will oversee ICQ, Digital City, AOL's
interest in Direct Marketing Services, and MovieFone, once the
acquisition is completed. Ted Leonsis was will be president of this
group. The Netscape Enterprise Group will manage AOL's side of the
Sun-Netscape alliance. Mark Tolliver, president of Sun's Consumer and
Embedded Division, will be president and general manager of the
alliance. And the AOL International Group, responsible for AOL and
CompuServe's international operations, will continue to be headed by
Jack Davies.
Each of the product groups will report to Bob Pittman; although
Netscape-branded operations will remain in Mountain View.
On March 31, AOL announced that it was laying off 850 employees, with
half coming from Netscape and half coming from AOL. The goal of the
layoffs was to eliminate duplicate functions created by the
acquisition.
UPDATE ON SUN-NETSCAPE ALLIANCE:
On March 30th, AOL and Sun Microsystems provided details of their
product strategy in the e-commerce infrastructure and application
software areas, as well as details on the organizational structure of
the Sun-Netscape alliance.
The alliance's product portfolio will include messaging and calendar,
collaboration, Web, application, directory (network phone book) and
certificate (security) servers. The products will be offered on all
major computing platforms, including HP, IBM, Linux, Windows NT, and
Sun. The specific product delivery schedules follow:
For messaging and collaboration servers - Netscape Messaging Server
4.1 will be delivered in early Q2:99; Sun's Internet Mail Server 4.0
this summer; the alliance's Messaging Server 5.0 will be delivered in
Q1:00; Netscape's Calendar 4.0 in Q2:99; and the alliance's Calendar
5.0 in Q1:00.
For Web servers - Netscape's Enterprise Server 4.0 and Fast Track
Server 4.0 will be delivered in early Q3; the alliance's Enterprise
Server 5.0 and Fast Track Server 5.0 in Q1:00.
For directory servers - the alliance's Directory Server and Meta
Server products will be delivered in CH2:99; and the alliance's
Certificate Management Server in CH1:99.
For application servers - the alliance's Application Server 6.0 will
be delivered in CQ1:00.
In a positive development, the Sun-Netscape alliance will have a
dedicated salesforce working off of one product list and one price
list. Branding issues still need to be addressed; the alliance team
says it is committed to working on these.
The vision? The goal of the alliance is to develop the leading
Internet and ecommerce infrastructure software company. In favor of
the alliance are: 1) the largest web audience with both AOL's and
Netscape's web properties; 2) leadership in the web's software and
consumer access segments; and 3) an emerging post-PC vision, whereby
the alliance's offerings would be available on multiple platforms via
multiple products.
In general, the alliance appears focussed and unified in both its
goals and organizational structure. The alliance's detailed product
delivery timetable puts useful and measurable stakes in the ground.
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