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AOL advances in shift to media company
Reuters Story - February 25, 1998 21:16
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By Richard Melville
NEW YORK, Feb 25 (Reuters) - Surging membership growth,
price increases and a whirlwind of recent internal changes at
America Online Inc. obscure a more important,
fundamental shift that should see AOL shed its online service
skin and emerge in the next century as a full-fledged media
outfit.
Signs of the transformation are evident in several key
decisions, such as AOL's September acquisition of archrival
CompuServe Corp. from tax preparer H&R Block Inc.
While that purchase added subscribers and broadened AOL's
reach, perhaps more telling was that it also turned over the
nuts-and-bolts business and related revenues from owning and
maintaining AOL's network to telecommunications power WorldCom
Inc.
Also important, analysts said, was the naming this month of
Bob Pittman, president of its AOL Networks unit -- who helped
build MTV Networks, the cable TV music channel -- as president
and chief operating officer of the Dulles, Va.-based company.
"Pittman getting elevated was quite telling," said Kate
Delhagen, a senior analyst at Forrester Research. "They're
clearly positioning themselves as a media company, and within
four or five quarters we think advertising and commerce-based
revenues should be half their total (revenues)."
The change will pit the company against a new set of
competitors such as the much smaller Web-based Yahoo Inc.
, as well as against massive established news and
entertainment giants like Time Warner Inc., Walt Disney
Co. and long-time foe Microsoft Corp.
AOL has proven itself able to take on large, strong
competitors, having beaten back a challenge from the Microsoft
Network, which failed to become a meaningful rival to AOL.
But analysts said the Microsoft Network's vast resources
and new focus on content could make any upcoming battle for
audience and ad revenues a far more evenly fought affair than
the subscriber war that took place before.
AOL is already aligning itself for the battle. In the
company's earnings release on Feb. 10, Pittman, with an eye to
the battle for electronic commerce dollars, noted average usage
among members doubled in the most recent quarter to 41 minutes
per day, a figure he said made the service an even more
powerful platform for reaching consumers.
"As AOL becomes increasingly embedded in our members' daily
lives, we are more and more attractive to content providers and
marketers," Pittman said.
Investors have warmed to the "new" AOL, sending its stock
soaring 30 percent since the start of the year. For analysts, a
reassuring byproduct of the ad and commerce revenue streams is
the steady reliability of the multiyear contracts AOL has
signed on that side of its business.
But for Forrester's forecast to come true would require a
quantum shift, because at $109 million, advertising and
commerce still remain lumped in an "other" category on the
income statement for AOL's second-quarter ended Dec. 31,
accounting for only about 18 percent of overall revenues.
And AOL is still adding subscribers at a sizzling rate. The
company added nearly 1.3 million members in the second quarter
to reach 10.7 million by year-end and passed the 11
million-member mark three weeks later.
The company recently announced it would raise its
subscriber fee for unlimited access 10 percent to $21.95 per
month from $19.95, a move that hinted at the pricing power AOL
gained in establishing hegemony in consumer online services.
Although the move put AOL's pricing above industry norms,
analysts are not anticipating widespread member defections as a
result.
"I don't think there really is any competition to be
concerned about at this point," BancAmerica Robertson Stephens
analyst Keith Benjamin said, comparing AOL's market position to
that of cable television companies, which often operate as
oligopolies, if not monopolies.
Over time, however, as telephone companies and cable
companies establish themselves as Internet access providers,
AOL is likely to see its market share shrink.
According to a recent survey by Forrester Research, a
whopping 40 percent of U.S. households currently get Internet
access through AOL.
The eventual rise of cable modems or low-cost, no-frills
access is likely to shrink that figure dramatically, Forrester
forecasts, a prospect that makes the re-invention of AOL a
necessity, rather than a luxury.
"A couple of years from now, that $20-per-year crowd will
diminish, which means the challenge will be to make sure
(AOL's) content is highly promoted and gets as much carriage as
possible," Delhagen said.
Ironically, that could mean AOL will be turning to some of
the companies it competes with for subscribers like AT&T Corp.
and Sprint Corp., even as it is promoting a
low-cost, long-distance phone service through its partnership
with Tel-Save Holdings Inc. |
