from WSJ:
June 18, 1998
AT&T Seeks Broad Marketing,
Technology Alliance With AOL
By JARED SANDBERG
Staff Reporter of THE WALL STREET JOURNAL
AT&T Corp. has talked to America Online Inc. about entering a
broad-based marketing and technology alliance, said people familiar
with the situation.
The New York-based telecommunications giant also has mulled an offer
to buy America Online outright, these people said, but no formal buyout
offer has been made. Instead, AT&T's current interest lies in having
AOL steer its huge telecommunications traffic to AT&T's network and
hawking AT&T's products.
AOL shares surged $4.875, or
5.5%, to close at $93.875 in New
York Stock Exchange composite
trading Wednesday after a report in
the Financial Times said AT&T
made an offer for the on-line giant.
AOL Wednesday night sent an
e-mail to employees saying the
company intends to remain
independent. The missive from
AOL Chairman Steve Case and
company Chief Executive Bob
Pittman called the report a rumor
but noted that AOL is "eager to
establish alliances with a wide range
of telecommunications, media and
technology companies."
AT&T is so eager to land AOL as a
partner and customer, executives said, that it has broached the
possibility of handing over its own lagging rival on-line service,
WorldNet, to AOL in exchange for the right to become a major provider
of telecom services to AOL. The 12 million AOL members rack up
hundreds of millions of phone minutes each month.
But one complication of an alliance is the on-line service's relationship
with long-distance service Tel-Save Holdings Inc., which struck a
multi-year, exclusive marketing alliance with AOL to offer its
subscribers long-distance service. According to executives familiar with
the discussions, AT&T's chief financial officer, Daniel E. Somers, has
been in discussions with Tel-Save related to the AOL contract.
Tel-Save put itself on the auction block earlier this year, and one
scenario has AT&T buying the tiny New Hope, Pa., company, which
has a market capitalization of $1.113 billion, to succeed Tel-Save as the
telecom partner of America Online, executives said.
Spokesmen for Tel-Save, AT&T and AOL declined to comment.
In the early 1990s, when AT&T expressed a desire to acquire AOL, the
upstart had little respect for the telecommunications heavyweight. Now
that AT&T's new chairman, C. Michael Armstrong, has taken the helm,
AOL's brass appears to have a different view. Messrs. Case and
Armstrong have spent time together at industry conferences in recent
months.
A Web-Portal Showdown
A comparison of some of the big players on the Internet
ÿ
MARKET CAP.
(billions)
NO. OF
USERS
'97 REVENUE
ÿAmerica
Online
ÿ$20.30
ÿ12.0 million
paid accounts
ÿ$1.69 billion-a
ÿYahoo!
ÿ$6.05
ÿ31.4 million
users a month
ÿ$67.4 million
ÿExcite
ÿ$1.78
ÿ19.4 million
users a month
ÿ$50.2 million
ÿLycos
ÿ$1.10
ÿ13.7 million
users a month
ÿ$22.3 million-b
ÿInfoseek
ÿ$1.08
ÿ13.3 million
users a month
ÿ$34.6 million
a-Fiscal year ended June 30 b-Fiscal year ended July 31
Source: RelevanatKnowledge; the companies
For AOL, AT&T's interest raises questions about the Dulles, Va.-based
company's value and its future. Can the nation's largest on-line service,
which has racked up billions in revenue but produced barely any profit,
go it alone to build critical mass? Or might it be better off as part of a
giant communications company that values AOL not so much as a direct
source of new profit but as a marketing limb for other products?
"There is no better marketing and advertising vehicle on-line today than
AOL, but it doesn't have the scale it would ultimately need to be an
extremely profitable company," said Nicholas Donatiello, president of
research firm Odyssey Ventures Inc.
AOL reaches 10.4 million U.S. households, about 25% of all
PC-owning homes. The next largest player: AT&T, with a paltry 3% of
PC households, or over one million homes. "It's such a tremendous
marketing engine, a tremendous prospect that will become a cash
machine two or three years from now," said Ulric Weil, senior analyst
at Freedman Billings Ramsey & Co.
AOL's marketing potential so captured the attention of Tel-Save that the
upstart paid AOL $100 million for exclusive rights to market long
distance to AOL members on-line. Since the beginning of the year,
Tel-Save says it has signed up 800,000 new customers from the
alliance. Before the pact, Tel-Save had 600,000 customers.
Now AOL ranks as one of the biggest "portals" in cyberspace, those
highly trafficked on-ramps that provide a roadmap of the Web.
Compared with other portal sites, AOL may be regarded as inexpensive
for a potential takeover. Yahoo! Inc., which has a market capitalization
of more than $6 billion, is trading at nearly 90 times its 1997 revenue.
Lycos Inc., another portal, is trading at 49 times its 1997 revenue. AOL
is traded at about 12 times last year's revenue and, unlike portals, its
customers pay to use the service.
Yet to date, AT&T's WorldNet service has been a disappointment.
Launched more than two years ago with plans to make the Internet as
ubiquitous as a dial tone, the company faltered with early technical
difficulties. It has little more than a million subscribers -- the amount
AOL signs up each quarter.
Many believe -- and the company has signaled -- that AT&T is
positioned to make Internet acquisitions. It has one of the strongest
balance sheets in the phone industry, and executives have talked of
making investments in areas such as systems integration and the
local-telephone market.
An AT&T marketing alliance with AOL would map closely with the
telecommunications company's recent activities. It has inked marketing
pacts with Yahoo! and Excite Inc. to hawk its phone services.
Emboldened by Mr. Armstrong, AT&T has made it clear that it intends
to finally become a major Internet player.
"The fastest-growing application is the Internet," Mr. Armstrong said
recently. "If that's not our business, I don't know what is."
-- Stephanie N. Mehta and Rebecca Quick contributed to this article.
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