"With AOL being half of that market today, obviously we're taking
users from them. Typically people are going to drop that service
unless they're offering some other capability of a broadband nature.
We look towards the opportunity to make deals with people and find
ways to cooperate - it's a rising-tide-floats-all-boats scenario - but
today, absent a deal, yes we are definitely taking subscribers away
from them."
Absent all this bluster (perhaps Armstrong and Jermoluk are playing a
good cop/bad cop scenario), they're are a few things we do know today
that can help us handicap how broadband may change the face of the
Internet and Internet media companies. First, we'll make the perhaps
too-obvious assertion speed is only important if (1) there's something
on the other end of the pipe worth seeing and (2) if there is someone
there to see it. Otherwise, you're just having a bad online experience
much faster (which has its own benefits, since time is money).
AOL's strength derives primarily from the 15 million consumers
worldwide that call AOL their online home. No one else has the sheer
size on online mindshare and market share AOL has; as importantly, it
is estimated that AOL now lays claim to more than 70% of all new
Internet users going onto the Internet. AOL's influence, on online
customers, is real and it is today.
The question is, will future Internet users bypass AOL altogether and
get right onto the Internet via their cable set-top box? Well, if the
experience, content, and value proposition were the same, of course;
if all things were equal, surely the speed advantage would create
enough of an incentive for consumers to go directly to the Internet
without using AOL. But, in our view, it isn't equal, and won't be for
some time (if ever).
The underlying reasons are complex, but they revolve around the
importance of community (humans, like investors, tend to be pack-
followers and want to go where their friends are, and online, that's
on AOL), the stickiness of the relationship AOL has built with their
current 15mm subscribers (who wants to give up their buddy lists,
email address, and "favorite places"), and the content and commerce
relationships that AOL has struck (recall that many are exclusive and
multi-year in nature). What, we find ourselves asking, would be the
incentives for either new Internet users or existing advertisers and
merchants to leave the AOL community?
Will consumers be willing to forgo AOL's chat rooms, their instant
message technology, buddy lists, and accept a hard-wired start page on
the @Home service? Some will, sure, but many will wait, preferring the
evil they do know to the one they do not. As well, a certain online
user values speed above all else (Pittman's analogy of broadband to
first class on an airline is an apt one). But there is no data to
suggest that speed is enough of an incentive for either current or
future Internet online users to not to want the AOL service. Remember,
at these subscriber levels, AOL just has to be "good enough", since
extracting AOL subscribers from the service competitively is so
difficult.
AOL, then, should be able to leverage their subscriber base with
providers of broadband services or content. And that is what we are
likely to see sooner rather than later. And though the spin is that
AOL will be left out of the broadband revolution, we tend to the
complete opposite view, that AOL themselves will be the architects of
the medium, owing to their consumer relationships, their online brand,
and the vast array of content and technologies that they could port to
this market once it develops.
For our part, we never rest any investment thesis on the assumption
that consumers are willing (or able) to change their behavior rapidly.
ATM machines, PC banking, catalog retailing and a host of other stock
market examples resonate as proof of this truism. And despite the
fact that we think the @Home service is fantastic and certainly much
better (all other things being equal) than 56K Internet service,
consumers will continue to seek the "safe" choice, which happens to be
AOL. The dynamics of consumer choice and preference are just that
simple.
Further, the relationship AOL subscribers have with AOL is very strong
(and if you needed any more evidence look no further than the access
problems AOL members suffered through yet stayed with the service),
and is as much a function of performance as price, value, community
membership, and just plain fun.
In all of this wool gathering, let's not forget about Yahoo!; though
their next generation "turbo' project remains secretive, they rightly
view broadband (as do other traditional media concerns who missed the
first wave of the Web craze in 1996/97) as an opportunity to uncouple
AOL from their dominant position with consumers. We'll wait and see
how all the industry jostling will play out, but as it does, keep in
mind one of the most important rules of Internet investing; technology
shifts provide the opportunity (but not the necessity) for massive
shifts in market share. We saw it when AOL went from a character-based
interface to a graphical-based interface for their service when
Windows 3.0 came out. Broadband represents a similar shift in
technology; AOL has its eye on this one, and certainly won't get
"Prodigy-ed" by broadband.
In the final analysis, increasing bandwidth into the home will
continue to be a challenge for a few years to come; we have a feeling
the "last mile" problem will remain an important buzzword for
investors for longer than some technologists hope. For our part, we
still haven't heard a convincing answer to Roger McNamee's annual PC
Forum query "When will I get a T1 line into my home?" So for now,
don't spend to many cycles dreaming up ways AOL could be destroyed by
broadband. There are plenty of other risks to worry about. |
