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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: Sam who wrote (12327)	12/4/1998 3:35:00 PM
From: brian z	Read Replies (1) \| Respond to of 13594

For AOL, Netscape was Just the Beginning December 4, 1998 Analyst: Alex Yakirevich America Online's (NYSE: AOL) plan to acquire Netscape Communications (NASDAQ: NSCP) for $4.2 billion in stock marks the first union of two Internet titans. The deal, which is expected to close in the first half of 1999, significantly benefits both parties. Netscape found a powerful ally and can breathe much easier competing against Microsoft (NASDAQ: MSFT) and other software giants within the Internet browser and electronic commerce markets. With Netscape, AOL has several lucrative opportunities. The company can enhance its content offering and to enlarge its online audience, which will ultimately translate into higher advertising revenue by adding the Netcenter Web portal to its list of online properties. According to Cyber Dialogue, a consulting company, the newly-formed Internet giant will reach approximately 70% of all Internet users in the U.S. AOL's predominantly consumer audience is highly complementary to Netscape's predominantly business-oriented clientele. More E-Commerce A larger audience will also allow AOL to ramp up its electronic commerce revenue by offering Netscape's suit of e-commerce applications to merchants who wish to conduct their business on the Web. Another driver that should attract more business partners to AOL is the distribution agreement with Sun Microsystems (NASDAQ: SUNW), which was signed at the time of Netscape acquisition. Under the agreement, Sun will use its formidable sales force to promote AOL's e-commerce services and Netscape's e-commerce software. As part of the deal, Sun will provide hardware and software operating systems and support businesses dealing with AOL. Potential Pitfalls The purchase of Netscape, however, is not going to be consummated without difficulties. One of the most serious roadblocks is that AOL and Netscape are targeting two different audiences. While, AOL caters to the residential market, 61% of Netscape users surveyed by Cyber Dialogue said they use the service to be "more productive" at work. This means that AOL is facing a challenge of developing content specific to business users, which is new territory for AOL. While the acquisition of Netscape considerably strengthen AOL's portal business, the company's principal Internet service provider (ISP) business still needs reinforcement. That's why we think that more deals involving AOL are coming up. This time it will probably be in the cable networking arena. AOL is still very much dependent on its online subscribers. In the first quarter of 1999, the company generated 83% of its revenue from subscriptions to its dial up connectivity services. However, in order to keep and expand its enormous subscriber base, AOL should ready itself to provide a host of interactive services and other exciting applications, which require high-speed Internet access -- a capability that AOL does not have. Partnering with a cable operator, such as TCI (NASDAQ: TCOMA), which is capable of providing high-speed Net access, would be a logical solution for AOL, since both address the residential market. However, AOL's management stressed, as it has on many occasions, that it desires to stay independent. This explains the fact that AOL challenged the proposed merger between AT&T (NYSE: T) and TCI and demanded the unbundling of a cable network operated by @Home (NASDAQ: ATHM), a cable ISP partly-owned by TCI. Bottom Line: Assuming current regulatory efforts fail to force @Home and the likes to open up their infrastructure to other ISPs, AOL will be faced with two options: using its high-flying stock to buy a cable network operator or lose its independence by pairing itself with another company. Either way, shares of AOL should rise.