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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (881)	12/31/1998 12:14:00 AM
From: James Clarke	Read Replies (2) \| Respond to of 4691

When I look at consumer businesses in terms of franchise value, a couple things about AOL jump out. Despite how easy it seems to switch internet services, its not that simple. This is my view as a consumer, not an investor. Why? I don't want to lose my internet address, because I have so many things hooked into it and so many friends know me by it that I won't change just to save a few bucks a month. Thats called a switching cost, and it is very powerful. It has nothing at all to do with AOL's service, but it has everything to do with the fact that they got me early. I have never switched. And one other thing you want to consider is the price relative to the value of the service. AOL costs, I don't even know what - $21 a month? If they raised that 10%, I could care less. I was willingly paying $50 a month when they charged by the minute. If I had no other alternative, I would willingly pay 5 times the price they charge me for the value I get out of internet access. Customers are generally loyal to a business where they believe the product is fairly priced, even if somebody else out there might be providing it a little cheaper. As long as it is a relatively small cost - if internet service cost $300 a month, you'd shop for a $200 service. But to save $10 a month, its just not worth the trouble to a lot of people. That is why it was so crucial for AOL to spend themselves to the edge to build a large base and infrastructure before competitors woke up. Once they did, the two factors I pointed out protect their lead. I don't understand the cable technology, but I know my cable company is pushing it on me. I think they will have an easier time selling it if they partner with AOL. I discuss this at length on this thread because I think AOL is the one internet business which MAY pass two of the four tests of Buffetology investing a) its a business I can understand; b) it has competitive advantages which should allow it pricing power in the future; but it clearly does not have: c) a historical track record d) an appropriate valuation That tells me to watch and wait and see if this seed grows. And if it does then hope it dies temporarily so the valuation comes into my range. This is a living on the edge management, so I think the road will be volatile, which is good for the game I play. I missed the first opportunity - I won't miss the next one. JJC