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record of tech investing is patently clear in this
regard: not having exposure to a Dell, a
Microsoft, or an AOL has severely handicapped
one's portfolio. And for professional portfolio
managers who are graded against indices, the
historical proof of this statement is particularly
clear (and perhaps painful).
So, as we move from Internet infancy to Internet
adolescence, we think many of the same rules
happily apply to this new teenager: increasing
returns, scale advantages, and business model
leverage help the big get bigger. That said, you'll
find us focused lots more on the execution front
in this, the Internet's teenage years and less on
the customer acquisition front. It's not that the
customer acquisition game is over, but the
brands that we know and love today (AOL,
AMZN, YHOO, ATHM, EBAY) are likely to be
the brands that we know and love tomorrow.
Significant shareholder value shifts are likely to
occur more along the lines of execution (getting
books and CDs to customers, making sure
trades are executed and billing systems are on-line,
ensuring networks are up and not over-loaded,
etc.) than along the lines of customer
acquisition (distribution partnerships, traffic
deals, branding, etc.). That doesn't mean these
latter elements aren't important, they most
certainly are, it means only that the leaders in
the Internet space (YHOO, AOL, ATHM, etc.).
are now moving toward consolidating and
protecting their positions, where 1998 was
about building them.
Which brings us back to Disraeli's quote above.
Was Internet youth a delusion? Not if you were
with the right names and kept the faith. Will
Internet adolescence be a disappointment? Not
if you maintain a focus on the forest and cast a
cold eye on execution.
A Half Billion Dollar Bet
Though the news from AOL that they signed a
five year, $500 million exclusive ad/commerce
deal with First USA (the credit card marketer)
was met with some encouragement, we think
the implications for both AOL and the Internet
at large are being considerably under
appreciated. Though the exact financial terms
of the deal are still closely held, we think there is
reason to believe that something like $75-100
million of the fee has been paid up front, with
the rest “earned out” over the life of the deal as
deliverables are met (impressions, customer
sign-ups, etc.) We do now that about $300
million of the $500 million is guaranteed, with
the remainder being ear marked for performance
incentives (that AOL feels confident they can
hit), but beyond that, the terms (and the
schedule of revenue recognition) remain
unknown.
The terms of the agreement are pretty
straightforward: First USA becomes the
exclusive marketer of credit cards on AOL,
AOL.COM, CompuServe, AOL Instant
Messenger, and Digital City AOL will offer a co-branded
credit card with an introductory 3.9%
interest rate, no annual fee, a rewards program
and an online shopping guarantee against
unauthorized charges (remember it was not so
long ago that many industry types were
wondering if fraud would keep consumers away
from online shopping). In addition to bill
presentment, consumers have a plethora of
service options, including: the ability to view
past statements and new charges; get balance
updates; transfer balances from other cards
without fees; change address and phone; request
additional cards, request credit limit increases;
and online customer service.
Looks Like A Win-Win-Win Situation
From where we sit, this deal appears to be a big
win for all concerned: AOL, First USA and the
consumer. AOL benefits from leveraging its
large and ever-growing subscriber base into
multiple revenue streams; this deal goes well
beyond advertising revenue - with AOL getting
cash up-front (again, we believe something |
