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To: Chuzzlewit who wrote (358)	5/9/1999 5:18:00 PM
From: jhg_in_kc	Read Replies (1) \| Respond to of 419

I received this excellent analyis of AOL. I repost it here. Any thoughts? To: jhg_in_kc (22337 ) From: Bill Fischofer Sunday, May 9 1999 10:29AM ET Reply # of 22399 Re: Utilities and ISPs This is a somewhat belated response but is topical given the recent T/UMG deal. Read AOL's recent 10-K (available at aol.com on the AOL webite) and it shows the following: America Online, Inc., including its subsidiaries ("America Online" or the "Company"), is the global leader in the interactive communications and services medium, with approximately $2.6 billion in revenue during fiscal 1998, including $2,161 million of online service revenues and $439 million of advertising, commerce and other revenues. In other words, over 83% of AOL's revenue last year came from its ISP business, and less than 17% was from advertising and related "placement" fees. As a result, their fundamental problem is clear: Over 80% of AOL's revenue is generated by a wire over which it has no control. As long as data traffic represented a small portion of overall telephone usage, the telcos were prone to ignore it. But as residential data usage grows and eventually overtakes voice traffic, it stands to reason that the companies that actually own those wires and are responsible for their maintenance are going to want an increasing share of that business. Thus to survive in the ISP business over the long haul involves owning and maintaining the physical wiring that reaches each home. The only entities positioned to do that are the phone companies, cable companies, and (possibly) electric utilities. It is irrational to assume that these utilities will allow another entity to indefinitely profit from their infrastructure without being able to participate in this revenue stream. Thus over the long haul the ISP business is just another utility with all the characteristics of a utility. In fact, it represents a fabulous growth opportunity for existing telco and cable utilities, which is why they are now moving with increasing determination in this direction. But as I stated earlier, the ISPs are just providing the access ramps. The real value is where you go and what you do once you're on the net. The real difference between AOL and MSN is that even though both today are trying to be ISPs, AOL is also a destination. AOL allows me to access it via the net (even though it would prefer that I access the net via AOL) whereas MSN does not. Therefore unlike the MSN model, which is fatally flawed, AOL is technically able to deal with the emerging reality even if the adjustment will involve some wrenching transitions. Getting out of the ISP business for AOL would probably be a greater psychological shift than their transition from hourly metering to flat-rate billing but my guess is that is exactly what will happen. I'm not aware of any data which would indicate what percentage of AOL's subscriber base is using their "bring your own access" plan, but this is the key number to watch going forward. If AOL is adjusting to the new realities that number should grow over time.