This morning the Wall Street Journal [subscription required] reported that last week AOL presented to the Time Warner, Inc. (NYSE: TWX) board, a plan to give away all of AOL's content and services to subscribers who don't use AOL for dial-up access. While I admire TWX's willingness to take a risk, I would advise the board to get solid answers to some tough questions before proceeding.
According to the proposal, rumors of which Tobias Buckell covered last week, AOL subscribers who don't use its dial-up access services -- this includes those with high speed or dial-up access from other providers -- will have free access to AOL content, including its e-mail services. The report estimates, that this will cost AOL $2 billion in subscription revenue.
I think it's smart for AOL to think about separate strategies for its Internet Service Provision (ISP) and Web content businesses. As I argued in my book, Net Profit, ISP is a structurally unattractive industry -- distinct from the potentially more lucrative Web content business. AOL remains heavily dependent on the less lucrative ISP business which accounted for 84% of its $8.3 billion in revenue -- the balance going to the advertising accompanying AOL's content.
If I was on the TWX board, here are the questions I would ask:
-
The plan assumes the number of subscribers would drop from 13 million to five million. But how much of its $7 billion in subscription revenue will AOL really lose under this plan?
-
What are the key risks underlying the assumptions of AOL's lost subscription revenue forecasts under the plan?
-
What percent of AOL subscribers will continue to visit AOL once they don't have to pay for the service?
-
What are the key assumptions underlying this forecast and how realistic are they?
-
How much will AOL be able to reduce its operating costs once it sheds these dial-up subscribers?
-
The plan forecasts a doubling in advertising and search revenue. Is this realistic? What is a worst case scenario and how likely is that?
-
What advertising rates will AOL be able to charge for access to the remaining visitors to AOL's content?
-
What will be the key elements of AOL's strategy for selling advertising?
-
Will AOL be able to use any of Google's technology to attract visitors to AOL's content?
-
Does AOL have a sufficiently strong advertising sales staff to double its advertising revenue?
-
Will the profit from advertising and search really offset the lost profit from dropping eight million subscribers?
With AOL chief Jonathan Miller on the hot seat for a turnaround and the chance for TWX president Jeff Bewkes to succeed CEO Richard Parsons on the line, the board needs to push hard for solid answers to these questions before plunging in.
The ISP business has very thin profit margins while advertising could have far greater profit potential. If AOL can execute on this transition, it could be a good bet. But I would not take it without a truly independent assessment of the key risks.
I am neither long nor short shares of Time Warner. For more about me, click here.











Reader Comments (Page 1 of 1)
7-06-2006 @ 9:57AM
Paul May said...
I live in a lake area where there are many weekend people come in from large cities. These folks used AOl at home because it was assessable in this area. Aol, then change their telephone connections in this area which in turn cut off probably thousands of users. These folks were never registered with this address so AOL never new when it changed it dial up connections.
Along with this their programming for folks who have other high speed connections and use AOL, when on the road with a laptop, you get no notification before you go into a service charge for over your allotted time on dial up. There should be a early warning that you are about to exceed your time at 9 hours or so. These can cause many to leave AOL
7-06-2006 @ 10:28AM
Scott said...
AOL really needs to take a long look at what they offer versus other ISP's. In addition it would be beneficial for AOL to find out what their current subscribers think. Currently with AOL, you get parental controls, a safety and security center that provides virus protection, firewall, phishing protection, spy ware protection etc. The multiple screen names that the AOL software allows make it very convenient for parents to set individual controls for their children. It seems to me that AOL offers many things that are available as separate programs but not all in one place. Some of the other ISP's provide these things but not in nearly the same easy to use format. Despite what reports may say people (parents in particular) are not as technologically advanced as we might like to think. In addition in an age where computers are as common as TV's it becomes difficult to monitor everything a child is doing since you may have two parents and three kids on different computers. I will concede that AOL's service is pricey when compared to other ISP's but you get less as well. I have switched from AOL and came back simply because I found the AOL interface to be much more user friendly and not nearly as troublesome as some reports like to make you believe. I am at least one subscriber that would be sorely disappointed to see AOL turn away from the ISP business. Based on the last two presidential elections, I think we know how much one voice can count.
7-06-2006 @ 11:28AM
Michael Rogers said...
One more data point supporting the rumor--AOL pulled its ads out of the TV upfront market last week: http://www.tvweek.com/news.cms?newsId=10301
7-06-2006 @ 3:56PM
Lamare M. said...
I am a very happy AOL subscriber, and have been as such since March of 2000, I believe that AOL would be making a huge mistake by abandon it's ISP and I think that although it should offer more free services, it should offer an advertising free paying model of the AOL client. I think that AOL should keep on pushing and really evalute it's businesses, and stay in the driver's seat. I'm one customer, who really likes the service. I WOULD REALLY hurt, if AOL collapses.
7-06-2006 @ 10:32PM
Cathy said...
AOL could just charge customers with other ISP connections 4.95 and still get business and make money. Going free? and then advertising everyone to death? Doesn't sound like a good idea.
7-07-2006 @ 3:44AM
Soonalater said...
I've been with AOL since 1997, met my long-term partner in an AOL chatroom soon after joining, and we've been together since then. We moved in together the following year, and a year after that he cancelled his account, so we've been sharing this one. Now we're buying our first house together, and need to cut back on expenses. We've been paying for cable internet access since 2000, but kept AOL because it had the best email program for sending pictures to our families. That's it - the only reason. But now other free email programs have made it easier to send pictures, so there's really no reason to pay $15/mo. just to have & use AOL software, on top of the $70 for our cable internet subscription. I'll be making the switch to aim.com for email and IM, and will gladly put up with the ads.
7-10-2006 @ 6:41AM
douglas mcintyre said...
Could AOL's Plans Hurt Time Warner? (TWX)
Press reports indicate that AOL is considering allowing a large portion of its paid subscriber based to begin accessing the company's content free of charge. The hopes are that this will build audience figures and page views so that AOL can compete more effectively for online ad dollars with companies like Yahoo! and MSN.
Unfortunately, the move is as risky as shooting a cigarette out of a woman's mouth with a gun held over the shoulder and a mirror used to view the target.
For the three months ending March 31, AOL's subscription revenue was $1.538 billion. Advertising revenue was $392 million. Although it is unclear how much of the subscription revenue might disappear in the move, if even a third goes away, advertising would have to rise 50% to offset the drop. It is also unclear what cost savings the Time Warner internet unit would have if its can lay-off thousands of employess who support its subscription business.
Yahoo!'s entire revenue for the same first quarter 2006 was $1.567 billion, so the pool of internet advertising dollars may not be large enough to accomodate the move by AOL.
According to NetRatings, Yahoo! had 105.4 million visitors in April. MSN had 92.8 million. Google had 92.1 million and AOL had 70.4 million. Based on these figures, even if AOL passed Yahoo! in total visitors and could reach the Yahoo! ad revenue level that makes up most of its over $1.5 billion in revenue, its would not come close to replacing its subsription sales base.
AOL's move may seem attractive at first, but it is not an action that most sane people would take.
Douglas A. McIntyre can be reached at douglasamcintye@gmail.com. He does not own securities in companies that he writes about.