By StephenAa
April 29, 2002
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Myths and facts about AOL:
1. Myth: The America Online service is the growth engine for AOL Time Warner Inc.
Fact: America Online is, for now at least, just another premium subscriber service provided by AOL. The real growth engine for this company, for now, is its cable division. Through cable, AOL will offer pay-per-view movie services, premium high-speed Internet service, bundl ing options that could increase magazine sales, etc. America Online stands to grow revenues by exploit ing AOL's broadband properties -- and not the other way around -- in the near future.
Moreover, online subscriber growth is slow ing as the industry matures toward saturation. Cable, by contrast, is expected to continue to grow dramatically, both in terms of new subscribers and as a result of new services provid ing an increas ing number of revenue streams.
This could change, of course, if consumer sentiment were to shift away from cable broadband access to DSL, satellite, or some other technology. Broadband is not expected to become widespread until about 2005-2008, and the real profits may not come until the wireless Internet takes off through the use of Microsoft's ".NET" and/or AOL's "Magic Carpet" services. (So far, it bears not ing that AOL trails Microsoft badly in develop ing these services, although AOL's hefty lead in current online subscribers nonetheless gives it a formidable advantage toward keep ing these customers.) DSL and/or satellite may yet make a dent in cable's dominance as the means by which people are obtain ing broadband online services.
But for now, it is generally conceded that cable access could shape the limits of AOL's broadband service offer ing s in the decades to come.
2. Myth: AOL is not heavily dependent on the advertis ing market.
Fact: AOL is extremely dependent on advertis ing . Every division in the company feeds off advertis ing , and, in a better ad market, AOL might actually have made its numbers. The advertis ing swoon has also led, indirectly, to a credibility gap for the company: To fill unsold advertis ing space, AOL has sold advertis ing from one division to another (e.g., America Online and CNN advertise on one another). This has raised questions about how AOL accounts for these sales, and AOL's reluctance to specifically address these concerns division by division has cost AOL the confidence of some analysts and some of its larger shareholders.
3. Myth: AOL wants ISP service access to AT&T Broadband's and Comcast's cable pipes as soon as possible and its failure to strike a deal so far is cause for alarm.
Fact: Shareholders certainly want this deal ASAP because of their concerns about AOL's seem ing lack of appreciation for the expected future shift to broadband services, but AOL will almost certainly wait to strike a deal, at least until the merger (assum ing it is approved) closes. First, its major leverage in strik ing a deal is its offer to buy out the 25% of TWE that AT&T Broadband currently owns. AOL is likely to use this to buy its way into the combined enterprise, rather than make a deal now just for access to the AT&T properties. Second, AOL will likely wait to see if federal regulators will deny the merger or insist on open-access requirements that could give AOL additional leverage in strik ing a deal for access on favorable terms.
4. Myth: Microsoft's financial support for Comcast will render the company unwill ing to strike a deal for offer ing America Online.
Fact: At this point, AT&T Broadband is a debt-laden, money-los ing enterprise, albeit one expected to grow revenues dramatically in the future, hence its high price tag. Comcast wants to immediately "monetize" its customers to pay off the debt. An immediate source of cash would be an AOL buyout of AT&T's share of TWE, and Comcast is eager to strike such a deal. Further, Comcast sees AOL's high share of online subscribers and wants the opportunity to direct those customers in its cable-serviced areas toward higher-premium services like broadband Internet access, from which it, too, can profit. Comcast and AOL thus have a common interest in strik ing a deal for access. If AOL cannot strike a deal with Comcast, it will likely look to expand its cable hold ing s by go ing after, say, Cox. But this would likely be a move of last resort, rather than a preferred option.
5. Myth: AOL lost $54 billion last quarter.
Fact: AOL's market capitalization lost more than $200 billion since the merger, of which approximately $54 billion can be attributed to "good will" that can no longer legitimately be regarded as a bona fide asset given the company's current market cap, and thus that, under recently adopted account ing rules, must be accounted for now rather than amortized over the next 20 or so years. In terms of money chang ing hands, AOL virtually broke even last quarter, beat ing consensus earn ing s estimates handily but fail ing to meet some of the more optimistic cash flow growth scenarios.
6. Myth: AOL paid too much for Time Warner Inc.... [Click here for the rest]
