- Summary: AOL CEO Jonathan Miller last week presented a proposal to Time Warner executives to retreat from the subscription revenue model and focus on generating advertising from free content and services. The proposal suggests providing AOL's entire range of services, including email, for free to anyone with a high-speed Internet connection. A third of AOL's subscribers have high-speed connections already and a further 8 million would be expected to cancel their $25.90 monthly dial up service, costing AOL up to $2 billion in lost revenue, partially offset by lower expenses and increased advertising revenue. AOL's subscriber base shrank from 26.5 million at end 2002 to 18.6 million in Q1 2006; during that quarter, AOL lost 850,000 subscribers to high-speed Internet providers. AOL generated $8.3 billion in revenue in 2005, of which nearly $7 billion came from subscriptions and only 16% from advertsing. Earlier this year AOL partnered with broadband providers to offer its services in a $25 monthly bundle, effectively discounting its services since the price was the same for its own dial-up service. "So far, however, these package deals haven't had the effect AOL had desired." AOL has also started publishing more free content on AOL.com, but has found that most visitors are current AOL subscribers.
- Comment on related stocks/ETFs: Jonathan Miller's proposal is an admission of crisis: AOL's walled-garden approach to the Internet is resulting in heavy and consistent customer attrition. However, the proposal offers no guarantee that AOL will be successful in the future, but will definitely result in a steep revenue decline if the projections cited in the article are correct. Given that Time Warner's stock (TWX) is largely held by value investors, the implication of sharply lower cash flow in the foreseeable future could damage the stock. AOL's bet on free content and services, such as email, increases competition for Yahoo (YHOO), Microsoft's (MSFT) MSN and Google (GOOG), and is therefore incrementally negative for all three stocks.
Today's WSJ story about AOL's proposal to give away all its services for free is of seismic importance for the Internet industry. Here's the summary of the article from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here), and comments on the stock implications: