AOL Rattles ISP Rivals

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According to The Wall Street Journal, AOL Time Warner's (NYSE: AOL) America Online unit is poised to offer a $9.95 discount dial-up Internet service under the Netscape name. The news didn't budge AOL -- soon to be Time Warner -- shares but slammed United Online's (Nasdaq: UNTD) to the tune of 18%.

United Online's NetZero and Juno brands have succeeded through a combination of low prices and high throughput. The company boasts of year-over-year revenue growth of 312%, 37%, 45%, and 46% for the last four quarters, as well as six straight quarters of positive free cash flow (FCF).

Investors have noticed and bid the shares up to 34 times enterprise value(EV)/EBITDA and 22 times EV/FCF, for a gain of 200% through yesterday's $30.92 close from the 52-week low of $10.74.

America Online's $23.95 dial-up service has shed 2 million subscribers for the year through June 30, while United Online gained 840,000 (Rex Moore provided the update). Not only does America Online face low-priced dial-up competition, but both SBC Communications (NYSE: SBC) and Verizon Communications (NYSE: VZ) press on the high side with telephone-line DSL broadband service at $26.95 and $29.95, respectively. AOL Time Warner's broadband product costs more, requiring a fee on top of the dial-up rate.

This latest move may be a necessary survival strategy for America Online, which has massive brand equity. But time will tell whether the commoditization of access will leave anyone making money.

AOL is set to change its name to Time Warner and ticker to TWX on Thursday. What's next? Join the discussion on our AOL Time Warner and United Online discussion boards!

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