Fool Portfolio Report
Tuesday, October 29, 1996


by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA -- October 29, 1996 -- With a sudden and peremptory blast, America Online announced flat-rate pricing today. In our message boards one Fool wrote what he felt should be the headline and subtitle on newspapers across the country tomorrow morning:

STEVE CASE DROPS SIX ATOMIC BOMBS ON ISP COMPANIES TO START WORLD WAR THREE

Steve, AOL's CEO, says it will be the easiest way to wipe the ISP's out, saying "The bombs cost us a lot of money, but it will be worth it. I will rule the 'Interactive World' once again!"

Some of the more prescient Fools claim to have foreseen this cataclysmic change, perhaps having spotted the sharp sheen of AOL's pricing missile arcing across the autumn sky, towering miles above the country before exploding in a blast of thunderous force: "BA-BOOM! FLAT RATE!" -- the proclamation reverberates, rattling monitors everywhere. A pricing change was expected from many Fools and company watchers, but to some it may be a surprise that the entire of AOL's proprietary content, as well as the Internet, will be available for a flat rate of $19.95 per month, beginning in the December billing cycle. Some guessed only the Internet would be coded with a "flat-rate" status, so the news of a flat-rate in totality is, as they say in some circles, "A pleasant surprise indeed, good chap."

Alongside the gun-shots of victory within the AOL community, Steve Case is spraying some fire himself, stating in the press release, "We're offering our members the best of all worlds: new rates competitive with those of straight Internet access providers, but including all our unique programming, sense of community, world-class customer service, and the most fastest and easiest Internet architecture. All in all, our unbeatable combination of low pricing and superior products and service will give more consumers more reasons than ever to use, and keep using, the world's number one Internet online service."

America Online also announced that it is restructuring into three divisions -- like so many splitting atoms or dividing cells -- and that accounting practices will be changed forevermore (or at least until the next change in accounting practices), among other announcements. We'll study the vast outbreak of AOL news and the energetic restructuring of itself in a moment.

First, looking at the markets with the single-minded, one day, short-term mentality of a stupid protozoan, the Fool got pressed against the glass and smeared by the S&P 500 today. Yes, the petri dish of Foolish stocks was slightly ill with bacteria. The Fool dropped 0.85%, even while the S&P 500 rose 0.61% and the Dow rose 0.57%. But the Nasdaq, the sickest batch o' investments the country has seen of late, continued its melt-down today, dropping another 1.06%. Folks are wondering what ails this conglomerate of entities.

The Nasdaq Composite has been dropping weight quickly and steadily. In the past few weeks the Composite has shed about 60 points, or more than 5%. If it continues its decomposition at the current rate, it will disappear entirely within about 48 weeks. Something to consider.

Fool stocks hit hardest were ATC Communications (ATCT) which dropped $7/8, and Iomega (IOMG), which also fell $7/8. ATC Communciations is due to announce earnings this week, but the top secret day of said announcement will not be disclosed by the company for fear of... something. Halloween goblins, perhaps. The company will most likely announce earnings Wednesday or Thursday.

But the "sickest" stock of all today, the stock which has been invaded wholly and has collapsed to the force of the attack is, gratefully, Fool short Quarterdeck (QDEK). The stock fell a whole $1/2 today (about 9%), to an asking price of $5 1/8, scoring a new 52 week low. The Fool has now grown an impressive 27.65% return on this experiment. Yes, a highly successful investment thus far, indeed. Perhaps the Foolish hypothesis has nearly been proven on this wretched compilation of a sickened and destroyed entity.

You, now. Let's talk about YOU for a moment: our dear Fools at monitors around the world, using either AOL or the Internet to view the ramblings of a word scientist gone Foolishly mad, just as Halloween rolls into view. You, believe it or not, mirror the hyper-activity of the markets' tick by tick moves in many ways. How? Imagine that you -- yes, you -- are composed of billions of cells, and each cell has 3 to 6 million pairs of nucleotide -- per cell. And every two minutes a nucleotide replaces itself with a new pair, a process some term "sparkler energy." This process is happening by the millions constantly, in your arm, in your hand there on the mouse, in your legs beneath you, all over your body. If you could see it, if the activity could be lit, you would be a great mass of flickering dots of light, of energy, sparkling, and constantly changing. What is the purpose of this maniacal regeneration?

Survival.

America Online (AOL) is likewise rebuilding itself. The company made a sweeping array of announcements today. Also, of course, the Fool's message board for the company is jumping with thoughts on the news, most being upbeat (not surprisingly). Meanwhile, the stock rose $1 1/8 today.

The company made three major announcements:

1. A New Pricing Plan
2. The Restructure into 3 Divisions
3. A Change in Accounting Practices

The pricing plan includes, most happily for the majority of members, monthly unlimited use of AOL and the Internet for $19.95. Obviously this makes AOL much more attractive than any stand-alone Internet Service Provider (ISP). You get much more for the same price. The pricing plan also offers an advance payment schedule, whereby when a customer pays in advance for a year or two years, the monthly rate is lowered to $17.95 or $14.95 per month respectively. There also exists a "bring-your-own-access" rate of $9.95, if you have your own Internet access already, and a light-usage program of $4.95 per month for three hours, $2.50 for additional hours.

(Importantly, also, we want to notify our Foolish Mac users that AOL Version 3.0 is now out of beta and available for preview on PowerMacs. There is also a 32-bit version of 3.0 available for you Win95 users out there.)

The company is restructuring into three separate divisions: 1. AOL Networks, which will be run by Former MTV CEO and founder, and also former Century 21 head, Mr. Bob Pittman. He heads the consumer network service. 2. AOL Studios, run by Ted Leonsis, and 3. ANS Communications. These divisions deal with corporate network services and content providers. The over-riding gist of the deal is, America Online is making a big old transition to becoming a mass media company. Hiring big-time media executive, Robert Pittman, to head its flagship online service appears to be a great step in that direction.

America Online also announced a change in accounting practices. They had been deferring certain expenses and will no longer do so, and they are switching to a pure cash accounting program, which in part will result in losses the coming quarters -- (transitional costs will also add to losses).

Steve Case said AOL was on track to pass 7 million members in mid-November (much improved growth from the last quarter), but it is important to remember the company is shifting the business model to new sources of revenues, namely advertising, merchandising, and online transactions. Membership growth will no longer be the over-riding factor to consider when measuring the company. AOL is moving to become a multiple-revenue-stream company in a serious way.

In the interim, AOL expects revenues of $400 million and a net loss of about $0.32 a share during the December quarter. AOL's Chief Financial Officer Len Leader said he expects the third fiscal quarter ending in March to result in "... revenues of $450 million and to be about breakeven in terms of earnings per share. The company will return to profitability in June, the fourth quarter of fiscal 1997, with earnings of about $0.05 per share and revenues of $500 million, the executive said." And, "Leader said the company expects to see earnings for the fiscal year ending in June 1998 in the range of $0.80 to $0.90 per share. "

This projected 80 to 90 cents per share is a far cry from the $1.90 previously estimated by four analysts for fiscal year 1998, but the stock, as said, rose anyway today. Apparently people are happy with the direction AOL is embarking upon, and the steps they are taking to get there. New hire Robert Pittman (a name we're going to be hearing a lot of around here) said, "America Online is the most exciting company in the world now, best positioned to lead the interactive industry as it moves mainstream."

Regarding AOL, on Thursday (Halloween of all days) David and I will be heading to Reston, Virginia for the company's annual shareholder meeting. Of course, one of us, or both of us, will report back to you whatever we think is of interest to all Fools. (For instance, I'll let you know if David's tie goes well with his suit.)

Finally, if you've read Richard Preston's true novel The Hot Zone, you know Reston, Viriginia is the site of the famous Ebola-Reston virus outbreak. Not to worry. We'll be wearing Fool caps atop our full body-suits and helmets. It will be difficult to ask questions through the face-guards, but if Dustin Hoffman can do it (in the film Outbreak), heck, any Fool surely can.

Stay Foolish!

Today's Numbers


Stock Change Bid ------------------- AOL +1 1/8 25.75 T - 1/4 35.63 ATCT - 7/8 22.25 CHV + 7/8 66.88 GM + 1/8 54.00 IOMG - 7/8 20.75 KLAC - 3/8 23.88 LU - 1/2 48.25 MMM +1 1/4 76.50 QDEK - 1/2 5.13 COMS -1 62.50
Day Month Year History FOOL -0.85% -5.91% 43.62% 168.18% S&P 500 +0.61% 2.06% 13.89% 53.03% NASDAQ -1.06% -1.94% 14.34% 67.05% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 20.75 723.75% 8/5/94 680 AmOnline 7.27 25.75 254.05% 8/13/96 250 3Com Corp. 46.86 62.50 33.38% 8/11/95 125 Chevron 50.28 66.88 32.99% 9/27/96 -890 Quarterdec 7.08 5.13 27.65% 8/12/96 110 Minn M&M 65.68 76.50 16.48% 8/12/96 280 Gen'l Moto 51.97 54.00 3.90% 10/1/96 42 LucentTech 47.62 48.25 1.33% 10/22/96 600 ATC Comm. 22.94 22.25 -2.99% 8/12/96 130 AT&T 39.58 35.63 -9.99% 8/24/95 130 KLA Instrm 44.71 23.88 -46.60% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 41707.50 $36644.37 8/5/94 680 AmOnline 4945.56 17510.00 $12564.44 8/13/96 250 3Com Corp. 11714.99 15625.00 $3910.01 8/11/95 125 Chevron 6285.61 8359.38 $2073.77 9/27/96 -890 Quarterdec -6304.75 -4561.25 $1743.50 8/12/96 110 Minn M&M 7224.44 8415.00 $1190.56 8/12/96 280 Gen'l Moto 14552.49 15120.00 $567.51 10/1/96 42 LucentTech 1999.88 2026.50 $26.62 10/22/96 600 ATC Comm. 13761.50 13350.00 -$411.50 8/12/96 130 AT&T 5145.11 4631.25 -$513.86 8/24/95 130 KLA Instrm 5812.49 3103.75 -$2708.74 CASH $8801.62 TOTAL $134088.75