Fool Portfolio Report
Thursday, April 10, 1997
by Rob de Baun (MOMS Rob)

PORT TOWNSEND, WA, (April10, 1997) -- Greetings from a veteran "MF" who first stepped over the doorstep into Fooldom back in August, 1994. Thereafter my romance with online community grew fast and furious, such that I was compelled to help launch a new forum on AOL, Moms Online. But don't call me an infopreneur -- call me a mundane manager who is trying to predict the sales and profit viability of online entities, be they search engines, 3-D chat palazzos, or communities of passions/interests. So let's talk about online advertising revenues and whether this will fuel the motley, rebel flotilla of online properties against the Old Media's Death Star.

But first, a look at today's Foolfolio performance. The Fool dropped 0.23% as the Nasdaq gave back 1.09%, while the S&P fell 0.30%. The Nasdaq has been giving back some of its recent gains.

AMERICA ONLINE (NYSE: AOL) today rose $1 1/2, receiving an earnings upgrade from Everen Securities for the quarter ended March 31st from -.15 to -.10. Third quarter earnings are due out around May 7, and hopefully AOL will cleanly state its quarterly advertising revenues that it lumped into "Other Revenues" last quarter.

AOL unlimited usage pricing plan has certainly rocketed membership, but the average usage revenue (i.e. subscription revenue) per member hour is dropping. Enter ad revenues. Members click open pages during their online visits and generate pageviews/impressions. AOL can sell these pageviews to advertisers, and they're trying to at a price of $60 for every thousand impressions (CPM). Check out AOL's Media Space, an ad banner bazaar where Procter & Gamble or you can buy banner ads in every nook and cranny of AOL.

That's the magic profit formula that long-term shareholders of companies like AOL, Yahoo!, and Infoseek are investing behind. Members = Pageviews = Advertising Inventory = Advertising Revenues. With online content companies, pageviews becomes a proxy for latent ad revenues. Companies tout the millions of pageviews their properties are generating, and the unspoken claim is "Look at the millions of potential advertising dollars we have!" That's why when Yahoo! announced its consensus beating earnings yesterday, the headline trumpted "Yahoo! hit 30 mln page views/day in March."

AOL recently announced that it is accommodating ad banners in its ever popular People Connection and is bringing to market 360 million impressions per month. Imagine if AOL sold out this inventory at a rate of $60 per thousand -- $65 million of incremental quarterly revenue would rain down! For comparison, this quarter only $10-15 million of advertising revenue is forecast. But the terms "online properties" and "sold-out inventory" are to date mutually exclusive. Supposedly The Dilbert Zone website's ad inventory is sold out at a high CPM of $75, but then again Dilbert doesn't have 360 million impressions to sell.

So what is the state of online advertising -- what are the real dollars flowing into online ad buys? Well, in 1996 estimates of online ad revenue range between $150 and $300 millon, depending on how one accounts for barter ad-spending where real cash isn't exchanged. The consensus for the first quarter 1997 apears to indicate that online ad spending has slowed dramatically, but this may represent traditional ad spending seasonality.

The important takeaway is that online ad spending is miniscule compared to traditional media spending (e.g. print, television, radio). The companies that sell cars, soap, life insurance, aspirin, and hair replacement treatments are on the whole spending 0% of their media dollars on online advertising as they remain undecided about their online advertising strategy. So who are the big online ad spenders? You guessed it -- companies like Microsoft, AT&T and IBM who derive large revenues from selling products to people who have computers. If you're online, then you have a computer (OK, WebTV users aside!) and therefore represent a solid sales prospect to these companies.

Will AOL successfully convert its membership into advertising dollars? Well, it certainly does have a critical mass of upscale subscribers, + 8 million that rivals the circulation of National Geographic. The only consumer magazines that exceed it are Modern Maturity, Reader's Digest, and the ubiquitous TV Guide. Are AOL users increasingly harder to reach through traditional media? Well, a recent Nielsen Study claimed that AOL users watch less TV. A more recent study by NPD Group claimed that "Ninety-nine percent of those who said they frequently read online publications often read print magazines or newspapers as well," so perhaps online cannibalization isn't so dramatic.

For those who expect AOL to jettison into profitability on a gusher of online advertising dollars any quarter now, just remember that Henry Luce, founder of Time Inc., waited 10 years for Sports Illustrated to finally enter the black. On the other hand, I understand that the TV show Jeopardy had a very short incubation period before becoming profitable. On the subject of Jeopardy, last night's Daily Double answer was "Online financial forum started by brothers Tom and David Gardner in 1994" -- the respondent got it right!

Stock Change Bid -------------------- AOL +1 1/2 46.63 T - 1/8 34.50 ATCT - 1/16 5.44 CHV - 3/4 64.50 GM --- 54.50 IOM - 1/4 17.88 KLAC -1 3/8 44.00 LU - 1/4 53.00 MMM -1 1/4 83.38 COMS -1 3/8 32.63
Day Month Year History FOOL -0.23% 4.34% -3.17% 158.43% S&P: -0.30% 0.16% 2.38% 65.43% NASDAQ: -1.09% 1.15% -4.28% 71.59% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.88 609.62% 8/5/94 680 AmOnline 7.27 46.63 541.08% 8/11/95 125 Chevron 50.28 64.50 28.27% 8/12/96 110 Minn M&M 65.68 83.38 26.95% 10/1/96 42 LucentTech 47.62 53.00 11.31% 8/12/96 280 Gen'l Moto 51.97 54.50 4.86% 8/24/95 130 KLA Instrm 44.71 44.00 -1.59% 8/12/96 130 AT&T 39.58 34.50 -12.83% 8/13/96 250 3Com Corp. 46.86 32.63 -30.38% 10/22/96 600 ATC Comm. 22.94 5.44 -76.29% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 31705.00 $26759.44 5/17/95 2010 Iomega Cor 5063.13 35928.75 $30865.62 8/12/96 110 Minn M&M 7224.44 9171.25 $1946.81 8/11/95 125 Chevron 6285.61 8062.50 $1776.89 8/12/96 280 Gen'l Moto 14552.49 15260.00 $707.51 10/1/96 42 LucentTech 1999.88 2226.00 $226.12 8/24/95 130 KLA Instrm 5812.49 5720.00 -$92.49 8/12/96 130 AT&T 5145.11 4485.00 -$660.11 8/13/96 250 3Com Corp. 11714.99 8156.25 -$3558.74 10/22/96 600 ATC Comm. 13761.50 3262.50-$10499.00