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July 15, 1999

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Subject: Re: "Reality Check"
Author: Goofyhoofy

TMF Jeannie said:
{{You don't have to buy the theory, but she is certainly entitled to express it ;-) For those who missed TMF Puck's "Reality Check", here's the link:}}
http://www.fool.com/portfolios/RuleBreaker/1999/RuleBreaker990707.htm

That's true. The Fool will pretty much let you put up any theory you want, crackpot or otherwise, and let the marketplace of ideas sort it out.

That said, it's generally good form for a writer, particularly one with a TMF in front of their name, to disclose any significant biases in the course of the piece, rather than dribble them out later, as Puck did here:

http://boards.fool.com/Message.asp?id=1030051001967002

An excerpt: "My husband called to cancel an account a while back, and while they acknowledged his wishes, they continued to debit his bank account. He called to complain, and nothing happened.... This is ridiculous. It's this type of "service" that drives people from AOL and keeps them from coming back. My question is..."

Even just a little "and I've had some troubles with AOL's customer service, but..." somewhere in the middle of the diatribe would have been good form.

I found this line hilarious: "My question is, is the company counting these subscribers whom they are wrongfully billing?... Every time I've considered investing in AOL, I think of my frustrating experience as a user, and I just can't bring myself to own shares in a company that has such poor customer service...."

How many people could this realistically be happening to before the words "class action" and "attorney general" would start littering the headlines? A realistic complaint? Sure. A realistic scenario about subscriber counts? I think not. But then, I'm not sure what to expect from someone who apparently hasn't the slightest idea how AOL counts subscribers in the first place. From earlier in that same post:

More: "I also question AOL's numbers. My guess is they are counting unique subscribers, not screenames. I'll give them the benefit of the doubt there."

Good guess! And thanks for the benefit of the doubt. If someone had wanted to do some actual research, that someone could have gone to the company's most recent 10-Q to find out: For the three months ended March 31, 1999, subscription services revenues increased from $580 million to $869 million, or 50%, over the three months ended March 31, 1998. ...The average monthly subscription services revenue per AOL North American subscriber increased from $17.74 in the three months ended March 31, 1998 to $19.44 in the three months ended March 31, 1999. ..Let's see 869 million divided by around 16 million subscribers divided by 3 months is about $18 each. Or divided by 60-70 million screennames is about $4.45 each. Anybody know about the $3 access plan? Shoot, I'm paying $22!

Anyway, I think it's nice that the company hides these little clues here and there, like in the 10-Q, because there's always the chance that some writers will stumble across them. And get one.

Here's something from another of Puck's followup posts:

"As for cutting its prices, I think that would kill AOL as we know it. It gets almost all of its cash flow from subscriptions. Would you be such a bull on AOL if its revenues were to drop 50% or more?"

Is this a trick question? I wouldn't be a bull on any company that's going to drop revenues by 50% or more. Oh, right, your theory is that AOL subscribers are about to drop like flies because, um, what again? Oh yeah, less savvy users learn more, then leave. This is the same reason everybody has a 9 burner gourmet stove in the kitchen, a 12-bit router in the workshop, and a quadraphonic home theater in the den. I forgot.

"The strength of AOL right now is its nationwide network. I'm in New York right now (not Fool HQ in Alexandria), and I was still able to log on using a local access number. Other ISPs, such as Mindspring, have yet to be that user friendly. But it won't be long before Mindspring and Erols and others can match AOL in this area."

Actually many ISPs are available nationwide, or nearly so. Mindspring's hundreds of POPs probably cover 95% of the country. I'll wager they even have one in New York! AOL's strength is it's ease of use, the fact that so many people recommend it to their friends because it works, it's marketing, it's brand, and its ubiquity. Just MHO, of course. But methinks you've picked a potential weakness that's not a weakness because it's not really a significant advantage now!

Well, I could go on and on, and I haven't even touched the original post that started the controversy. I'd love to, but I'd end up just going on and on...

Well, this one thing did sort of stick out:

"The Times article calls AOL "the biggest, most powerful company on the Internet." It claims that 39% of Americans' time online is spent using services America Online controls, which is 10 times that of its nearest competitor Microsoft. I'm not sure if I buy that 39% figure. It seems a bit high. "If you ask me, there are several companies that could be in the running for that "biggest, most powerful" title -- Yahoo! (Nasdaq: YHOO)"

OK, back to the 10-Qs. Yahoo's most recent quarterly revenue: $86,064,000. Not bad. AOL had $869,000,000 in subscription revenue (10x Yahoo's total), $275,000,000 in ads and e-commerce revenue (3x Yahoo's total) and 109,000,000 in enterprise solution revenue (training for business customers, consulting, technical product sales.) a total of $1,253,000,000. Just a little bigger. OK, OK, 14 times bigger.

"or, even better, its parent Softbank, whose properties include E*Trade (Nasdaq: EGRP) and Ziff-Davis (NYSE: ZD)n. Now that's the granddaddy of Internet companies"

According to a valuation article in Forbes about a year ago, Softbank was worth about $5 billion. It's doubled, and doubled again since then. Call it $20- or $30 billion. AOL's market value as of this morning: $139,344,522,000. Pretty close. About 5 or 6 times larger. And I'm not sure I'd even count the ZD magazines or cable channel toward "the internet" any more than I'd count "Glamour" as being in the make-up industry, although it writes about it and has a lot of influence in it. I'm one who thinks those products are in the "magazine" industry, but hey, that's just me.

"Plus, there's CMGI (Nasdaq: CMGI), another big player online."

CMGI marketcap $11,523,994,000 Getting colder. 12 times smaller.

Well, I'd like to go continue and pick apart the section that says that because WebTV isn't a smash, AOL can't be. Maybe they won't, but using somebody else's failure to predict the future would have meant that VHS wouldn't have beat Beta, that Microsoft shouldn't have developed Windows, and that we'd all be using CompuServe now.

And I liked the part about the difference between using the computer and using the TV. True enough, of course. But completely unmindful of the possibility of interactivity between the two mediums (media?), like getting different camera angles, commentary, or stats during a sports broadcast, or like some digital cable channels are about to offer for do-it-yourselfers with detailed instructions on "how-to" projects. Of course Puck may not think it's every going to happen, and she may even be right. I just wonder if she's even thought about it. There's no mention in her piece.

There's also no mention of much of anything about AOL except the funny little online service. No ICQ, no Netscape or Netcenter, no CompuServe, no SUN alliance, no Digital Cities, MovieFone, iVillage, Motley Fool, Tel-Save, or anything else.

All she sees is "subscribers." Harumph. Guess I expected more.