David Cassel (destiny@wco.com)
Thu, 31 Oct 1996 01:04:43 -0800 (PST)
Those of you who read Wednesday's Netly News (http://www.netlynews.com)
saw a quote from AOL's Vice President of Product Marketing last May: "An
all-you-can-eat for $9.95 option will never happen in my lifetime." In
the interview with Interactive Week, he continued, "the challenge facing
us now is to create a bundle of packages and services that customers will
pay for." But if that's the challenge, AOL's abandoned it; even non-TCP/IP
accounts will now get unlimited access for $20.00!
"Our phones have been ringing off the hook fro members who are really
enthusiastic about the pricing changes," AOL's Corporate Spokeswoman
Melissa Andrews told me. Unlimited chat, unlimited games of Federation,
unlimited access to the Motley Fool. But there's some lingering doubts in
the air--"AOL is reinventing itself," Gary Arlen of Arlen Communications
told USA Today. "It has to." Less than a month ago, Case said he believed
subscribership would pass 10 million by the end of the summer. I heard
defensiveness in his voice as he said in a conference call, "It's not our
god-given right to wave our hands and get 10 million members. We'll get
there by doing a better job than anybody else." But he won't. At least not
by the end of the summer, Case conceded Tuesday.
AOL's other big move: "deferred subscriber acquisition" costs will be
eliminated. That means the money AOL spends on marketing will be deducted
from their profit margins--instead of being deferred over two years. Last
quarter that figure was $71 million--if AOL's marketing remains unabated,
they'll need to pull in $71 million in profits to offset it. One business
consultant told me "With that kind of uncertainty and a decreasing
subscriber retention period, it's just not acceptable to keep putting off
what are, essentially, marketing expenses."
But AOL's moves received mixed reviews. The Washington Post described it
as "an emergency overhaul", and added AOL was "abandoning an accounting
policy that critics said had turned huge financial losses into paper
profits." In fact, AOL's accounting decisions received almost as much
press attention as their price cuts. "The old approach had allowed AOL to
report profits," the Post reported; "the new one will put it deeply in
the red." Using AOL's new accounting techniques, the Post reported last
quarter's $29.8 million profit would instead have been a $124.2 million
loss.
But all those losses disappear in a single "charge" taken this quarter.
The Business columnist for the San Francisco Chronicle asked "Is AOL
performing the ultimate accounting switcheroo?" An accounting professor
emeritus at a New York University complained to him that "They're talking
about a third of a billion dollars as if it's chopped liver."
The logistics are interesting, too. Several papers reported that all
subscriber bills will automatically be switched to the $20 rate. Though
4.5 million members still pay $9.95, they'll have to proactively notify
AOL that they wish to retain their current pricing. To push the new
model, AOL announced users can sign up immediately (though the pricing
plans don't go into effect until December 1.) AOL will drop their price
to $18 per month for users who pay in advance for one year. This locks in
$215 while offering a two-dollar-a-month reduction (or a $5-a-month
reduction for any customer who ponies up $359 in advance for two years
worth of service). But how many takers will they get? It's been
estimated the service has a yearly "churn" rate near 100%. AOL's new
chief, Robert Pittman, told Media Daily subscribers would pay *more* than
they had under the hourly rates--and gladly, to avoid metered access. But
users also can reduce their monthly bill to $4.95 a month--and earlier
this year, C|Net quoted AOL's spokeswoman as saying 95% of AOL's customers
don't go over 5 hours a month...
The San Francisco columnist also questioned whether AOL's new model will
work. One short-seller told him, "If they couldn't make money doing it the
wrong way, what makes you think they can make money doing it the right
way?" The Post echoed their doubts--an analyst at Cowen & Co. noted "The
jury is still out on whether AOL can really make money under this new
model,"
But it got a lot of coverage. The Associated Press described it as
"Embracing a tactic that has hammered it," the accounting moves "an
acknowledgement that its financial statements might not have been
accurately reflecting the company's condition. An analyst at Arlen
Communications told C|Net AOL's move was "risky", but added it's not clear
they had a choice.
In any case, AOL's recent announcements of expanded access through BBN
make more sense now--subscribers lingering online would clog the phone
lines. The only drawback: the expansion will cost $340 million.
In other news, Cincinnati's Bell Telephone Company found AOL was blocking
mail from their ISP, Fuse.net. AOL hadn't notified them; they only found
out when Ron Newman--a subscriber to the wrongfully-blocked Cybercom.net--
contacted them after seeing their name on the list. (In a related note,
the spam block doesn't appear to be working--tonight one test AOL mailbox
contained eight pieces of junk mail.)
And despite the optimistic announcements, our anonymous tipster, "TrustNo1",
says "the large layoffs soon to come have not yet been announced."
THE LAST LAUGH
Though GNN will be eliminated under the restructuring, visitors to their
web site still find the original page: "Why Join GNN", "AOL Member's
Choice"--and a large picture captioned, "Do something!"
Destiny
More Information - http://www.wco.com/~destiny
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