Aol's Financial Case

AOL's estimated earnings for `96 are $38 million on estimated revenues of $1 billion. But there's a catch. In the last couple of years, AOL has made $100 million in acquisitions that some analysts feel are languishing. Observers have also criticized the way AOL treats some of the costs of attracting new members as capital expenses. They say that AOL is more dependent than ever on attracting new members and retaining old ones, a process that has become more costly.

According to Cowen & Co., in the last quarter of 1995 AOL added 1.8 million new members, but lost 950,000, leaving a net gain of 880,000. And despite the May 8, 1996 release of slightly higher-than-expected 3Q earnings, AOL's stock price fell 18% over a two-day period, in part
According to reports, Kerner lowered his estimate based on impact of the recently announced $20/20 hour plan which will be available effective July 1. Kerner said that he estimated the impact of the new pricing plan to be about a 9%-10% reduction in AOL's average revenue per subscriber.

In May, Robert Seidman wrote...

Growth may be slowing down. On December 28, 1995, AOL announced it had surpassed the 4.5 million member mark. About 40 days later, on February 6, AOL announced it had eclipsed 5 million. Since then, we've heard nothing, but I believe we'll hear shortly that they've eclipsed the 6 million member mark.

The thing is AOL was growing at a run rate of about 1 million every 80 days. By that logic, if AOL was still growing at that pace, they'd have announced the 6 million mark on about April 26. I expect we'll see this announcement sometime in the next 2 weeks...

But there was no announcement. (Quotes taken from Seidman's Online Insider.) It was later revealed that AOL was only able to announce they'd reached 6 million subscribers by inflating the count with their GNN subscribers. Though they use that figure in every press release, AOL has yet to reach 6 million
In the 10 days after May 7, AOL stock lost more than 23% of its value.

What makes the announcement so remarkable is that the week before the announcement, Steve Case told Robert Seidman:

"We've done a lot of price testing -- of lower and higher monthly fees, with varying amounts of free time -- and there's a reason why we're still at $9.95 for 5 hours. If we thought we could attract more customers with a different price point, we'd do it...

Backpedalling furiously, AOL's spokeswoman Pam McGraw downplayed the switch in policy, telling C|Net that 95% of AOL's users spend less than 5 hours per month online.

But if that's true, then to get the average bill of $18.00 a month reported in Business Week, the paltry 5% who do go over $9.95 a month must be racking up monthly bills of $153.00--and using the service for 48 hours a month.

Under a $20-for-20-hours plan, that would still come out to $104.00. AOL only gives a discount on the middle 15 hours, which now goes for $10.00 instead of $45.00.

Still, even if Pam McGraw's figures are correct, AOL gives up close to $100 million a year from that 5% of their