AOL Money & Finance

Can AOL make up for $2 billion in lost subscriptions?

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This morning the Wall Street Journal [subscription required] reported that last week AOL presented to the Time Warner, Inc. (NYSE: TWX) board, a plan to give away all of AOL's content and services to subscribers who don't use AOL for dial-up access. While I admire TWX's willingness to take a risk, I would advise the board to get solid answers to some tough questions before proceeding.

According to the proposal, rumors of which Tobias Buckell covered last week, AOL subscribers who don't use its dial-up access services -- this includes those with high speed or dial-up access from other providers -- will have free access to AOL content, including its e-mail services. The report estimates, that this will cost AOL $2 billion in subscription revenue.

I think it's smart for AOL to think about separate strategies for its Internet Service Provision (ISP) and Web content businesses. As I argued in my book, Net Profit, ISP is a structurally unattractive industry -- distinct from the potentially more lucrative Web content business. AOL remains heavily dependent on the less lucrative ISP business which accounted for 84% of its $8.3 billion in revenue -- the balance going to the advertising accompanying AOL's content.

If I was on the TWX board, here are the questions I would ask:

  • The plan assumes the number of subscribers would drop from 13 million to five million. But how much of its $7 billion in subscription revenue will AOL really lose under this plan?
  • What are the key risks underlying the assumptions of AOL's lost subscription revenue forecasts under the plan?
  • What percent of AOL subscribers will continue to visit AOL once they don't have to pay for the service?
  • What are the key assumptions underlying this forecast and how realistic are they?
  • How much will AOL be able to reduce its operating costs once it sheds these dial-up subscribers?
  • The plan forecasts a doubling in advertising and search revenue. Is this realistic? What is a worst case scenario and how likely is that?
  • What advertising rates will AOL be able to charge for access to the remaining visitors to AOL's content?
  • What will be the key elements of AOL's strategy for selling advertising?  
  • Will AOL be able to use any of Google's technology to attract visitors to AOL's content?
  • Does AOL have a sufficiently strong advertising sales staff to double its advertising revenue?
  • Will the profit from advertising and search really offset the lost profit from dropping eight million subscribers?

With AOL chief Jonathan Miller on the hot seat for a turnaround and the chance for TWX president Jeff Bewkes to succeed CEO Richard Parsons on the line, the board needs to push hard for solid answers to these questions before plunging in.

The ISP business has very thin profit margins while advertising could have far greater profit potential. If AOL can execute on this transition, it could be a good bet. But I would not take it without a truly independent assessment of the key risks.

I am neither long nor short shares of Time Warner. For more about me, click here.

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Last updated: November 23, 2009: 09:18 AM

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