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“AOL IS ABOUT TO GO AWOL”

October 2000

Escaping Groupthink

In December (1999) I panned AMAZON.COM (AMZN). It has fallen like a rock. Virtually every other Wall Street analyst was singling its praises. Turn your attention next to — and your portfolio away from — AMERICA ONLINE (AOL.)     

           AMZN was 106 when I advised you to dump it. It's 38 today. AOL has fallen from 94 to 54 over that same time frame. So isn't the worst over? No. AOL is down in sympathy with the other, lesser-capitalized tech stocks. It's down because tech is down. And it's down because there is some question as to whether or not the US and EU will allow the takeover of TIME WARNER (TWX.)   My concerns about AOL have nothing to do with the state of tech stocks. And they have nothing to do with their "merger" with TWX. Worse — I believe their business model is unsustainable.

           There are plenty of 800-pound gorillas out there today. We own a number of them. We buy them right and don't worry about the ups and downs of the market in the short term. Why? Because we believe all have sustainable business models that will allow them to steadily rise over time, regardless of the short-term fluctuations. But I'd advise you to drop any one of them like a hot potato if they ever lost that competitive advantage.  AOL has lost the bubble. The days of competitive advantage for them are history. They still have deep pockets. But they have their hands full today and I believe they are going to have their pockets emptied in just a few short years.

      How can this happen, you ask? After all, with more than 24 million subscribers, AOL is the world's #1 provider of online services. Its CompuServe Interactive Services subsidiary adds yet another 2.8 million paid subscribers. If successful, AOL's takeover of entertainment giant TIME WARNER will make the company the #1 media company in the world. The company also owns Netscape and all that entails, and has entered into a joint venture with Sun Microsystems to develop e-commerce software. AOL bolsters its Web presence through its AOL Instant Messenger, AOL.com portal, Digital City, and AOL MovieFone properties.  A quick visit to their corporate website shows their many strategic alliances, their lead internationally, and their prowess at the leading edge of technological innovation in terms of Internet delivery mechanisms. How can they fail?      Easily. The same question was asked about PENN CENTRAL, CONTROL DATA, UNIVERSITY COMPUTING, AMERICAN COTTON, and plenty of others.     

           The problem, in a nutshell, is that AOL charges money in a free world. Back when AOL was founded, everyone who wanted to access the Net had to pay for the service from CompuServe, AOL, AT&T, a regional Bell, or some other ISP.   But today, scores of other firms offer cheap or free (advertiser-supported) e-mail, Internet access, home pages, and everything else. In a nutshell -- what AOL has going for it today is consumer inertia. But who is going to continue to pay $250 a year to AOL when they can have an ISP that connects as fast, is as reliable, and gives as much content, for half that price?     

           True, AOL generates much of their content themselves but, even if they succeed in acquiring TWX, they will still control just a very small subset of the information available on the Internet -- the world's biggest library. They also make a big deal of their reliability and connect speed. Yet millions of former AOL and other for-pay ISP users have abandoned in droves.     

           I count myself among those who believe I can spend $250 better on my behalf than can Steve Case and Co.  I may be among the first movers, but I certainly won't be the last. How about you? Is the exclusive content and instant messaging you have with your current ISP what keeps you there at 20 bucks or more a month? Or is it simply that you haven't seen how good these other ISPs are?
      I don't believe AOL will disappear. Especially if they take over TWX, they can reinvent themselves as an entertainment provider. But neither do I believe they will continue to be the #1 ISP in the world. We are now seeing the zenith of their power and influence.      Sell it now and move on to greener pastures... < >

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