David Cassel (destiny@crl.com)
Sun, 20 Oct 1996 01:06:16 -0700 (PDT)
On May 8, AOL announced a joint venture with Mitsui & Co. Ltd. to create a
service in Japan. Press accounts reported "the Mitsui-AOL venture expects
to have more than 1 million subscriptions in Japan over the next two
years".
Let's see what they're up against.
NiftyServe 1.83 million
NEC Corp.'s Biglobe 1.77 million
Asahi Net People 630,000
ASCIINET 120,000
Just-released figures for Japan show that in June there were a total of
just 5.7 million people online. AOL apparently targeted one million
subscribers because that was the number of subscribers on NiftyServe at
the time--but since then, NiftyServe's number has actually risen to 1.8
million. Ironically, NiftyServe pays royalties to...CompuServe.
High predictions aren't new. AOL is telling American reporters they'll
reach 10 million subscribers by this summer. Since they only added
700,000 in the last six months, adding 4 million in the next 8 seems
unlikely. When questioned about that in a conference call earlier this
month, Steve Case explained how he thought AOL would reach that level:
"word of mouth".
More than 80% of Japan's subscribers come from small services with less
than 10,000 subscribers each. The same is true in the U.S.--AOL is the
largest online service, but millions use pure-internet accounts from small
local ISPs (Boardwatch magazine lists over 2200). Just in Japan, there
are 52 internet companies, with 300 more saying they'll start a service in
the future.
With even Prodigy and MSN offering flat-rate net access, there's now more
pressure on AOL. One financial analyst told me businesses traditionally
try to expand overseas when competition heats up in their own country.
(When AOL announced the Japanese expansion, they also announced they were
planning to expand into the questionably-lucrative India market.) But
there's a problem even with that. All AOL's European services could cost
27.5 percent more in a few months due to a new tax being considered.
AOL has alot at stake overseas. A Forbes article called "Subscribers
Today, Cost Manana" noted that AOL has already borrowed against their
future earnings. "There's no harm done so long as the number of loyal
subscribers continues to climb. But...what hapens if subscribers last, on
average, less than 24 months? Then America Online would have to write
down the paper asset it calls 'deferred subscriber acquisition costs.'"
(10/23/95)
At the time, that number was $77 million. (The "deferred subscriber
acquisition costs" in the last update.) As the problem worsened, Business
Week wrote that "Case is running a high-wire act," saying AOL "needs to
sell stock periodically to meet its bills."
The whole setup depends on continuing rapid growth: A slowdown in
subscriber sign-ups, a price war that drives down per-subscriber revenue
or, worst of all, a loss of subscribers could spell real trouble...
The article (4/15/96) goes on to point out that at the time, AOL was
spending $93.00 to acquire each new subscriber--and their deficit had more
than doubled, to $189 million. "That adds up to a huge gamble... If
growth slows, those deferred costs could erase future earnings."
Since then, the deficit has risen past $300 million, and the cost for each
new subscriber is $224. Allan Sloan wrote in Newsweek (10/23/95) that AOL
was "covering its cash deficit with money from stock sales", raising $100
million dollars in a stock offering they were too desperate to delay, even
though the market was down. "If AOL can't sell stock, it's got big
trouble."
But the odds of a new stock-split are low. AOL's stock closed this week
3/4 a point above last week's close--which at the time was a one-year low.
(Until the next day, when AOL went lower still.) One Usenet post summed up
the situation: "AOL needs to come up with $300 million SOMEWHERE... Maybe
that's why they're expanding into India..."