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============================================================================= Seidman's Online Insider ============================================================================= Weekly Summary of Major Online Services and Internet Events ----------------------------------------------------------------------------- Vol. 3 Number 19 May 12, 1996 ============================================================================= Copyright (C) 1996 Robert Seidman (robert@clark.net). All rights reserved. May be reproduced in any medium for non-commercial purposes, so long as attribution is given. IN THIS ISSUE ============= -America Online: Good News/Bad News -Earnings announced w/Record Revenues -Deal for Japanese AOL Announced -New Pricing Announced -Stock Slides -CompuServe Stock Watch -Here Comes Da Judge -Stock Watch -Disclaimer -Subscription Information. Part I America Online: Good News/Bad News ================================== *Earnings Announced w/Record Revenues America Online reported net income of $15,127,000, or $0.14 per share (which beat analysts prediction by a penny), for the quarter ending 3/31/96 after taking into account special charges of about $850,000 relating to the acquisition of Johnson- Grace, Inc., as well as goodwill amortization of $1,825,000. This was versus a loss of $3.3 million or $0.05/share (which included a $7.6 million charge for acquired research and development) the previous year. Revenues rose to $312.3 million, a 185% increase over the same quarter last year. Revenues from merchandising, advertising, transactions and network access were $26.9 million. Strong first quarter growth due to high sales of personal computers during the holiday season led to AOL adding 905,000 net subscribers for the quarter ending 3/31, which according to the AOL press release put them at "approximately" 5.5 million subscribers at the end of March. Though this is all good news for AOL, the best news was perhaps this blurb from the press release: "In the year since it acquired Advanced Network & Services, Inc. and started to build its own dial up TCP/IP network, the Company's AOLnet has grown to more than 100,000 28.8 kbps modems deployed in more than 400 cities throughout the United States. Just six months ago, AOLnet comprised fewer than 25,000 modems and in that time traffic on the Company's network has leaped from about 20 percent to greater than 50 percent." This is great news for AOL because one of their biggest expenses is what they pay SprintNet for network access. Everything they can shift over to their own network represents significant savings for them. *Deal for Japanese AOL Announced* America Online announced a joint venture with trading giant Mitsui & Co., Ltd., and Nihon Keizai Shimbun, Inc., (Nikkei), which publishes arguably Japan's leading business newspaper. The joint venture hopes to offer an interactive consumer online service in Japan with localized, Japanese language content by the end of this year. AOL will own 50% of the venture, Mitsui will own 40%, and Nikkei 10%. Mitsui and Nikkei will contribute more than $56 million (6 billion yen) to fund the launch of the service. Additionally, Mitsui has purchased approximately $28 million (3 billion yen) of convertible preferred stock in America Online. AOL's European partnership with Bertelsmann has already kicked off in several European countries. AOL continues to take the path of strategic partnerships in key international markets. For more information on the Japanese online market, check out the page from e-media at < http://www.e-media.com/jpn >. You have to suffer through the first part of the page which is basically advertising for, well, e-media! But, there is good info and links to the various players. *New Pricing Announced* Last week you may recall reading these words from AOL CEO, Steve Case: "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," said Case by e-mail. A few days later, Mr. Case was singing a slightly different tune when the company announced its "20/20" plan. The new plan will be available effective July 1, offering 20 hours of access for $19.95 a month. Additional hours beyond 20 hours will be billed at $2.95/hour. "Loyal members who have personalized the service for themselves, shared AOL with families and recommended AOL to others are a big part of our success. With the new plan, we are saying 'thank you' to these members and making it easier and more affordable than ever before for them to share the magic of AOL with their families," said Case in the press release on the new plan. Now the two Case quotes may seem sort of at odds with each other, but not necessarily. Besides, you don't get to be a multi-millionaire CEO of a company with almost a $5 billion market value without being a pretty smart guy. Unfortunately (at least for me), part of being smart also means sometimes being elusive, and Case was pretty slippery when I pressed him last week. Case may be right in saying that a new price point won't attract more customers. But in the short term, this plan seems more about keeping existing customers and reducing churn than attracting new customers. *Stock Slides* At one point in the week, the stock got as high as $71/share. Seemingly it soared on rumors of the Japanese venture as well as predictions for a good quarterly report. The slide seemed to start on worries over the new pricing plan. It was later compounded, seemingly, by a Reuters story which quoted traders quoting Mary Meeker's earnings release analysis. The Reuters story started like this this: -- " Shares of America Online Inc. continued their decline after falling ten percent Wednesday, and traders said that a Morgan Stanley analyst cited concerns about a higher "churn" rate of customers. Churn rate refers to customers who sign up to subscribe to a service and then quickly leave and go to another one. Mary Meeker, the Morgan Stanley analyst, also said that the company's earnings were a little stronger than she had expected, but that she believed the stock should take a breather, traders said. Meeker was not immediately available." -- Thanks to Meeker, I actually got my hands on a copy of her earnings analysis, and while there is nothing incorrect in the Reuters story, it left out most of what Meeker really had to say. On the whole, the analysis from Meeker was nothing but good news for AOL. Of course, the title of her analysis was "EPS Strong; Stock May Have Lost Some Mo'", so it isn't hard to understand why someone might have jumped at the stock price comments. Indeed Meeker did say that AOL management did "caution about spring/summer seasonality and a higher rate of churn than usual in the month of April." "This, combined with a big recent run up in stock price (shares hit an all time high on 5/7/96 at $70 but traded down to $63 post EPS call) could, in our opinion cause AMER shares to stall for a while," said Meeker in her report. "AMER shares have been stoked by loads of good news and positive momentum over the past 3 years, and while the news is still great, we think it's gone from super-great to just great. And we know what that can mean for momentum stocks...," said Meeker. Some General Comments... Meeker's report stated that Morgan Stanley continues to believe AOL will hit their target of 10 million subscribers by the end of June 1997. With AOL saying they're near the 6 million member mark, they need to add a net of 4 million subscribers in the next 13.5 months to hit 10 million by the end of June, 1997. I believe with increased international subscriptions, they can achieve this goal, but I don't see how they can do it based on US growth alone. AOL had excellent growth for the quarter ending 3/31, but that was helped tremendously by the holiday rush. Even AOL warns about the seasonal trends. In the post-holiday quarter, they added 905,000 accounts. They did not announce 6 million US subscribers by close of business on 5/10, and if they had, I would have been surprised because that would mean they are outpacing the 905K growth (about 452,500 net subs every 45 days). In order to hit the 10MM target by the end of June, 1997 they'll need to add about 888,888 customers per quarter (roughly 296,300/mo.) If the quarter ending March 31 represents a stellar quarter, I think averaging growth of 888K subs/quarter may be a difficult task. However, if they can grow at the rate of about 100K/quarter or better in Europe (and later on, Asia), they shouldn't have any trouble making the 10MM target. As for the price plan, I know many of you are thinking, "What crap! That's not good enough." We may be in a world where a lot of us want everything at one low price-- including unlimited AOL, but that's not necessarily the real world. At least not yet. Though I still suspect that we'll see some sort of unlimited plan for accessing AOL from other ISPs, you're not going to see such a plan direct from AOL, which provides access, too, anytime soon. In fact, you won't see it until AOL absolutely has to do this to succeed. Given the current data, there's nothing to indicate they have to do this at all right now. For all the talk about churn, as long as they're adding subscribers a lot faster than they're losing them, life is still pretty good for them. When the day comes that they near losing subscribers faster than they're picking them up, we might expect to see a "real" value plan that includes unlimited access. But you won't see that as long as new growth is way ahead of churn. The 20/20 plan is a very smart slow-roll for AOL. It won't please the most hard-core of users (though they should be happier than they are today), but it will please MOST of their heavier users. It will appeal to everyone currently using around 20 hours, and will appeal to most of the folks using more than 20 hours who do NOT want to leave AOL. Last week I suggested such a plan may hurt their financial performance, but the news that more than 50% of subscribers are now accessing from AOLNet (at a cost to AOL of less than half of what they pay SprintNet, according to Mary Meeker), can go a long way in offsetting the potential loss of revenues. There is also the suggestion that some people will sign up for the 20/20 plan and not use all 20 hours, and I'm sure this will happen at least to some extent. Combined savings gained in the subscriber shift to AOLNet and expanding revenue from non-core business -- especially advertising, should also help offset any revenue impact of the new 20/20 plan. Getting new customers is only part of the game, AOL is now shifting to the mode of figuring out how to keep them. Both from a technical side and a management side they are working to improve the companies infrastructure and Case maintained in the companies conference call that they will continue to strive for better customer support. Additionally, the 3.0 release of AOL software, currently in beta testing, gets around the number one complaint I hear about AOL -- forced graphics download. CompuServe Stock Watch ====================== I've received many letters explaining to me why the CompuServe IPO was a great IPO. Remind me to write one back to them that says, "HA!" Seriously, I understand that CompuServe did well because they brought $33/share (the IPO price) into the company. Many of the letters I received suggested, in well reasoned manners, that a soaring stock price only means anything if there are secondary shares offered. From where I sit, that's a pretty huge thing because, H&R Block only spun off about 18% of the company, and is hoping to sell the remaining 82% over the next year. Had the stock soared, at least it would have had a nice place to fall down to. But it never got over $35 and at the market close on Friday, it was down to $25.50, about 23% less than the IPO price. Now if it were me, I wouldn't be too thrilled that in the several weeks following the IPO, the perceived value of my company was down 23% when I still was trying to sell stock for the remaining 82%. Here's hoping that CIM 3.0 is coming SOON... In other CompuServe news, executive VP and chief technical officer Sandy Trevor resigned from the company to join a family business effective May 3rd. Trevor, who joined CompuServe in 1971 is credited by CompuServe for the invention of multi-user chat, formerly known as CompuServe CB. Sources tell me that along with Trevor goes new technology that has as much of 5 years worth of work in it. Replacing this new technology is allegedly a new project code-named "Red Dog". I don't know about the project, but I like the code name a lot! Here Comes Da Judge... ======================= ...Or the judges, in this case. The evidence has been collected, the arguments have been made. Now it's time for a panel of three judges, U.S. District judge Stewart Dalzell, Dolores K. Sloviter, chief judge of the U.S. Third Circuit Court of Appeals, and U.S. District Judge Ronald L. Buckwalter to decide whether the "communications decency" legislation passed as a part of sweeping telecommunications reform earlier this year, is constitutional. The hearings, which took place over a 5 day span which began in March and ended last week, clearly left the judges with many questions regarding the constitutional validity of the "indecency" laws. A ruling is expected sometime within the next several weeks. Separately, our friends at the American Family Association (AFA) are now whining because the FBI refused to investigate allegations that CompuServe has violated the Communications Decency legislation by posting nude pictures on their service. Recently, the Justice Dept. advised the AFA that until the case mentioned in the paragraph above is resolved, they had agreed not to prosecute or investigate based on the new law. So the Justice Dept. forwarded it to the FBI, and apparently the FBI smelled this rotten egg a mile away, threw up their hands and said NO WAY! It's getting to the point where Patrick Trueman the director of governmental affairs for AFA is starting to get on my nerves. I mean, I am all for families, and I am all for kids being protected from things that maybe they aren't ready to see. I'm all for that. But the weekly whiny press releases from Trueman are starting to suck. Still, Trueman came through with one important bit of information in this week's rant. "The fact that CompuServe allows parents to block pornography is not sufficient to block liability under the Communications Decency Act," Trueman said. "Congress anticipated that on-line companies would block out all pornography that they may provide to their users on their service unless an adult specifically requests it. CompuServe has turned the law on its head, by providing pornography to all its users, including children, claiming that it should be the parents' responsibility to block out such material," said the press release. I must have missed that part of the congressional coverage and it seems to me that most of congress doesn't have enough familiarity with the services to have anticipated any such thing. Now the one interesting nugget from the release: "By CompuServe's own figures, far less than 1% of parents have initiated parental controls (only .128%)," said the press release. If true, that is a very interesting figure and I'd agree that the online services need to do a much better job of forcing parents to make a decision. But I think Trueman goes to far when he suggests that the reason that the parental control usage is so low is "likely because few parents are aware that their children have unlimited access to pornography on CompuServe." You would think CompuServe was running the "Sex Shack" or something. It's just skin. No kiddy porn, no sexual acts, no animals.. Just naked people. Do parents have a right to protect their children from "just naked people"? Sure they do, and CompuServe gives them a way to do this. Does CompuServe (and other services) have an obligation to do a better job of making parents aware of the content control tools? Probably, but either way CompuServe is a far cry from a service with unlimited access to pornography. In an unrelated development, CompuServe announced an expanded commitment to the Platform for Internet Content Selection (PICS) rating platform and announced that all CompuServe content on the Internet would be PICS compliant by July 1, 1996. Additionally, CompuServe announced a corporate sponsorship of the Recreational Software Advisory Council on the Internet (RSACi) content-labeling advisory system, a PICS-compliant rating system that will be used to rate CompuServe's Internet content. --- TV GUIDE is now Online ALL THE WAY. They've been teasing us with bits and pieces of TV Guide at the I-Guide site at < http://www.iguide.com >, but now the whole thing is there at < http://www.tvguide.com >. Well, almost. As of Sunday, the Week beginning 5/12 was not up yet. I'll cut them some slack for this week since they have a Teri Hatcher photo on the main page... Stock Watch for the Week Ending May 10, 1996 ============================================ In its May 13 issue, Barron's reports on a survey from portfolio managers who ranked Yahoo and Netscape as their least favorite stocks! According to Barron's most of the managers were nuetral on the two stocks, but that among those who weren't nuetral, the bulls outnumbered the bears. Intel was the favorite, followed by Motorola. This % 52 52 Week's Change Week Week Company Name Ticker Close 1 Week High Low ============ ====== ====== ====== ====== ==== @Net Index IIX $263.12 3.8% $263.12 $185.76 America Online AMER $58.13 -7.2% $71.00 $16.75 Apple Computer AAPL $27.25 14.1% $50.94 $23.00 AT&T T $61.13 2.9% $68.88 $49.13 BBN Corporation BBN $27.00 -2.3% $48.75 $16.50 CMG Information Svcs. CMGI $32.00 7.7% $50.25 $5.50 CompuServe CSRV $25.50 -3.8% $35.50 $25.00 CyberCash Inc. CYCH $39.25 11.3% $64.50 $24.50 Excite Inc XCIT $17.19 -10.7% $21.25 $13.13 FTP Software FTPS $9.25 -6.9% $40.63 $8.13 H&R Block HRB $35.13 0.0% $48.88 $31.50 IBM IBM $106.38 -1.6% $128.88 $83.13 Lycos Inc. LCOS $17.50 4.5% $29.25 $14.00 MCI MCIC $29.13 0.4% $31.13 $19.09 Mecklermedia Corp. MECK $16.00 3.2% $24.38 $8.50 Microsoft MSFT $114.88 3.6% $115.25 $78.88 Netcom NETC $35.63 -6.2% $91.50 $19.22 NetManage NETM $14.38 1.3% $34.00 $9.38 Netscape Comm. Corp NSCP $60.25 6.6% $87.00 $22.88 News Corp. NWS $22.25 -3.8% $25.13 $18.50 Oracle Corp. ORCL $33.88 1.7% $36.66 $21.25 PSINet Inc. PSIX $16.19 -4.8% $29.00 $6.75 Sears S $51.13 1.8% $53.25 $26.81 Spyglass Inc. SPYG $30.00 -4.8% $61.00 $13.25 Sun Microsystems SUNW $57.00 -0.7% $59.13 $19.75 UUNET Technologies UUNT $61.63 -2.2% $98.75 $21.75 VocalTec LTD VOCLF $11.25 0.0% $20.75 $8.50 Yahoo YHOO $31.25 -2.3% $43.00 $24.50 Disclaimer ========== I began writing this newsletter in September 1994, at the time I was working for a technology company now owned by MCI. In March 1995, I began working for International Business Machines Corporation. I speak for myself and not for IBM. Subscription Information ======================== To subscribe to this newsletter by e-mail: Send an e-mail message to: LISTSERV@PEACH.EASE.LSOFT.COM In the BODY of the message type: SUBSCRIBE ONLINE-L FIRSTNAME LASTNAME Example: Subscribe Online-L Robert Seidman If you wish to remove yourself from this mailing list, send a message to: LISTSERV@PEACH.EASE.LSOFT.COM and in the body of the message type: SIGNOFF ONLINE-L . A Web version of the newsletter is available at: <http://www.clark.net/pub/robert>.