AOL Growth Forecast Draws Skepticism
AOL Growth Forecast Draws Skepticism (TechNews.com)
By David A. Vise
Washington Post Staff Writer
Wednesday, March 17, 2004; Page E01
America Online has projected that its subscriber base will grow by about 20 percent, or 6.4 million users, over the next four years, a plan that some industry experts and Wall Street analysts said is overly optimistic given the Internet firm has lost members for five straight quarters.
The Dulles-based firm initially had estimated that it would grow in the United States from 26.6 million subscribers to its flagship product and other U.S. services to 33 million users by the end of 2007, according to internal company projections. Those numbers have since been revised downward to about 30 million, or an additional 3.4 million users.
To achieve rapid growth, AOL had been counting on signing up more than 11 million new bring-your-own-access (BYOA) subscribers. These computer users would get high-speed Internet access from a cable or telephone firm, and also pay $14.95-a-month to keep their America Online accounts. AOL has 3 million such users now, and had estimated that the BYOA figure would grow to 14.5 million by 2007, a compound annual growth rate of 48.2 percent, according to projections contained in an internal company document used for business planning.
AOL also hoped to build its subscriber base by selling Internet access under other brand names. The newest, Netscape, is a low-cost, $9.95 per month dial-up service AOL launched this year. America Online is counting on signing up roughly 3 million new Netscape customers in the growing low-cost segment by 2007, according to recent projections.
Meeting targets for growth, and holding onto more of its high-speed and dial-up users, are important goals for America Online, which derives most of its revenue from monthly subscription fees. If AOL is unable to regain momentum, it could be forced to slash spending further, which may aggravate the problem of subscriber drain.
Some analysts said AOL could be headed for disappointment trying to achieve that growth without massive price cuts, something the firm has resisted.
"I'm dubious," said David Card, an analyst with Jupiter Research.
"It is overly optimistic," said Youssef Squali, an analyst with First Albany Corp. "I think the rate of loss is going to accelerate. The bleeding will continue."
AOL declined comment on its projections. In its annual report filed this week, AOL parent company Time Warner warned of the adverse impact on AOL if its new efforts to win subscribers are unsuccessful.
The company's focus on its bring-your-own-access service is the centerpiece of chief executive Jonathan F. Miller's strategy for the company. Miller has said that while AOL grew up in a dial-up world, the shrinking of that sector and changes in technology point to a future based on AOL providing top-notch content, including music and video, that appeals to customers who buy their high-speed Internet access from somebody else.
AOL is beginning to show traction that supports Miller's view. While its dial-up base was eroding, America Online added 1.2 million bring-your-own-access subscribers last year. But a number of analysts said the subscriber numbers America Online had projected in the high-speed sector would mean that roughly half of all households that add high-speed Internet connections would also have to elect to stick with AOL.
"These numbers don't jive," said Tim Horan, an analyst with CIBC World Markets. "There is no way."
Meanwhile, AOL's $23.90 per month flagship dial-up business continues losing customers to faster and cheaper competitors. While the firm lost 800,000 dial-up users last quarter alone, AOL had projected that the losses will slow to about 1.3 million annually for the next several years.
Jessica Reif Cohen, an analyst with Merrill Lynch, said that AOL might surprise people by attaining some of its aggressive subscriber targets, even though her own estimates differ.
"They are spending a lot of money and making a big effort. They could be right. It is not insane," Cohen said. "So many things can happen over the next few years. What if new content develops that seems compelling? There are a lot of, 'What ifs?' I don't know. One could say it is possible. A little on the aggressive side, but possible."
Numerous Wall Street and industry analysts said AOL's projections look too rosy, given that AOL lost 2.2 million subscribers last year alone.
Jed Kolko, vice president of Forrester Research, said his projections call for AOL, and other firms with dial-up subscribers, to lose about half of those users by 2007. For AOL, that would mean a decline from 21 million dial-up users to about 10.5 million. Internal company documents had projected that AOL would have about 16.2 million dial-up users in 2007.
Analysts said one way AOL might be able to increase its high-speed business more quickly is to forge marketing partnerships with cable or telephone firms. Microsoft's MSN subsidiary recently struck that type of partnership with Verizon. AOL last week announced an agreement with Covad Communications Group that would make it easier for subscribers to stick with AOL and sign up for a high-speed connection at the same time.
Thus far, though, such big-time partnerships have been slow to materialize, as growing cable firms and telephone firms have resisted sharing revenue with the nation's biggest Internet service. AOL has even been unable to persuade Time Warner Cable to market AOL as a primary part of its high-speed Internet service, even though both are part of the same giant media company.
In recent months, AOL pulled the plug on its own branded $54.95-a-month high-speed Internet service. That marketing effort was aimed at selling users high-speed access, along with America Online content and e-mail addresses, through one-stop shopping, but it didn't find enough takers.
Still going is a marketing partnership with Wal-Mart, the nation's biggest retailer. After giving away millions of free disks in Wal-Mart stores across the country, AOL's Wal-Mart Connect service has about 500,000 customers; America Online projected it will grow modestly in the years ahead, according to internal AOL documents. Meanwhile, its CompuServe brand, with about 1.2 million users, will shrink to 400,000 by 2007, according to projections.
Some analysts pointed out that America Online has a powerful marketing machine, plenty of cash and a stronger ability to increase its subscriber base than is generally recognized. They noted that one-time rival Microsoft has given up on the Internet access business and that AOL has a proven ability to continually sign up new dial-up subscribers.
"You have to take it with a grain of salt," Oppenheimer analyst Peter Mirsky said of AOL's internal projections. "I'm not willing to bet against AOL. They were supposed to be dead several times over. The likelihood that they could remodel themselves as a differentiated product in this space is something I would not want to dismiss."
March 17, 2004 at 09:38 AM in Business Models | Permalink
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