AOL Respun, Will It Work This Time?

There was a time when simply providing access to the Internet was enough for a company to reap wild stock valuations and no other company did as much reaping as AOL. AOL achieved its success by delivering Internet access to the masses using existing telephony dial-up circuits. In 2000 AOL used its grossly inflated stock value to acquire Time Warner, an old world media company looking to re-brand itself by leveraging new technology. 

A key limitation however faced by AOL and other Internet access providers was that standard dial-up circuits offered only low bandwidth. This was fine as long as used were only sending or receiving simple files like text. Over a short period of time, Internet based content became richer and dial-up access proved inadequate causing lengthy file download and upload times.

Broadband circuits like DSL offered cheap high-speed Internet access. Looking to enjoy the benefits of rich media, customers rapidly moved away from dial-up to high-speed broadband as their preferred Internet access technology. As a result, AOL has seen declining subscription revenues for years. Today only those customers in areas where broadband service is unavailable available (e.g. in rural areas) use dial-up because it is the only service available. With the growth of rural service providers, even this market is declining.

AOL’s traditional business model which was based on subscriptions is dead. Now it is pursuing ‘online media content and branded display advertising ads’ to create new revenue streams. The challenge for AOL is that Internet users are very discerning their strategy is directly linked to its ability to draw users. And to make matter worse, there is so much free content on the Internet, revenue models are difficult to realize.

Attracting users is in itself not at easy task. Even if AOL is successful at drawing users, there is no guarantee of profitability. Yahoo’s recent experience is an example of the challenge AOL faces: Yahoo being the second most visited Internet site (next to Google) found itself unable to be profitable from ad revenue and content delivery and is attempting to rebrand itself.

Almost ten years since it acquired Time Warner – AOL is now being spun-off to be on its own. The reward for Time Warner shareholders – 1 share of (new) AOL stock for every one owned. As a rule, companies don’t spin-off they’re well positioned entities. Time will tell if its stock value will be worth more than the drop in Time Warner stock value. However, AOL is venturing into a market with low barriers to entry, low differentiation amongst competitors and high levels of consumer power. This isn’t a good combination for AOL’s prospects or those owning its stock.