Snagged in the net?


AOL: The computer service is twice as big as its two biggest rivals combined. And yet the Internet has cast a shadow over its future.

July 28, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

A photo caption identifying America Online's president, Steve Case, was mistakenly omitted from an article on the computer service on Page 1D of today's editions.

The Sun regrets the error.

For a man who has lost $3.2 million this month, Steve Case is a pretty calm guy.

The head of America Online Inc. is trying at once to navigate the riptide in the technology stock market and the tidal wave that is the Internet. His company has added 5 million customers in two years, yet his stock is down $41 a share over the past two-plus months.

Sound confusing? It is. AOL has a lot of Wall Street's better minds tied up in knots.

The world's biggest online services company is at a crossroads. AOL dominates its industry, but to a market lately ensnared in the World Wide Web, many question whether the online service industry matters anymore.


"The big issue is, is this a business that's going to go away because of the Internet or is this a business with intrinsic value?" says Lise Buyer, technology analyst for T. Rowe Price Associates Inc. "I believe there's a place for AOL. Like everyone else, I'm having difficulty valuing the stock."

Home computing is changing, almost as fast as things once had to change to make AOL possible in the first place. There is abundant skepticism that AOL can keep up the pace that has taken it from 900,000 customers to 6.2 million since 1994, and there is an array of reasons to take the skeptics seriously -- or not to.

Things also are changing as fast inside AOL as in cyberspace itself. In the past six months, it has hired a president who left four months later, overhauled the software its subscribers use and restructured its pricing in what analysts describe as a bid to hang on to heavy users who find the freewheeling Internet cooler and cheaper.

Insiders have been selling shares, which skeptics take as a sign of trouble. Another sign is that as fast as AOL adds subscribers, it loses them at a slower but still rapid clip, fueling doubts that recent growth figures will pass the test of time.

AOL's biggest competitors are betting that the Internet will change the way they have always done business, a conclusion AOL is resisting.

And short sellers and others say AOL's accounting overstates its profits and question whether there is a real business under all the hype.

"Ask what the bull case is, other than bull generally," demands David Rocker, a New York hedge fund head who says AOL is still one of the market's most overvalued stocks.

AOL stock has fallen to $30 from $71 since May, from $43 since July 1 as technology stocks take the brunt of Wall Street's retreat. Case, AOL's president, took a $2.4 million loss this month on his 186,554 shares of stock. Add his 3 million options and the loss is more like $40 million. Not a great four weeks.

Yet, Case, who turns 38 next month, has been there before. He has weathered similar pessimism ever since the company was founded in 1985.

"I think we've seen this movie before," Case says. "Last year the fear was that Microsoft would crush us. Two years ago, it was media companies like News Corp. Three years ago, it was interactive TV."

There are certain things for which no one will deny America Online credit. Dulles, Va.-based AOL has had a remarkable run. It was founded to serve users of two computer systems people barely remember -- the pre-MacIntosh Apple II and Commodore -- and has outstripped competitors such as Prodigy and CompuServe that were backed by IBM, Sears and H&R Block.

It expects to have 10 million customers by next year. Its revenues for the nine months that ended in March were $759.4 million. It is an essentially idiot-proof way to exchange e-mail, chat with other users (about 60 percent of the use comes from e-mail and chat), and get news and information.

"There's probably something to the fact that we have more customers than all [other online services] combined," Case says. "Two years ago, we were a distant third."

New Age infotainment

It's cold but true: AOL's business is less about selling high technology than New Age infotainment. It can be used to surf the Net, but the key to understanding AOL's view of the world is to grasp that it works, above all, on the premise that the communications world is changing less -- not more -- than many people think.

The dispute over arguments like these is growing as AOL does. Prodigy and CompuServe have announced that they are moving away from the proprietary software they have used to offer their services in favor of using Internet standards and inviting subscribers to gain access to their service through the World Wide Web.

In essence, they are betting that AOL isn't all that has swiped their market but that the Internet is bowling them over, too. They think they have to ride the emerging wave or else.

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