In my last post I talked about how I thought eBay was going to be a generational winner, due to its popularity with a younger generation, and their ability to hold onto its user base throughout the rest of those user’s lives. The kind of company that you look back on and say “I wish I could have gotten in when they were just starting.” But the customer experience and management have gone sour, so I dropped the stock. There is another company that I thought went hand in handwith eBay, that year’s from now, when people thought of the internet, they would think of this company. AOL.
Rewind to 1990 and my first PC with a modem. After discovering local bulletin board services that you could dial on to with local phone numbers, I came across America Online. I was in awe of how much the service had to offer. It provided world wide web style navigation of news, movie reviews, etc and on top of it all, chat. AOL’s instant message service allowed for two AOL users to communicate directly just like it does today, but what brought all those users together was AOL’s chat rooms. Users would spend hours online talking to one another about their various interests. All of which was just fine, because it had the meter running. AOL didn’t offer an “unlimited” usage per month until much later, December 1996 to be exact.
During the 1990′s AOL enjoyed tremendous subscriber growth, and their stock went up and up and up. Profits and Revenue were growing by leaps and bounds. AOL was the de facto method for everyone(outside of college students with free internet from their schools) to get onto the internet. But being number one makes you a target, and here is where AOL began to fall apart. Competition started to grow in AOL’s core dial-up internet service. Companies like June, Netzero, and Mindspring all began offering lower-costing internet service. These services didn’t have the value added content that AOL offered, but at the same time the world wide web was developing into its own, and web sites were beginning to offer the same content that AOL had, but without the cost.
Then came broadband. Cable and phone companies began offering their DSL and cable modem services that far exceeded the speed of AOL’s dial-up service. This is where AOL really dropped the ball in my opinion. They made their bones as a company that exceled at getting their customers on the internet. Their management team did nothing to protect their business while broadband was developing in the US. The proof is in their results. AOL subscriptions today are a far cry from what they were in the late 90s. But AOL is not dead, far from it. Their AOL Instant Messenger(AIM) software and platform has millions of users. The problem is that it is free and that is another way in which AOL has dropped the ball. They have failed to monetize what is now its most popular service.
You may be wondering why I have talked so much and have not even mentioned their enormous merger with Time-Warner, and how popular opinion rates it as one of the worst mergers in the history of business. That is because I am trying to explain why the core business of AOL has gone from what should have been a generational winner, to a soon to be spunoff (in all likelihood) asset to any bidder willing to take on all of its baggage.
Was management asleep at the wheel? Where was the long term plan? How could the company have so much marketshare, and let is all dwindle away? How could it take paying subscribers and convert them to users of its free AIM service? Instead of looking back and saying “I wish I could have gotten in on that stock”, people will look back and say “I wish I had shorted that stock.”
AOL stock made a lot of people money in the 90′s. And it lost a lot of people money in the 00′s. I still have mine, although it now trades under the symbol TWX as Time-Warner had before AOL purchased it. In its current form, the stock may be worth holding onto as it has come down from such great heights and most of its value is in the Time-Warner side of things, rather than AOL.
It just goes to show you that even companies that look like they can just sit back and ride into the sunset on cruise control, can hit large bumps in the road. Who knows where AOL/TWX will be in 30 years from now. Maybe together or maybe separate, but the company that was once AOL will need to either shape up or ship out.
Edit: Just a day or two after I published this article, the motley fool site ran this story. A perfect example of the roller coaster ride of this company. Read it here.