Cover

Just in Case the Bubble Bursts

AOL made its move before its high-flying share price could be forced to earth

Ross Laver January 24 2000
Cover

Just in Case the Bubble Bursts

AOL made its move before its high-flying share price could be forced to earth

Ross Laver January 24 2000

Just in Case the Bubble Bursts

Cover

AOL made its move before its high-flying share price could be forced to earth

Ross Laver

“Use it or lose it.” The

phrase did not originate in the technology sector, but increasingly it's an article of faith among executives of high-flying Internet companies. What it implies is that firms whose stock is overvalued because of the current mania for all things Internet should use those shares as currency to buy other companies while they still can. Otherwise, there’s a risk they may “lose it” if and when the Internet bubble bursts and stocks like eBay, Yahoo! and Amazon.com return to earth.

Last week, it was Steve Case’s turn to use it, and he did so in spectacular fashion. But almost forgotten amid the hype surrounding America Online Inc.’s $ 156-billion takeover of Time Warner Inc. was one key fact: for Case, marrying AOL to one of the world’s leading publishing, cable and movie empires is, above all, a defensive move. Sure, it’s possible that the whole will be greater than the sum of the parts—providing Case and his counterpart at Time Warner, Gerald Levin, can reconcile the wildly different cultures of a 78 -yearold media conglomer^ ate and a 15-year-old online service that hitherto has always put technology ahead of content. For now, however, the real significance of the Time Warner deal is that it solves a pressing problem for Case, one that down the road might have threatened AOLs viability.

The problem is that AOL, as the world’s biggest Internet service provider, earns most of its revenues from the monthly fees it charges subscribers for dial-up access to the Net. Up to now, that steady stream oi income has been a strength; many other Net firms,

after all, have little or no revenues beyond the relatively modest advertising dollars they collect from their Web sites.

But lately, AOL has watched while one competitor after another has offered free Internet access, directly undermining its business model.

One of the first companies to join the free ISP movement was a California start-up called FreePC Inc., backed by former Hollywood mogul Barry Diller and his company, USA Networks. A year ago, Free-PC began offering free computers and Internet access, in return for which users have to endure onscreen ads tailored to their interests and buying habits. Although Free-PC no longer accepts new subscribers, similar free-access deals are available from firms such as NetZero Inc., lstUp.com Corp. and Freei.Net, attracting millions of consumers.

The latest and biggest entrant in the free ISP market is Excite@Home, jointly controlled by AT&T Corp. and many of North America’s largest cable operators. Earlier this month, Excite@Home said it will soon offer free Net access through dial-up connections in most of the United States and Canada. People who want a high-speed connection will still have to pay about $40 a month to use Excite ^Home’s cable broadband network.

For the record, AOL says it isn’t troubled by the free ISP trend. But the company may be more concerned than it is prepared to admit. Notably absent among the advisers that participated in last week’s Time Warner acquisition was Goldman Sachs Group Inc., which has worked for AOL before. Speaking to The Wall Street Journal, AOL executives noted that the securities firm recently led a $230-million share offering of NetZero, a move that appears to have hurt Goldman’s relationship with the online giant.

To conclude that Case saw the writing on the wall from the free ISP trend is perhaps going too far: in an industry that is constantly reinventing itself, he does, after all, have a welldeserved reputation as a survivor. But there’s no doubt that AOL was facing a formidable challenge. By buying Time Warner, Case managed to convert a huge block of his company’s stock into hard assets. Better yet, the deal gives him access to Time Warner’s U.S. cable network, which will make it easier for AOL to roll out its own high-speed service. For that, Case can thank the investors who bid up AOLs stock in the first place. With paper like that, who needs money? G2