AOL: Higher fees, but no more cash?

Summary:America Online stock surged 12 percent Monday to an all-time high of 110 7/16 on news that the online service will raise rates and has shuffled top management assignments. But did the market overreact?

America Online stock surged 12 percent Monday to an all-time high of 110 7/16 on news that the online service will raise rates and has shuffled top management assignments. But did the market overreact?




America Online restructuring costs jobs at CompuServe and costs customers too -- ZDNN News Special.


Are AOL subscribers the victims -- or cause -- of the rate increase.




Some observers say the stock's jump was overdone, since the price change is not expected to boost the bottom line, and the new management assignments, in which one-time MTV executive Robert Pittman becomes president of the company, are not very different from the old ones. (In a separate move, the company also announced layoffs of 500 positions from its CompuServe unit.)

To be sure, the price change, in which AOL's standard monthly flat-rate fee will rise to $21.95 from $19.95, may bring substantial new revenue. Indeed, Abhishek Gami, a stock analyst with Nesbitt Burns in Chicago, said the price increase could bring in $230 million in additional revenues over the next 12 months

That works out to additional income of $1.84 per share - a notable sum, since America Online is expected to post earnings of only 16 cents a share in a report for the December quarter due out after markets close Tuesday. And AOL is expected to earn only $1.66 a share in the fiscal year ending in June 1999, according to the consensus estimate by Zacks Investment Research.



Hey, AOL users: Will you cancel your subscription now that prices are going up?:


Yes: There are plenty of good $19.95 (or cheaper) alternatives available.


No: AOL is worth the extra $2 a month.





But AOL executives said the additional revenues will not boost the bottom line. Instead, AOL Chairman and CEO Steve Case said the company needs the additional fees to serve a subscriber base that's staying logged on longer. The average subscriber now surfs AOL for 23 hours per month, he said, compared to seven hours in 1995, before the company moved to flat-rate pricing.

"The price increase basically will not drop to the bottom line because of the increased network costs that we are experiencing," Case told the Reuter news service.

(America Online said it will make no changes in its current $9.95-a-month plan for access to AOL's proprietary content only and its $4.95 "light usage" plan of three hours plus $2.50 for each additional hour. The $2 increase in the charge for unlimited monthly access to AOL and the Internet will take effect in the April billing cycle.)

But even though AOL may need the fees to cover costs, the price increase raises competitive questions that could have repercussions throughout the online industry. Indeed, some analysts said it was possible that major online services, many of which have been struggling to break even, will follow AOL in increasing prices.

But executives at Earthlink, AT&T and the Microsoft Network said they had no plans to increase prices. (Microsoft is a partner in the joint venture that operates MSNBC.)

"AOL's price increase makes it all the more attractive for people to convert to an Internet service like Earthlink," a spokeswoman for the Pasadena, Calif.-based company said. Monday the company put an "AOL Members, don't pay more" section on its home page to lure subscribers from AOL.

And Forrester Research senior analyst Kate Delhagen said she expects the major telephone companies to use the AOL price increase as an opportunity to market Internet services at prices even lower than the standard $19.95 per month rate that most now charge.

"They may use this as an opportunity to scale really fast," she said.

The pricing change also raises questions about AOL's plan, announced in 1996, of using subscriber fees to cover operating costs, while relying on rapid growth in advertising and marketing fees for profits.

David Simons, who covers online and Internet stocks for Digital Video Investments in New York, said that AOL's increase in subscriber fees can be interpreted as a tacit admission that advertising and commerce fees aren't rising as fast as Wall Street had been expecting.

Indeed, in the fiscal third quarter ending Sept. 30, AOL reported commerce and marketing fees of $87 million, lower than the $90 million in the previous quarter, and below the more than $100 million that some analysts had been expecting.

But Case insisted that "revenues from advertising, commerce and other sources continue to grow as anticipated,"

Instead, Case said that the fees "are not yet able to cover the growth in member usage."

Pittman gains responsibilities

In other announcements Monday, AOL detailed management changes and job cuts that had been described in press reports last week.

As part of the changes, AOL: Named Robert W. Pittman, formerly the head of the company's online service, to the position of president and chief operating officer of the company, reporting to Case. The move was widely seen as a kudo for Pittman, a former television programmer, who is credited with accelerating AOL's growth, controlling marketing costs and improving content since joining the company in 1996;

Said that the AOL Studios unit will continue to be run by Ted Leonsis, who will now report to Pittman, instead of Case;

Said that Lennert Leader, AOL's chief financial officer, will be appointed to the new position of president of AOL Investments, as soon as a replacement CFO can be found. In his new role, Leader will manage AOL's growing investment portfolio, which includes companies like Excite and Web merchants N2K and Preview Travel, which have major marketing and revenue-sharing deals with AOL.

AOL also disclosed plans, as expected, to shed 500 jobs from CompuServe. In a related move, AOL also said it planned to speed up development of the next generation of CompuServe software, version 5.0, but had suspended work on a Web-based service called "C."

Additionally, AOL said it is also reviewing alternatives for Sprynet, CompuServe's Internet Service Provider unit. That was widely interpreted as a signal that AOL was looking to sell the service, which has approximately 300,000 subscribers. Analysts said the service could fetch $30 million to $60 million.

Reuter contributed to this story.

Topics: IT Employment, AT&T, Microsoft

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