Lawyers Licking Chops Over AOL Sub Flub

AOL Time Warner has already attracted the attention of regulators and disgruntled shareholders over its revenue accounting. Last fall the company said it was subtracting $190 million from previously recorded revenue over eight quarters, and this year the SEC has been questioning the recognition of $400 million of sales to Bertelsmann recognized in 2001 and 2002.

The company already has acknowledged that there are some judgment calls in its subscriber counts. Earlier this month, when Ohio's attorney general filed suit against AOL Time Warner on behalf of state pension funds, the lawsuit cited AOL Time Warner's conference call acknowledgment of including nonpaying free trial subscribers in its subscriber counts.

As for the quality-of-subscriber issue, the bulk subscriptions are no longer a factor in the company's subscriber counts, says Cohen. She, like others, already were predicting that AOL will lose in the neighborhood of 10 million subscribers to discounting and broadband over the next half-decade.

Fodder

But though people have quantified AOL's subscriber-count vulnerability, what's harder to quantify are the legal consequences facing the company. That's where Friday's news may come into play.

The new-subscriber-count story could be fodder for shareholder litigation, most of which is currently focusing on revenue recognition issues. Shareholders could argue that subscriber counts were one of the factors they used to value AOL Time Warner, and any manipulation of such counts constituted fraud.

Whether such fraud is provable isn't clear. Subscriber counts in many industries, including cable TV and magazines, require judgment calls, especially with bulk-subscription deals. AOL Time Warner could argue that its policies in this gray area were reasonable.

But Friday's story could represent new opportunities for litigants to refile complaints. The Ohio lawsuit accuses AOL of inflating subscriber growth through tactics such as counting free-trial participants as paying subscribers, even after their free trials had expired. But the lawsuit doesn't appear to mention bulk deals as a means of such inflation.

A class-action suit led by the Minnesota State Board of Investment doesn't appear to mention subscriber counts at all.