Well, Mary Meeker sure took the wind out of my sails.
Two weeks ago, I was sitting here working on a column about the perils facing ISPs today, and about why I think
is going to be just fine, thanks, despite all the market noise about its members' lack of access to broadband connections. After all, I was saying, AOL's size, momentum and mega-brand name count for a lot -- and anyone who's written off AOL's ability to strike a deal to get widespread broadband access for AOL was seriously misreading the
record. AOL will be fine, thanks, I wrote, despite the grave perils ahead for its smaller brethren in the ISP business.
I decided to hold the column overnight to try to get some numbers from AOL ... and boom! a couple of hours later, Mary dropped her AOL bomb -- an upgrade from outperform to strong buy, based on her judgment that, ahem, the talk about AOL's lack of broadband access was way overdone.
The upgrade from Meeker, the
Morgan Stanley Dean Witter
analyst who is second to none, in my view, among Internet analysts (a field she created nearly single-handedly), moved AOL in a big way: up 10 points that day, another 13 the next. Even in the Internet era, a 23-point gain over two trading days spells C-L-O-U-T. (Since then, AOL has sagged a dozen points ... which, it occurs to me, is another way of measuring the power of a great analyst: Was her upgrade worth 23 points, or only 12? On the cloutometer, does it matter? A better-than-10% move for a $136 billion company is raw power, period.)
Rather than looking like I was faking it, trying to rewrite Mary and make it look original, I decided to hold the column until after last Wednesday's AOL meeting with industry analysts in New York. So was there big news there? More to the point, did the AOL people say anything that would shake my "they'll be all right" thesis?
Nope. AOL execs described why we shouldn't worry about the broadband issues, and how far along they were on their DSL partnership-building -- with two already in place, remember.
I think that this "analyst guidance" was, for once, right on the button: Though most other ISPs are going to see a bloodbath over the next couple of years -- and remember, AOL is really nothing more than a big, powerful, clumsy, high-profile ISP that throws some content on its site -- AOL is not going to be one of the victims, but in fact will thrive.
Precisely because of that size, momentum and mega-brand name I mentioned earlier. Big Mo, in other words.
Indeed, no other Internet company I know has done as well at exploiting Big Mo as America Online. While
and other net highfliers have prospered through innovation and great customer service, AOL has succeeded beyond any reasonable hope by being ... well, big, dumb AOL.
And in the process, aggregating 17 million-plus customers, who more-or-less-happily pay $22 a month to "belong."
AOL remains the overwhelming choice of Web newbies; that alone puts it in a prime position as more and more Americans get on the Web. For many Americans, "AOL" is nearly a synonym for both "the Web" and "email." Its very ubiquitousness led to a romantic movie about its email service. It has a strong history of profits. It has well-known content partners. Its size led to $1.8 billion in sales on AOL's shopping sites last quarter -- up from $1.2 billion in the previous Christmas quarter, which was the all-time boom quarter so far for e-commerce.
In sum, thanks to its most important subscriber, Big Mo, and Mo's powerful self-replicating nature, AOL has become critic-proof, in much the same way that
Star Wars: Episode 1 -- The Phantom Menace
became critic-proof through its prerelease enlistment of Big Mo. Bad reviews, lukewarm reviews, ho-hum reviews, even devastating reviews of both entities can't and won't make a dent in their success as business propositions.
I've been a loud voice on the importance of broadband Web access, and its ability to transform the Web experience. So how can I suddenly be so
about AOL's failure to move aggressively in terms of lining-up broadband access for its customers?
First, as Steve Case likes to remind us, AOL hasn't been asleep at this switch. AOL has two DSL deals in the can, with
. Look for more to be announced soon, with
and at least one other RBOC.
Second, I think AOL may turn out to be the poster child for DSL. They need something. The RBOCs need a high-profile, no-doubt-about-their-commitment Web partner like AOL to help them peddle DSL. And AOL's content, erratic as it may be, is still vastly better than the local content provided by
, the two horses
(which I am long) hopes to ride down the TV cable wire into your home. I've said before that ultimately, I don't think local content is very important in selling fast Net access -- you don't go out to buy a local-movies listing and some local-newspaper retreads when you go shopping for a fast-access provider; you go out to buy fast access, period -- but the phone companies' planners think it's important, and see content such as AOL's as a key drawing card for them.
Third, despite AOL's cozying up to the RBOCs, I don't think an AOL-AT&T deal has been foreclosed, notwithstanding
reported comments that every time AT&T and AOL try to get together, something new comes up and they drop the deal. AT&T sees AOL as a competitor for access into the home, and rightly so; but in this "age of coopetition" (thanks to
ex-CEO Ray Noorda for that one), a liaison between the two is not beyond reason.
On the other side of the ledger, AOL is probably right in continuing its jihad in Washington against cable-access providers, claming their pipes into the home should be given common carrier status. Not necessarily legally or morally right -- the argument is specious -- but right in a tactical sense, because it keeps the heat on the cable companies. If AOL is to deal with some of those providers, it needs to do so from strength, and in our culture, that means with some standing in Washington.
If AOL plays its cards right, building partnerships based on DSL, plus the occasional regional cable system, it will do just fine. And experience suggests that if AOL is anything, it's a dealmaking shop.
Seventeen million users can't be that wrong.
Looks to me like AOL is going to turn the fast-access boom of the next two or three years to its own ends, and will be a lot more than just a survivor.
What about all those other ISPs? Over time, they're going to get killed. Whether you go for DSL or cable-modem service -- and as soon as one or the other is available in your area, many of you will make that jump -- why would you continue a relationship with a dial-up ISP?
You won't. You'll put up with the nuisance factor of changing your email address yet again, and you'll become an @Home or RoadRunner or AOL customer -- in cooperation with the local DSL or cable provider you choose -- and never look back.
That means that not only the little ISPs, but also the roll-ups, such as
, and the national operators, such as
and Earthlink, have a lot to worry about. The logical way out for MindSpring and
is selling out to an AT&T or RBOC ... but these aren't going to be the kind of high-ticket sales where the purchaser sees a lot of value in the acquired company's customer lists, and is reliably buying customers. Sure, the acquirer will solicit present customers, make them special offers and so on ... but since they could get many of those customers anyway, by dangling high-speed access offers in front of them, broadband acquirers are not going to be willing to pay very high prices for the ISPs they buy.
is a special case among national ISPs. MSN's link to
, a division of
(which I am long), makes this complicated to unravel, as do MSN's strategic advantages for Microsoft. I suspect we'll see MSN continue to fail upward for some time to come.
Frankly, if it never turns a dime -- and it certainly hasn't so far -- MSN remains a bargain for Microsoft as a test lab. (Cynics would point out that it also has value for Microsoft's lawyers, who will, in future antitrust trials, be able to point to MSN to disprove the notion that Microsoft's brains and dough mean it can jump into, then dominate, any market it chooses.)
The ISP business,
, is going to become a less and less important part of computing, at least on the consumer level, over the next few years. Eventually, we'll stash it in the same closet with our not-so-fond memories of dot-matrix printers, acoustic modems and eight-inch floppy disks.
By then, I expect that America Online will be reincarnated as a full-fledged media company, the days of whistling modem connections, metered billing and worries about broadband access long forgotten -- more profitable than ever ... and perhaps controlling some of the companies it now turns to for DSL partnerships.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long AT&T and MCI WorldCom, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at