AOL Faces New Threat From Cut-Rate Internet Services
America Online, fighting to stem plunging profits and management turmoil, is now facing a looming price war that threatens to undermine one of the most profitable segments of its Internet-access business, Monday's Wall Street Journal reported. Much attention has been focused on the AOL Time Warner Inc. unit's failure so far to make significant inroads in the growing market for high-speed Internet-access services known as broadband. But less noticed has been the rise of discount online services that are targeting the Internet behemoth's core base of "dial-up" Internet accounts with some success. Dial-up is a shorthand term for traditional Internet service, where a computer literally places a telephone call to an Internet-access point each time a user logs on. Broadband is always on -- eliminating the need to dial a connection each time a user logs on -- and can provide access to Web sites at speeds about 25 times faster than dial-up service. Broadband accounts are relatively pricey, at about $40 to $50 a month, compared with $23.90 a month charged by America Online for its dial-up service. Still, dial-up is the service that welcomed millions of consumers to the Internet in the 1990s and generates the vast majority of America Online's $9 billion in revenue. Now this core business is getting hit from above -- as more users graduate to the higher speed of broadband connections -- and from below as a host of discount rivals crop up offering dial-up Internet service for about half of America Online's price.
Source: Yahoo/Dow Jones Business News
What is so shocking in all this is the sheer scale of the folly. As this piece from the NYT points out, in the last two years they've lost more than the entire annual value of New Zealand's GDP! So how, we might ask, with all that money and talent, did they manage to get it so, so wrong.
A well-known company makes one of the most disastrous acquisitions in corporate history. Its senior management is split, divided by clashing egos and mutual loathing. Profits plunge, the stock price tanks, famous executives are shown the door. How could things possibly get worse? AOL Time Warner answered that question on Wednesday, announcing an unexpectedly large fourth-quarter loss of almost $45 billion — the biggest quarterly loss in American corporate history — and a write-down of assets totaling $45 billion. Add that write-down to a $54 billion charge announced earlier last year, and the company lays claim to nearly $100 billion in write-offs in a single year. In other words, all of AOL Time Warner's high-flying initiatives of the last two years have amounted to a $100 billion mistake — a figure larger than New Zealand's annual gross domestic product. And Wall Street analysts are wondering how managers who have survived the infighting and blunders thus far are going to turn around the company.
"The real issue is, where is the growth going to come from?" said John Tinker, a media analyst with Blaylock & Partners in New York. "It's like: `What's happening, guys?' " Investors certainly seemed unsure today. Shares of AOL Time Warner fell $1.96, or 14 percent, to close at $12 in heavy trading on the New York Stock Exchange. AOL Time Warner, still reeling from America Online's ill-fated acquisition of Time Warner two years ago, said on Wednesday that it would write down the value of the company's AOL division by about $35 billion and its cable division by about $10 billion.It also said that Ted Turner, a maverick entrepreneur who founded the Cable New Network before selling it to Time Warner, was planning to resign as the company's vice chairman. The company said it was still undetermined whether Mr. Turner, one of AOL Time Warner's largest shareholders, would retain his seat on its board. While the timing of Mr. Turner's departure added to the gloom surrounding Wednesday's announcement of the huge loss, he has been uninvolved in the company's daily management for some time.
Moreover, there is a host of much more severe operational issues facing AOL Time Warner: Whether its vaunted cable assets are even more seriously overvalued and how that might affect a planned initial public offering of stock in the cable unit. A huge and burdensome debt of $26.4 billion. A continuing Securities and Exchange Commission investigation of the struggling America Online's accounting practices.Slow earnings growth in the company's publishing, media and film divisions. Wall Street's uncertainty about whether Richard D. Parsons, the company's chief executive, will be able to wrestle all of these problems to the ground.
Source: New York Times
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