AOL Needs to Make this Decision Now
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AOL, Inc. (NYSE: AOL) used to be one of my favorite stocks. The company was a great performer early on in my portfolio as more and more people signed up, and the list of subscribers got longer and longer. I slowly but surely sold off my shares to pay for school bills at the time, and stopped owning AOL, before the now infamous AOL and Time Warner merger. Today, AOL is an afterthought in its main market which is advertising. The company has an opportunity to unlock some shareholder value that they haven't realized yet.
There seems to be a theory that AOL's parts are greater than the whole. This point was driven home when AOL struck the deal to sell 800 patents, and non-exclusive license the rest to Microsoft (NASDAQ: MSFT) for $1.06 billion. Given that the whole company was worth about $1.7 billion in market cap prior to this deal, apparently the market undervalued the worth of all of AOL's patents and properties. One division of AOL that the company needs to make a decision about is AOL subscription revenue.
It's real simple, AOL's subscription service needs to be sold off to the highest bidder. The company is losing subscribers and this division is dragging down an otherwise okay company. Consider the impact in just the company's fourth quarter results if they had already sold the subscription service.
Results as Reported: $576.8 million total revenue – 3% decline from 2010
Without subscription services: $382.20 million total revenue – 6.14% growth from 2010
Subscription results were bad enough to turn overall growth from the company's other divisions from a positive 6%+ growth rate to a negative 3% growth rate. There are still about 3.3 million people using AOL's subscription services, with monthly average subscription revenues of $17.87 per subscriber. That equates to about about $59 million in monthly revenue to the acquiring company.
I could see United Online (NASDAQ: UNTD) as being a logical potential acquirer of the business. The company already owns NetZero and Juno, why not buy the AOL subscription business and negotiate to leverage the other AOL properties to existing NetZero and Juno subscribers? Offering AOL as a higher-end dial-up solution, and NetZero and Juno at the low end, would be a good way to differentiate their service. United Online has plenty of free cash flow to get a deal done, and 3.3 million new paying subscribers wouldn't hurt.
I could also see EarthLink (NASDAQ: ELNK) as being a logical fit. EarthLink is in the same boat as United Online and could use the shot in the arm of 3.3 million new customers. The positive addition of some AOL properties for their members to use would be a nice benefit as well. Both United Online and Earthlink boast around 1 million paying subscribers, and both have much lower average subcription revenues. Acquiring AOL's subscription customers would allow the companies' online networks to benefit from a much larger customer base to spread costs across.
AOL of course would stand to benefit from this in two ways. First, this would eliminate the worst performing division of the company. Second, it would allow AOL to leverage its properties and search with whomever bought these 3.3 million subscribers. Dial-up Internet access is about as much of a commodity business as there is, but the AOL software and sticky services like video, buddy lists and AIM are features that customers have a hard time leaving behind.
This move would seem to be a win-win for both AOL and the acquiring company. It allows AOL to focus on display advertising and its web properties. This deal would also spread AOL's properties to a somewhat broader range of customers. The new subscribers would be a shot in the arm for the company acquiring these customers, and would improve the acquirers cash flow as well. AOL has an okay business behind the scenes, and if the company can continue to license the remaining 300 patents the company still holds there could be more deals down the road. This deal to shed the subscription business needs to happen now. It's the right thing for the company, and the right thing for shareholders.
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