Internet Outsider

AOL: A Mistake to Go Free? (NYT and DJ Take Note)

With everyone speculating about what will happen when TimesSelect (NYT) and Wall Street Journal Online (DJ) go free, it makes sense to check in on the last major wall-removal story: Time Warner's (TWX) AOL.  Was AOL's move a good one?  Or should it have hung on and watched its subscriber base slowly dribble away?

Answer: It was a good move.  AOL certainly sacrificed some near-term cash flow, but, critically, it has retained (or replaced) the lost subscribers in the form of unique users.  If AOL hadn't made it's email available for free, meanwhile, it likely would have lost most of these subs forever. Also, even as AOL's subscription revenue plummeted, the company has preserved its cash flow, which is far more important. 

What hasn't happened, which would have been nice, is that unique users and pageviews haven't swelled as the rest of the world learned that AOL is now free.  This said, they also haven't collapsed, which was a distinct possibility.  (Why? Because each AOL "subscriber" represents more than one unique user, as there are usually multiple users in the same household. Also, in the old days, AOL subscribers generated far more pageviews-per-user than average uniques, because of the frequency with which they checked email.  So the loss of each subscriber could theoretically have meant the loss of more than one unique and several multiples of average pageviews.)

Let's put some numbers on this...  (If you want to see the quarterly progression, percentage changes, and calculations, please check out this spreadsheet.  It's online, so just a quick click and no downloads or worries about nasty Excel viruses.)

Subs. Over the past year, AOL has shed 7 million subscribers, approximately 3 million more than it would have lost if it had maintained the status quo.   Importantly, the attrition rate has now returned to almost the pre-free rate (1 million a quarter), and the sub base is still a considerable 11 million.

Cash Flow. Thanks to big cost savings in marketing, sub retention, and network expenses, AOL managed to nearly preserve its pre-free subscriber cash flow.  (We estimate pre-free cash flow of about $400 million a quarter versus about $300 million now).  The company will continue to shed subscribers, and most of the big cost savings have already been booked, but subscription revenue should continue to throw off at least $200 million a quarter for several quarters.  (We estimate the subscription profitability by assuming an operating profit percentage of 35% for the company's ad revenue, calculating the operating profit from ads, and then backing into the operating profit from subs.  Please see the bottom of the spreadsheet).

Users.  Unique users have been relatively stable at about 110-115 million for the past year, despite the loss of 7 million subs.  This suggests the subs who quit the paid service are sticking around.

Pageviews.  Similarly, pageviews have stabilized and are now beginning to increase again (although most of the sharp gain in the last quarter was the result of a measurement-method change).  This, too, suggests that subs are sticking around.

Of all the companies considering going free--i.e., NYT and WSJ--AOL certainly had the most to lose.  And, for AOL, at least, pulling the wall down has turned out to be a good decision.

TiVo Provides the Missing Movie-Download Link; Threatens Cable Cos

At long last, someone has finally addressed the gaping hole in the digital-movie-downloading business. TiVo's new deal to let subscribers rent or buy Amazon.com digital movies directly from their TiVo boxes removes an awkward step in the process: customers no longer have to futz with their computers to rent or purchase a movie. Now, they can just pick up the TiVo remote.

Perhaps this will finally light a fire under the cable companies, whose resistance to unforced innovation is legendary--and whose grasp on the digital rental market continues to slip. Or perhaps it won't...

Cable giants like Time Warner Cable, Cablevision and Comcast have been trying for years to boost revenue with on-demand movie rentals. But success has been hindered by limited movie selection, short viewing windows, and the inability to for viewers to purchase downloaded movies outright.

Meanwhile, online movie services like Amazon's Unbox or Apple's iTunes have required a computer to make the transaction and download the movie file. Getting the movies to play on TV has been even more complicated and expensive, requiring either a complex computer setup or a pricey gadget like Apple TV. TiVo's deal with Amazon solves some of these problems, allowing subscribers to buy movies without leaving the couch, or rent them for 30 days, often for less money than 24-hour cable rentals.

But don't short cable yet: TiVo's impact is limited by its modest presence -- only 4.3 million total subscribers, of which only a small percentage have set-top boxes compatible with the new service. Also cheap, no-brand DVRs built into cable boxes have already reduced TiVo's market share, and now that TiVo has blazed the trail, the cable companies are presumably free to strike similar deals of their own. Because digital-download services require a high-speed Internet connection, moreover, even the TiVo box is not a total loss for the cable companies.

In any case, expect more deals like this in the near future from companies like Apple, Microsoft and Sony, all of which are eager for a place in your living room -- at your cable company's expense.

Time Warner Chief Hallucinates at Cable Show, Speaks Truth

Dick Parsons must have puffed on something stronger than a peace-pipe before taking the stage at the National Cable & Telecommunications Conference this week.  Addressing the growing tension between Big Media and Google, et al, the normally thoughtful Time Warner chief drew an analogy to one of the most famous (and gruesome) battles in the conquest of the American west.

"The Googles of the world, they are the Custer of the modern world. We are the Sioux nation,"  Reuters quotes Parsons as saying, referring to the Civil War American general George Custer who was defeated by Native Americans in a battle dubbed "Custer's Last Stand." They will lose this war if they go to war," Parsons added, "The notion that the new kids on the block have taken over is a false notion."

Um, okay, but leaving aside the outcome and horrific violence of this particular clash (if memory serves, Sioux squaws completed the massacre by collecting scalps and family jewels from Custer's still-living soldiers), who won the war?  Despite his apparent intention to express confidence in Big Media, perhaps Parsons was actually just being his usual forthright self: Time Warner, et al (the Sioux Nation), might win a battle or two, but there's no question about which side will ultimately prevail.

More from Steve Baldwin.