In February, Time Warner (TWX) investors were encouraged (sort of) to hear new CEO Jeff Bewkes say he was eager to sell AOL’s dying “Access” business–the $20ish/month subscription model that powered AOL to Google-like heights during the 1990s.
[Imagine that: AOL’s market cap in 1999 was much bigger than Google’s is today. Oh, how the mighty have fallen. Oh, how the mighty could fall!]
From what we hear, AOL is still trying to make this access sale a reality, but two big hurdles stand in the way:
- There are no buyers.
- AOL’s “Access” and “Media” businesses are almost inextricably linked.
Problem 1: To Sell Something, You Need To Find Someone to Buy It
On the first problem–a lack of buyers–we exaggerate: There aren’t “no” buyers. But there likely aren’t any buyers at a price AOL wants to accept.
The two logical buyers for AOL’s access business are Earthlink (ELNK) and United Online (UNTD). Both continue to operate dying access businesses of their own, both could theoretically benefit from having more scale. The trouble:
- Earthlink has only an $800 million market cap and zero net cash.
- United Online has only a $750 million market cap and $200 million of net cash.
Could either of these companies buy AOL’s $2 billion access business by merging with it? Yes. But would it be worth it to AOL to go through the hassle of separating and selling the access business to own, say, half the stock of a combined (and still-feeble) AOL Access / Earthlink or AOL Access / United Online? In our opinion, no.
Are there any other potential buyers? Yes, Yahoo could conceivably buy the business. We suspect it would only do this in conjunction with a broader AOL merger, however, and we think this is unlikely.
Problem 2: AOL’s Access and Media Businesses Are Actually Deeply Linked
What exactly is AOL’s “Access” business? If you bought it, what would you get? If you don’t know, you’re not alone: Our sources say AOL doesn’t know yet, either.
AOL was successful in the 1990s precisely because it did NOT have separate “Access” and “Media” businesses. AOL’s whole value proposition in those days was based on the idea of the convenience of a single “service.” Separating this “service” into two parts, therefore, is proving challenging.
For example, here are some of the issues:
- AOL’s access subscribers still contribute a huge percentage of AOL’s total pageviews. (We hope this percentage is less than 50% by now, but it wasn’t a year ago). The access business is thus still very important to the success of AOL’s media business. So why would they really want someone else to have control over it?
- Does the access business include the AOL home page? If so, does AOL lose control over the programming of that home page? If so, what happens to that traffic firehose?
- Does the access business include AOL’s email? A significant percentage of AOL’s pageviews come from email. AOL, therefore, can’t afford to sell its email business, especially because its sole remaining strength as a company is its communications platform. But if AOL sells its access business and the buyer chooses to emphasise another email platform (its own, for example), AOL’s email business could be hurt. This would likely necessitate a provision forcing the buyer to use AOL’s email, adding still more complexity.
- Does the access business include AOL’s access software, IM, etc. One assumes so. But then what happens to all those AOL IM and email users who prefer to use the AOL client even when using the service for free over broadband? Do AOL Access subscribers have to switch to the buyers’ software, or will they be able to continue to use AOL’s client? Who will maintain it?
- Which AOL employees go with the access business? Just the network ops folks? The call centres? Any programming people? Ad sales?
- Which AOL physical assets go with the access business? Ditto.
These are just some of the many questions AOL (and the hypothetical buyer) have to answer before they spin off the Access business.
So What Should AOL Do?
In our opinion, AOL should just keep (and milk) the access business until it figures out what the heck to do with the rest of AOL. As long as AOL is going to stay in the portal business, the access business is complementary. It is dying, but it won’t die tomorrow, and in the meantime it will continue to throw off cash (and, more importantly, traffic).
[In fact, instead of spinning off Access, AOL might even consider buying Earthlink and United Online, as a way of building even more critical mass in the dial-up business and driving more traffic to the AOL portal while it still can.]