Goldman Doesn't Hate AOL, Sony's Latest Futile Attempt To Attack Kindle, Google Buying Yelp

Our notes on today’s news and analysis:
Goldman On AOL: Not As Bad As Everyone Thinks
Goldman Sachs’ Ingrid Chung initiates on AOL with a Neutral Rating.  She is a little more optimistic than other analysts about AOL’s prospects and is more in-line with our view that AOL’s strategy could work:

Why the turnaround might work this time: While we view the stock as close to fairly valued currently, we believe that AOL’s prospects are not as meager as some investors view them to be because:

  • (1) the new management team seems to have a coherent strategy for growing the advertising side of the business again;
  • (2) dial-up subscribers account for less than 20% of both uniques and page views for the Advertising business, so that a 20% annual decline in subscribers is only a 3-5% drag on traffic for;
  • (3) traffic declines from paid subscribers are lower yielding, as paid subscribers tend to use e-mail and instant messenger more, for which AOL is paid less; and
  • (4) we believe the company will be generating enough cash to eventually initiate more shareholder friendly practices (i.e., dividends and/or share repurchases) once the Advertising business and overall topline growth has stabilised in 2014.”

Our Take: We agree.  We like management’s open, freelance-drive editorial strategy, believe it can stem losses from access and email declines by improving its communications products, and has cash to invest in growing businesses like local Internet.  We also think AOL will sell off at least $1 billion-worth of non-core assets, which will create more cash for acquisitions and shareholders.

Holiday E-Commerce Growth Still A Bit Better Than Expected
JP Morgan’s Imran Kahn:

“Chase Paymentech’s Pulse Index, which measures same-store sales growth at large online retailers, is notching more than 15% growth Y/Y through December 16. We view this as a positive indicator of how the 4Q shopping season is shaping up for sites such as Amazon.”

Our Take: This is obviously good for Amazon and potentially eBay, but it’s also a help to search companies like Google, Yahoo, and Microsoft since a large portion of e-commerce activity is driven by search queries.


Sony launches another futile attempt to steal Kindle thunder in e-readers
Specifically, now Sony is offering WSJ subscriptions.  This sounds promising–publishers are unhappy with the Kindle and Amazon’s revenue splits–but the Kindle has a huge lead in the e-reader market and we see nothing in Sony’s offering that will change that.  Ultimately, publishers will HAVE TO do business with the market leader, regardless of how unhappy they are with it.

News Corp. executives said they were receiving better deal terms than those offered by the Kindle.  In addition, the Sony Reader will charge an extra $5 to subscribers, charge $10.99 for Marketwatch, and $9.99 for the New York Post.

“Several newspapers, including the New York Times and the Journal, sell subscriptions on the Kindle. But some publishers are unhappy with their financial arrangement with Amazon, which they say keeps as much as 70% of subscription revenue…”

“Sony said its new device, the Reader Daily Edition, will give users a more authentic feel of reading a newspaper, along with features like a touch screen that will let them take notes and look up words on the e-reader’s dictionary. The new reader, which will sell for $399.99, is scheduled to go on sale before the end of the year.”


Google Is in Talks to Buy Local-Search Businesss Yelp
“In a sign that Google is interested in broadening its reach among local businesses, the search giant is in acquisition talks with Yelp, the review site for local businesses, according to three people with knowledge of the deal.”

Our Take: Google is still weak in local ads, which Yelp has nailed better than anyone.  Might as well use that huge market cap to buy its way in.

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