AOL's Bid to Rule the Nets

The company has made acquisitions all over the place, and subscribers are swelling - but can it last?

America Online Inc. is bullish on the Internet. The company is spending tens of millions of dollars to distance itself from the herd and establish itself as the Internet onramp for the masses. The question is, if the company succeeds in making the notoriously user-hostile Internet accessible to consumers, will they log on?

"Most Americans aren't online and won't be any time soon, so how do you get to them from a marketing or a services standpoint?" asked John Lawson, president of Convergence Services. "I think the information revolution will take place and what we end up with will look a lot like television."

It's nonetheless been a banner year for the Vienna, Va.-based online service, with subscribers, revenues and profits all growing at phenomenal rates. For the first quarter of fiscal 1995 ended Sept. 30, AOL posted revenues of $54 million, a 185 percent hike over the previous year. Net income, before merger expenses, ballooned a mind-boggling 882 percent to nearly $3 million, or $0.32 per share. After taking $1.7 million in merger-related expenses into account, net income still increased a respectable 318 percent to nearly $1.3 million, or $.14 per share.

The company declared a two-for-one stock split on November 28, and at the close of the quarter, AOL's subscriber base had tripled to approximately 1.15 million subscribers during the past year. Steve Case, president and CEO of AOL, predicts the subscriber base will double to 2.5 million within the next year.

In September, the 9-year-old company quartered itself into four operating divisions to exploit the multitude of interactive opportunities both domestically and internationally.

AOL Services Company has responsibility for the company's flagship online service, which it hopes to make the nation's number-one consumer online service as it expands into the new frontier of cyber commerce.

The company plans to beef up its less-than-full-blown access to the Net with the Internet Services Company, expanding AOL's current Internet offerings to include World Wide Web, Telnet and FTP.

"They will continue to provide a rich and interactive environment, something the plain vanilla Internet carriers won't be able to do," said Greg Cline, director of network integration and management research for Business Research Group.

AOL Technologies will support the efforts of the company's traditional online services and newer Internet offerings by upgrading its system architecture and development of new technologies compatible with the next-generation of hardware and software.

Finally, AOL International will lead the company's foray into the interactive international marketplaces of Europe and Japan. "I don't see them having severe impediments going international, it's a matter of getting the right partnerships," said Cline.

In order to realize all of these grand ambitions, AOL has been on a shopping spree this year for companies it needs to make its cyberspace dreams a reality. In May, AOL announced a $35-million merger with Redgate Communications Corp., an interactive marketing services company with expertise in CD-ROM technology. The merger was designed to marry the multimedia capability of CD-ROMs with the connectivity of online services.

In early November, AOL bartered $34 million in stock for BookLink Technologies Inc., and NaviSoft Inc.

Both firms specialize in navigational software for the Internet, and will form the foundation of AOL's new Internet Services Company. Several weeks later, AOL announced it would spend $35 million in cash and stocks for Advanced Network & Services, a networking specialist that will help the company offer subscribers high-speed Internet access.

Cline said AOL will face fierce competition in the coming year, especially from Microsoft's planned online service, and is making the right moves by boosting its Internet capability.

"They have to be aggressive; 12 months from now, the typical Internet user will be somebody who does news groups, mailing lists, and especially World Wide Web," he said. "I think they will continue to be strong." Lawson is not so sure, and sees an industry shakeout on the horizon.

"AOL is a great American success story, and their moves to improve their interfaces and content are all positive for them," said Lawson. "However, I think there has been so much hype about the Internet that something's got to give; I don't think all of the online services will survive."

Ironically, AOL may find success on the Internet has less to do with interactive shopping and more to do with simple human interaction.

"The real impact of the Internet on AOL is to make people use their free hours every month and go into overtime," Cline said. "That's the really powerful lure of the Internet and all of these virtual communities. Once you find your hobby or interest and hook in, it becomes highly addictive. People tire very quickly of hunting for information."n


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