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Business Readings
Source: Reprinted from "AOL faces crippling cash shortage" by David Henry, USA Today, August 16, 1996. Copyright 1996 USA TODAY. Reprinted with permission. David Henry Though the company counts 6.2 million subscribers and has built what may be the best brand name in cyberspace, the financial structure of America Online (AOL) is begging for millions more customers. AOL needs their monthly fees and their appeal to advertisers to cover its costs. That’s why AOL is revving up a marketing blitz that will shower the nation with millions of disks of its latest software and prod TV viewers to try the service. Thursday two demonstration trucks began a 30-city whistle-stop tour of downtowns, shopping malls and fairs across the USA. The cash expense of the campaign: $240 million to $300 million this summer and fall. That’s twice as much as the two major presidential campaigns will spend. AOL hopes the campaign will help break its dependence on investors for cash. The company spends more money than it takes in, even though accounting conventions allow it to post profits by deferring the expense of signing up subscribers from its income statements for two years. Going into the marketing blitz, the company had $120 million in cash. The campaign is budgeted for $120 million to $150 million a quarter through June, says AOL Chief Financial Officer Len Leader. By then America Online wants to have 10 million subscribers, 3.8 million more than now. Without realizing big gains in subscriber and advertising revenue and savings from lower telecommunications rates, the company could be forced to return hat-in-hand to investors. Wall Street likely wouldn’t take a plea well. Investors, though largely unfazed by last week’s 18-hour AOL blackout, are fretful about AOL’s prospects for signing and keeping customers. "Now here we sit wondering if this wonderful freight train of a stock has derailed," Morgan Stanley analyst Mary Meeker, who still recommends AOL, wrote last week. The stock this year has gone from $37-1/2 to $70 and back to $36-3/4 at Thursday’s close. Jeff Goverman, analyst at Cowen & Co., estimates AOL this spring spent $240 for each account added to its base. That is up from $136 in the winter quarter, $93 last fall and $67 in spring 1995. The explanation, Goverman says: New subscribers are harder to find. Leader says that analysis is flawed. Most new-subscriber spending went to enlist enough members to make up for those who dropped out, he says. The cost of making up for the dropouts is becoming less of a burden as it is spread over a bigger base of loyal subscribers, he argues, adding that AOL’s improved software and customer service should help retain users. Leader says if the company reaches its subscriber goal it shouldn’t have to ask investors for money. The goal is important for another reason: more of those deferred costs, now totaling $314 million, are due to be charged against the reported earnings that stock investors watch. Last quarter the charge was $50 million, leaving AOL with $32 million of operating income. The quarterly charge will be $100 million by June 1997, Leader says. Will AOL be able to pay its own way? Says Goverman: "It is a goal. I’m sure you have goals, too." Discussion Questions
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