Since the AOL-Time Warner merger, this stock has seen nothing but stagnation and deterioration of price. Investor confidence in AOL’s ability to execute has waned, and with good reason. AOL’s management is the least effective in the online ISP/Search/Ad space. Why would I say such a thing? Because there is unimpeachable evidence that AOL-Time Warner is the weakest and most vulnerable to a total collapse.
Let’s examine their core income streams to better understand how the AOL division generates revenue. Most of the revenue is generated from ads that Google delivers to AOL Search users and AOL’s failing dial-up ISP division. Both of these fledgling operations are nothing less than unmitigated disasters. On the search side, AOL has admitted that it can not muster the technological sophistication to run its own search engine or advertising, handing the reigns to Google so that AOL can concentrate on losing the rest of its dial-up business.
And losing, they are. AOL’s dial-up business has faced a dramatic contraction in revenue growth as broadband becomes popular and dial-up prices dropped by over 50% in the last decade. AOL hasn’t dropped their prices enough, their customer service is the worst in the industry, and many people can obtain DSL, cable or fiber and say goodbye to modems. If they can’t go broadband, they can at least get a $5-10/month account at a faster and cheaper ISP.
AOL also suffers from another serious problem. A talent vacuum. This vacuum exists from the top down and has since the merger. When’s the last time AOL did something new and original?
AOL has also lost its direction, its consumer appeal and ultimately they may face losing their remaining customer base as more appealing options are readily available. They can’t attract new customers anymore.
Time Warner has been losing revenue in its entertainment division as movie and music sales dwindle. Its cable company (TWC), which directly competes with AOL for broadband, has seen a slowdown in subscriber growth.
For all these reasons and more I believe TWX has the potential to retrace from this $13 level all the way back to $3-5 by mid 2009. I suggest playing the short side as all major levels of multiyear support have been significantly broken down. Single digits are likely as the next capitulation sell off gets under way. I feel sorry for the folks that work at AOL-Time Warner, but there’s always ample opportunity to find another job while your company sinks!
