America Online Dials Up Stock Offering, Expansion Plans

by Stan Hinden

Monday, March 2, 1992

In the gee-whiz world of personal computers and electronic data banks, a little old-fashioned arithmetic is all you need to discover why so many computer networks are fighting so hard to get you to buy their on-line services.

At America Online Inc., for instance, the company reports that it had 155,000 subscribers at the end of last year. The Vienna-based firm also estimates that its subscribers paid an average of $14 a month during 1991.

By my calculator, that comes to a little more than $26 million a year. And that sounds like something that business people would find worth fighting for.

To be precise, America Online did not take in $26 million last year. But during the last six months of 1991, sales were running at an annual rate of about $24 million.

All of this revealing information -- and more -- is contained in the prospectus that America Online recently issued for its first sale of stock to the public.

Taking advantage of the current boom in IPOs -- initial public offerings -- America Online is planning to sell 2 million shares at between $9 and $11 each.

The sale will take place with the help of two underwriters, Alex. Brown & Sons Inc. of Baltimore and Robertson, Stephens & Co. of San Francisco.

If the name America Online is unfamiliar, it may be because the name was adopted only four months ago. Until then, the seven-year-old company was known as Quantum Computer Services Inc.

Like most of its competitors, America Online offers a wide range of information that includes news, weather, sports, stock quotes, movie reviews and travel information.

The company originally aimed its software products at users of Commodore 64 and Apple II computers. In time, service was extended to IBM-compatible and Macintosh computers, which have become the fastest-growing part of the company's business.

Of the 2 million shares being offered for sale, 1 million will come from the company and 1 million will come from venture capital groups and individuals that supported the formation and growth of the company.

America Online is headed by chairman James V. Kimsey, 52, a long-time Washington business executive, and president Stephen M. Case, 33, a former marketing executive at PepsiCo. Inc. and Procter & Gamble Co. The chief financial officer is Lennert J. Leader, 36, who previously worked at Legent Corp., a computer software company in Vienna.

If the America Online offering were to take place at a mid-range price of $10 a share, the company would earn $10 million before expenses, an estimated $8.8 million after expenses.

The company expects to use $3.2 million to pay dividends that have been accumulating on the company's preferred stock, which will be converted to common shares. The rest of the money will be available to pay for expanding and improving the company's services.

The three biggest blocks of stock to be sold by current shareholders will come from KB Berkley Japan Development Capital Ltd., which is selling 160,000 shares; Argosy Asset Management of Luxembourg, S.A., selling 120,000 shares; and Commodore Holding, B.V. of New York, selling 100,000 shares.

It is fairly common for venture capitalists, both domestic and foreign, to invest money in promising new companies and then to sell some or all of their holdings when the company goes public. In cases where the company is successful and the stock sale goes well, the return on investment for the venture capitalists can be very large indeed.

However, as any venture capitalist will tell you, not every company is a winner. Indeed, the losers can cost them a lot of money.

What is interesting to note is the list of major shareholders who are not selling any of their stock. Among them are Allstate Insurance Co. of Northbrook, Ill., Citicorp Venture Capital Ltd. of New York and Tribune Co. of Chicago.

In fact, the Tribune Co., publisher of the Chicago Tribune, recently paid $5 million to buy the equivalent of 512,00 shares in the company. After the offering, their holdings will represent a 9.5 percent stake in America Online.

However, the Tribune Co., which is a major force in newspapers and broadcasting, wants to buy even more America Online stock and has asked the underwriters to save them 100,000 shares from the offering.

The $5 million deal between the Tribune Co. and America Online came about last August when they agreed to produce "local editions" of America Online in Chicago and in Fort Lauderdale and Orlando, Fla., where the Tribune Co. publishes newspapers.

"In addition to offering the complete package of America Online services," the prospectus says, "these local editions are expected to include content from a variety of local sources, including Tribune-owned properties -- for example the Chicago Tribune newspaper, WGN-TV, WGN radio and the Chicago Cubs baseball team -- and will be marketed by the Tribune.

"The company believes this local edition concept may have significant potential and, as a result the company is now discussing similar alliances with additional newspaper companies."

The type of strategic alliance is one of the goals that America Online says it is pursuing. It is also focusing on developing specific audiences, such as individuals involved in the world of small businesses.

Working with Microsoft Corp., America Online is offering subscribers the Small Business Center, "an on-line resource center and electronic forum for the exchange of ideas and information."

America Online also is trying to expand its reach into "affinity groups," such as the members of the National Education Association, as well as college alumni and trade groups.

While America Online is doing all this, it has to keep looking over its shoulder at the competition. There are many competitors. And some are part of very large companies with very deep pockets.

The biggies include CompuServe, a division of H&R Block; GEnie, a division of General Electric Information Services; and Prodigy, a joint venture between International Business Machines Corp. and Sears, Roebuck and Co.

And there are more competitors to come, including the Bell companies, which are launching electronic newspapers and information services -- some with advertising -- while a congressional debate rages over whether phone companies should be permitted to do so.

What does the future hold?

Of 24 million households with personal computers, only about 2 million subscribed to a consumer on-line service in 1990, according to Link Resources, a New York research firm specializing in electronic information services.

Steven Sieck, a vice president at Link, said he expected to see continued growth in the on-line service business. But he noted that of the 24 million homes with personal computers, only about 6 million had modems -- the communications devices needed to hook up to an on-line service. And then, he said, only about 80 percent of modem owners actually use them.

"The key issue," Sieck said, "is what size is the market and to what extent will you reach a saturation point."

As competitors fight for market share in the next few years, Sieck said, the most successful on-line services will be those that are most nimble in forming alliances with others in the information business, including the telephone companies.

One of the major strengths of America Online, he said, was the company's "skill at making alliances," such as the one with the Tribune Co. It's major handicap, he added, was that it lacked the financial resources of a Sears or GE.

Unlike many companies coming to the public market these days, America Online has a solid, ongoing business. But it is also clear that when a small group of companies has a good thing going, others will try to get in on it. If history is any guide, that will lead to a shakeout, mergers and eventual domination of the industry by a few big players.

Until then, however, investors in America Online could find themselves signing on at the right time.

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