) is losing share in the Internet search market, where it competes
with Google (
), Microsoft (
) and Yahoo (
). In the company's earnings report for the second quarter of 2010,
management noted that AOL's search problems are being caused
primarily by the steady decline of its legacy dial-up subscription
We expect these negative trends to exert downward pressure
on AOL's share value going forward. Accordingly,
we have reduced the Trefis stock price estimate for
AOL from $27.79 to $24.97.
Our analysis follows below.
AOL by the numbers
Once known primarily as a dial-up Internet access service, AOL
now makes most of its money by selling advertising against free
content on its own network of sites as well as third-party sites.
Display ad sales currently constitute 52.7% of the Trefis stock
price estimate for AOL, versus 13.8% for the subscription
Search advertising, which is a much more profitable business
than display advertising, contributes another 12.2% to AOL's share
value according to our estimate.
AOL's search market share slipped from around 6.2% in 2006 to
3.2% in 2009.
AOL captured only 2.3% of the search market in July
according to Comscore, an Internet market research company. We
expect this decline to continue over the next few years, reaching
1.8% by the end of the Trefis forecast period.
We have priced this anticipated decline into
our current price estimate for AOL's stock.
However, the stock could see an additional downside of 4% if AOL's
search market share slides to 1% by 2016.
You can drag the trend-line in the chart below to create your
own search market share forecast for AOL and see how it impacts the
company's estimated share value.
AOL's search advertising revenues declined from $120 million in
the first quarter of 2010 to $106 million in the second quarter.
According to management, this decline was driven primarily by the
steady disappearance of subscribers who use AOL search as their
AOL's total subscriber count has dropped steadily in
recent years, from around 25 million in 2005 to around 5 million in
2009. Meanwhile, U.S. broadband penetration increased from 28% in
2004 to 69% in 2009.
AOL currently sells dial-up and broadband Internet access. AOL
does not provide the actual broadband connection, but works with
third-party service providers. We believe that cable and telecom
companies will continue to gain market share at AOL's expense
because they offer higher broadband speeds.
We expect AOL's subscription business to vanish almost entirely
by the end of the Trefis forecast period. You can drag the
trend-line in the chart below to create your own subscriber count
forecast for AOL and see how it impacts the company's stock
And you can see
the complete $25 Trefis Price estimate for
AOL's stock here.