London - The pop star Prince is enjoying something of a career revival in the United States. And, fittingly, Silicon Valley is also partying like it's 1999.
The tech-heavy Nasdaq index is now higher than it was at the peak of the internet bubble. Privately held companies such as Uber and Snapchat are raising money at staggering valuations. Perhaps most surprisingly of all, AOL is back in the headlines.
The US telecommunications giant Verizon agreed to pay $4.4bn (£2.8bn) for AOL on Tuesday. That's not chickenfeed, even if Verizon did make a profit of more than $12bn in 2014 and is paying mainly out of its cash reserves.
Verizon is really only interested in one part of AOL: its mobile video platform, forecast to be the main driver of revenue growth for the telecommunications industry in the short term. It's a market already worth $600bn a year, according to the blurb Verizon put out to announce the deal.
Long gone, but not forgotten, is AOL's part in arguably the worst deal in corporate history. In fairness to AOL, its management should not be blamed for a market that so inflated its share price that it was able to bid $164bn for Time Warner in 2000. AOL's revenue and profits were a tiny fraction of its much larger “partner” (the deal was billed as a merger, perhaps to minimise Time Warner's embarrassment at being swallowed up by paper that would soon become almost worthless).
Not entirely worthless, as it turns out. AOL's current business is split into three parts: its mobile and video platforms; its publishing business (including the The Huffington Post and TechCrunch websites); and its subscription business.
Of its publishing and content businesses, referred to as its “Brand Group”, The Huffington Post is the most valuable asset. AOL paid $315m for the online newspaper in 2010, and Verizon has already hinted that it may be spun off.
Its current value is hard to ?estimate, given that its results are rolled up into its group finances, but a similar valuation in a tech-hungry world is not hard to imagine. Given that The Huffington Post won a court case in March 2012 that supported its right to pay bloggers nothing, its business model looks sound.
“AOL Platforms”, which includes its proprietary mobile video technology, is what Verizon paid for. This enables advertisers to direct adverts to specific audiences and is widely viewed as being one of the most advanced and competitive platforms in the market. In order to remain competitive against the likes of Google and Facebook, Verizon clearly felt that buying AOL, with whom it was already in a development partnership, was the logical progression.
The third string to AOL's bow is its “Membership Group”, essentially its old dial-up internet subscriber base. Around 2.2 million people are still paying AOL for this pre-broadband service.
Anyone looking at AOL might be forgiven for assuming that its base of subscribers is by some distance the smallest part of the business. But far from it. Although it is shrinking rapidly, AOL subscribers still contributed approximately 30 percent to the company's 2014 revenue. Last year, the “Membership Group” contributed $791m to group revenue, a fall of 5.6 percent compared with 2013 but still more than the $770m from the “Brand Group” .
Verizon can claim, accurately, that the mobile video and advertising platforms were the main contributor to revenue and growth, if not to profit. Because, of course, the subscription business, which is far more mature despite its status as a dinosaur, is also the highest margin business.
So what has Verizon actually paid for? For once the numbers are actually very easy to calculate, and Verizon shareholders should be very concerned: the “AOL Platforms” part of the business, despite growing revenue by 38 percent in 2014, made an operating profit of just $4.4m.
Even the mathematically challenged should be able to calculate that with a price tag of $4.4bn, Verizon paid an almost lunatic 1 000 times earnings for the good bit of AOL. Even by the standards of the last tech boom, that's a very rich valuation.
No wonder Verizon is looking to offload some of AOL's assets. The Huffington Post and TechCrunch, along with a handful of other titles, might get it a billion dollars of its money back, but those businesses are struggling for growth too - a $25m decline in revenue from 2013 to 2014 is not going to excite many potential media asset buyers.
That would leave Verizon hanging on to the subscription business, the decline of which is likely to speed up now AOL is back in the headlines and paying customers decide to take another look at their bills.
There is much to credit AOL chief executive Tim Armstrong with over the revival of a brand that not too long ago looked as moribund as MySpace. But Verizon may end well up kicking themselves. It is reminiscent of the tale of Prince Jefri Bolkiah of Brunei, who bought the uber-posh Bond Street jeweller Asprey in 1995. Once his own spending in the store was stripped out, the purchase price relative to the store's earnings soared to heights that even his brother, the Sultan, found too queasy to bear.
Verizon's chief executive, Lowell McAdam, will be hoping his own shareholders don't get the same feeling.
The Independent