AOL layoffs, restructuring costs, and those loan repayments….oh my.

Since it’s unusually cold in my neck of the woods, and since I hate being cold, I’ve been staying inside with the heat up around 82 degrees and a copy of every public filing AOL made in the last three months in front of me. The more I read them, the more uncertain I become. I think what’s got me feeling most uncertain is Tim Armstrong’s math. Take the layoffs. Please. They save the company not $300 million in the first year, as advertised…try maybe $64 million. Here’s how…

Layoffs are projected to save $300 million yearly but will cost as much as $200 million to administer, which includes the cost of paying each laid off person’s severance and COBRA, closing some as-yet unknown “facilities”, and so on. If the $200 million only cost $200 million, then AOL would come out ahead by $100 million on the layoffs, but…AOL’s net income is so low (just scraping $74 million) that it seems like Timmy had to run to the bank for some money. So he set up a $250 million revolving line of credit with fluctuating interest rates, just like on your credit card.

I have no idea how much of the $250 million AOL will ultimately borrow, what fluctuating interest will be, nor how long AOL will take to repay whatever it owes, so I’ve assumed AOL will use up to $200 million to restructure and will use the other $50 million for day-to-day operations. I ran the loan through a Yahoo finance calculator at flat 8% interest for 10 years. Assuming those figures are accurate (which I’m not assuming, believe me) the outcome is:


Total interest will work out to around $134 million – almost half the loan amount, and about 70% of what it will cost to lay off employees.

Monthly payments (assuming they are monthly) would be a little over $3 million.

Average monthly interest will work out to about $950 thousand.

The total amount to be repaid, including interest, will be just shy of $383 million. Time Warner also gets 1% interest on the total amount of the loan for as long as it’s being serviced. That brings us up to $384 million, easily, for AOL to spend $200 million to save $300 million dollars a year by laying off 2,500 people. Capice?


Is it worth it? And to whom?

The math from here, assuming my numbers are anywhere near accurate, suggests AOL might save just $64 million this year.

Of course, it will look better on paper. Loan repayments each year, according to my figures, work out to “only” $36 million, as opposed to continuing to pay $300 million a year for 2,500 employees, so when you look at quarterly numbers, you won’t see the $134 million loss that interest paid by AOL might incur over the service life of the loan; you’ll just see big “savings” on employee costs each quarter, as opposed to the much smaller amounts put toward loan repayments.

Looking beyond AOL’s first year (and it will be rough, between restructuring costs, loan repayments, various debt repayments arising out of fraud and cancellation charges, continuing subscriber losses, and an under-performing stock, which was targeted by a few analysts to trade at $31 out of the gate, but hasn’t approached anything near that wuthering height yet), if, for any reason, AOL defaults on this loan, Bank of America will become the new owner of every patent and trademark currently owned by AOL. It will also own all patents and trademarks that AOL might create up until default takes place.

What would AOL’s new slogan become in that case – “Welcome, you’ve got banking”?

Can any of you imagine AOL effectively being owned by Bank of America? It’s not as clear-cut as that: the terms of the loan prevent real property from being seized should AOL default, but if AOL loses all patents and trademarks, they basically lose the right to run their own business – instead, they get to “manage it” for BOA. At least that’s how I see it. I’ve looked online for a better explanation of what happens to a business should their patents and trademarks come to be owned by a bank, but I can’t find any good real life examples.

What buy you?

BusinessWeek offers financial comparisons between AOL and a few companies, including Earthlink. Earthlink, though it has no future as a dial-up provider, is a pretty decent broadband provider with financials that look much better this year than AOL’s, and it’s not banking on an unproven Demand Media business model with nothing but a fading subscriber base and a struggling advertising unit to back it, so it might be a safer bet than buying stock in AOL.

Full disclosure: I don’t buy, sell or trade stock – I never have – so it would be an overstatement to call me even an armchair analyst. If I did buy and sell, I would still encourage you not to quote me, since I’m more intuitive than I’m able to make a mathematically-based call.

My prediction? AOL’s stock will rally before spring, rise and fall some, peak mid-summer, then slowly slide back again, with everyone talking disaster by December of this year. It will ultimately (long-term) not do too well. I don’t know why I think any of that, and again, I could be completely wrong, so take me with a big, fat grain of salt.

Do I want AOL to fail? Do I plan on encouraging it?

No, and no. I simply want AOL to get out of the dial-up business. I know subscribers are their only major source of income, so I feel bad that I really want those people yanked right out from under them, but AOL’s dealings with consumers, to this day, have been less than on the up and up, especially when it comes time to cancel payment of their dial-up plans. Between that and AOL’s difficult-to-remove software, their old business model – locking in consumers – bothers me on too many levels.

So I want AOL to get out of any business that involves selling anything to anyone. That means they need to either sell or close access and try to make money online off of advertisements that run alongside their new content. Once they do that, I don’t care if they succeed or not, but I’m not against them succeeding, should a day like that come.

14 thoughts on “AOL layoffs, restructuring costs, and those loan repayments….oh my.

  1. No wonder the merger “sort of” failed…
    None of them could speak English. If I mangled the language as much as they do I’d hope someone would muzzle me for my own good, not give me a high-powered job at AOL. I haven’t seen the spoken word sound this fucked up since W was prez:
    Levin: But this next thing that registered on me was that they seem to have a very sweet relationship and I liked that, and we had some fun, joked around, and so from a personality point of view we talked.
    Really????
    Pittman: It was a very heady time because 1999 was the first year the thesis that everybody was going to be on the Internet and every business was going to be on the Internet and it was going to be a primary means of communication finally was accepted.
    Dear God.
    And Pittman and Parsons use the phrase “sort of” until I sort of want to puke:
    Pittman: 1999 was the year it sort of kicked in…me and a couple other people said there’s no chance that’s ever going to happen and I sort of paid no attention …
    Parsons: …him and Steve were sort of going down the road to see how it could work….
    In that vein, I was sort of surprised at the following: To call the transaction the worst in history, as it is now taught in business schools…
    Imagine AOL Fail being taught in schools. That you don’t have a well-rounded education until you learn that the AOL/TW merger failed! That’s sort of cool…
    Back to their atrocious use of spoken language *takes a moment to cringe violently* maybe that’s the secret to success: be vague and sort of, you know, non-specific. And simultaneously twist grammar into a tangled mess at every opportunity. Then, yeah, I dunno, maybe sort of…profit?

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  2. They know it already. The dial-up business (which requires upkeep on the software side of things, since it’s all interconnected with AOL) is not only a cash cow for them, it’s their only cash cow. So they cling to it. You can’t blame them. You can’t blame Tim for not wanting to let go of the only revenue source his company has a real stranglehold on.
    AOL’s costs have dropped to almost nothing to maintain subscribers, since there’s less people dialing up through AOL than ever, so there’s less wear and tear on modems, servers, call reps, and so on…it’s a cakewalk to hang on to the 5 million or so people left.
    It’s a lot harder to not lose them, though, with broadband and high speed DSL so readily available these days and prices dropping all the time.
    Figure a basic dial-up connection is $9.95 with AOL now and one with tech support is $11.95, but it’s dial-up. Slow.
    For $8 more I get a 1.5Mbps down/maybe 400 up – many times orders of magnitude faster than what an AOL dial-up user gets. Now you do the math and tell me how much longer Tim is going to have those 5 million people dialing up.
    I can almost promise attrition will take care of at least 2 million of those people between now and this time next year. The other three million should be gone by 2012-13. I hate waiting that long to see it all finally fall down, but if I have to, I will. In the meantime, Tim needs to get the Demand Media ripoff nice and strong and profitable so that when the last few million subscribers wander away, he won’t miss their money.

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  3. If they took the approach that Metconnect does in NYC and provided free dial-up (or nearly free, maybe at $5/month) supported by ads (you have to use Metconnect’s search engine, which is just Google with Metconnect branding) and then eased their users into broadbrand, maybe, just maybe, they could be saved. But I think the culture at AOL is too embedded for them to make that kind of change.

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  4. Re: No wonder the merger “sort of” failed…
    I remember the dot-com boom and bust-everyone thought they were going to make gazillions on the internet. Someone would have an interesting idea, get some start-up money (mainly from their parents) and suddenly venture capitalists were offering millions for the chance to bag controlling shares at an IPO the following week.
    It was a heady time to be young, in tech and on the the cusp of the millennium so I really can’t blame people for rushing into it but guys like Levin should have known better-it was his supposed business acumen that justified his ridiculous salary.
    Pfft, business schools. Look at what they produced-the last ten years of Wall Street have just about ruined the county the global economy. Sure, the AOL-Time-Warner merger was fraught with blunders but it’s hardly unique; the issue is in not being able to properly restructure and salvage what they do have. AOL still has nearly universal name recognition, as opposed Prodigy Internet (remember them?). They could still turn it around.

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  5. Re: No wonder the merger “sort of” failed…
    Oh the language fail…they talk a good game but it’s all BS. One of my professors told me “The market is like a casino, these analysts have convinced everyone they know what they’re talking about but don’t believe a word of it.” 😄

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  6. I think they missed the boat when they didn’t do that years ago. Around the time Jeff Bewkes kicked Jon Miller to the curb, it should have been done. I could see Jeff kicking Jon out to make room for a guy who could bring AOL fully into the broadband age by selling broadband after laying their own cable to provide direct access, but I cannot see Jeff kicking Jon to the curb if he had no intention of getting a guy in to do that for them.
    Obviously, Randy was not the guy to do that for them. He just messed what was left of AOL up even more while doing nothing, nada, not a thing, to bring AOL fully into the digital age and keep subscribers, and grow the subscriber base, by switching over to a broadband access business model.
    I can just hear all the whiny excuses for it, too: “Broadband is fully penetrated, there’s no room left for new competitors, we can’t afford to lay the cable then compete effectively price-wise” blah blah blah. Such bull.
    With Earthlink actually losing millions of subscribers over the last few years, AOL had a big chance to jump in and lay sophisticated, high-powered cable to compete with FIOS, even, but what did they do? They collectively sat on their hands banking on a subscriber model that doesn’t even make sense to consumers anymore with so many better, faster, and software-free options available for directly connecting the Internet now.

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  7. Re: No wonder the merger “sort of” failed…
    They actually can’t turn it around, simply because Tim Armstrong has no desire to. All he wants now is to turn AOL into a media company. He’s building this new media company mostly off of AOL’s new website, seed.com, where us “contributors” can go to submit new articles that are carefully SEO’d to appear (hopefully, for them) at the top, or near the top, of Google results for every search everyone does on the article’s most likely keywords.
    The contributors are usually paid only “if” their work is published (Seed holds most articles they receive for “whenever”, publishing very little as soon as it is received), and even then, contributors are paid just a tiny percentage of ad revenue that comes from ads placed right on the pages that their articles appear on.
    So if you’ve ever visited ehow.com in IE or another browser that doesn’t have the ability to block ads, you’ve seen what any article that got plucked from seed.com and distributed to one of AOL’s dozens of blogs will look like: a page garishly strewn with ads, and content that’s mostly like, duh, I could’ve done that in my sleep without any instructions from you, thanks. While a lot of content submitted to seed.com doesn’t have to be in the how-to format, a lot of it will be, giving you the SEO suck that Deamnd Media sites like ehow.com now produce.
    It’s not just a content business model; it’s a second rate and rather unoriginal one, dependent upon SEO and ad revenue to succeed. It caters to the lowest common denominator by design and in that spirit it will attract, at best, remnant ad inventory on the great majority of its pages. Rotsaruck to AOL on this. I don’t, honestly, give it a chance. But I think the public will be wowed with it for a while before the blinders come off and they realize what they’re looking at, and why.

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  8. Those 5 million people are probably like me, stuck out in the middle of nowhere; with absolutely no hope that DSL will ever be launched their area. They are stuck with either dial up or … satellite. To most people paying $70+ is not worth it. If you pick dial up, I personally recommend NetZero. They also have 10 hours free, and I got faster feeds than I had ever gotten with AOL (on the same plain old phone line).

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  9. Does satellite Internet really cost that much? I’m sort of hyperventilating at that $70. You paid that for how long? You had…let me think…Wild Blue or somebody for satellite Internet? But yeah, you do have to live fairly close to where DSL is offered to get DSL. But I live 20 miles out from nothing more significant than a gas station and my DSL is great (for DSL – I still think DSL sucks compared to broadband, though). I would hope they’re expanding the networks from where they were years ago…I remember just as recently as 2007 you couldn’t get DSL unless you lived no more than 2-3 miles from it or something…I really don’t understand how getting DSL works, honestly, I just know you’re supposed to live fairly close to where it’s offered or you’re not going to get it.
    Have you tried wireless, Mike? I tried it before signing up for DSL here. My neighbor’s network showed up just fine but it was password-protected, so I guessed the password and got in, only to find that he had blocked it some other way so all I could do was connect to him, not to the Internet (I say “his”, but I have no idea which neighbor’s network I was on, just one of them).
    Point is, if you buy a cheap little wireless adapter, maybe you’ll have better luck than I did. Especially if there’s legitimate free wifi nearby, like from a library/cafe/whatever (which reminds me, did you ever read about how I amplified my wifi signal by something like 15% with a flimsy little pie tin when wifi was my only connection last summer?).

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  10. “Cost that much”? LOL. Oh that’s just the middle plan, and not counting the equipment and installation. Since it’s a 2-way satellite and not 1-way like TV sats, the FCC requires a “professional installer” (aka someone who has one of those devices that tells you have locked a signal to the bird) to perform the installation, which is, most of the times free since they run the $99 deals constantly. But if you have to have a “custom install”, which means they must do additional work, like dig a hole in the yard, stick a pole in it, add some quikrete, and stick the dish on the mount, then it’s however much they want to charge you.
    The highest plan is $80 for 1.5 down and 200 up. Much lower during peak times, since the sats are so congestive, not talking about the 2 sec lattency. Then the FAP or “cap” which is 12GB in a rolling 30-day period (depending on the plan). Which brings me to the wireless, or “air cards”, or “data cards”.. or whatever they’re calling them this month. Most of the cell companies have a cap of 5GB a month, and like 0.59 for every MEGABYTE afterward. But yes that was my first choice, until I found that out.
    I live on a dead end road and my neighbors don’t have internet. The funny thing is DSL (Bellsouth) ends about 10 miles down the road, and it “cost a lot of money” to maintain DSL on their part and they don’t see any profit putting it out here. I told them if I was fucking rich, I could pay to have a central office put in my damn yard. LOL. I doubt I would have any luck at all with wirelessly. 😦
    The United States is so behind with internet speeds, just look at Japan with their 50-100Mbps.
    PS. It’s been really, REALLY, cold here too, like in the teens at night and not getting above freezing in the day. It’s finally warmed up, to the 40-50’s. 😀

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  11. “The highest plan is $80 for 1.5 down and 200 up…”
    It makes me sad that people pay $80 for what I pay $20 for – one of the 3 slowest high-speed packages. And to have to deal with latency, congestion, and that tiny little cap (I download that much every few days – in fact, I had one of those little Firefox add-ons that kept track, and I average 4GB down each day) on top of that, so you don’t even get what you’re paying for? That sucks. I guess I should be thankful that though I have little, at least “little” costs me a lot less?
    The one thing I couldn’t hack was my DSL installation charges, so I applied for and got help to pay it down – it was $80 after you added in one time charges – so my first phone bill was over $200 – the highest phone bill I’ve ever gotten in my life. Which gives me an idea – people don’t realize you can get financial help for installation charges if you want to switch from say, AOL dial-up to high-speed DSL…I wonder why I never thought to discuss it before now…or if I should…
    Yeah, it’s finally warming up here, too. I hope I get to thaw out before the next cold snap…I lost my tan (and I’m so white without a tan) and I miss the sun… 🙂

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  12. Pingback: AOL to Run MSN Portal « Anti-AOL -An InTooLate Production

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