AOL's partners put up millions, wait for payoff

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While most online sites go begging for advertising dollars and some go out of business waiting for the money to flow, America Online is enjoying a run of commerce deals in the past six months that total well over $160 million.

A few other gateway or portal sites such as Excite and Yahoo! are also flush with the promise of cash from recent deals, but the largest online service provider by far outdistances any competitor.

AOL's commerce deals range from lesser-known businesses such as Provident American Corp. and Software.net, in which AOL has taken a small equity stake, to recognized names such as Barnes & Noble and American Greetings Corp.

On top of cash payments for positioning and sometimes exclusivity, AOL also usually gets revenue sharing or stakes in the company for goods and services sold.

AOL has also struck a number of content alliances in recent months with partners including Bloomberg, E! Online, Business Week and Teen People, although no dollar figures or structural details have been released.

IT ALL STARTED WITH CRITICAL MASS

It all started last fall, when AOL topped 10 million users, also known as critical mass within the company. Now, its subscribers surpass 12 million.

"Five years ago, [CEO] Steve Case said if we hit 10 million members, good things will happen. And good things are happening," said Barry Schuler, president of AOL Internet Services. "If you have a really high-caliber audience with strong affinity to the product at critical mass, you can derive value out of it."

And value it is deriving, although not without some criticism.

Most of the Internet companies with which AOL deals, and most online ventures in general, are not profitable. Many have had to raise venture capital, or cast initial public offerings or secondary ones just to pay off their multimillion-dollar commitment to AOL.

For example, Preview Travel, which renewed its online travel deal with AOL in October for $32 million over five years (plus a revenue share for AOL), noted its commitment to AOL and Excite ($24 million) in Securities & Exchange Commission filings for its IPO, saying, "The company is obligated to make aggregate payments totaling $8.5 million in 1997 assuming completion of the company's initial public offering in 1997." Also noted was that the company had accumulated a deficit of about $18.7 million as of June 30. One analyst who declined to be named said, "More amazing is that the stocks of those going into hock to buy the ad space have risen smartly on announcement of the `strategic marketing alliances.' The theory is that the visibility purchased is a can't-loose proposition."

AOL'S `INCREDIBLE CLOUT'

AOL is aware of the criticism, said Mr. Schuler. However, the company believes its name and brand strength lend credibility to those IPOs and venture fundings. In fact, in some cases, Mr. Schuler said, AOL has cut deals contingent on the success of the fund-raising.

"We've had circumstances where people came to us with great products and they're a great young company," he said. "By doing a deal with AOL, they are able to raise money for the next round."

Forrester Research analyst Kate Delhagen said she believes the strategy may work. "AOL has incredible clout in the marketplace and if you want to play, you have to look at them," she said. "Many merchants are realizing that now is the time to push all their chips on the table and all at one time."

Greg Eckstrom, VP-marketing at CyberMeals, which cut a $20 million deal with AOL, said he has heard that a letter of intent from AOL or Yahoo! will bring in a second round of funding. But, he added, his company's deal with AOL was not brokered or intended to work that way.

"AOL will profit more by our success than if we fail," he said. "And yes, if they charged us $20 million upfront, we would go out of business. . . . It is a lot of money, but at a certain point you have to jump off the diving board and really make a go of this."

Copyright April 1998, Crain Communications Inc.

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