Why AOL's Tim Armstrong Isn't Sweating Dial-Up Revenues

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AOL CEO Tim Armstrong didn't have to go very far to discover his company was struggling. He just asked one of his employees. And the employee, Michael Arrington, was happy to fill him in.

During an awkward and tense exchange at TechCrunch's Disrupt conference on Monday, Armstrong asked Arrington, who was moderating the discussion, whether he felt AOL was in trouble--quite the turn given Armstrong is the boss, and Arrington is the one who was supposed to be asking the questions.

"Yes," Arrington said immediately. "I think there is a plan [for AOL], but if you didn't have the dial-up revenue, the company would not be profitable. Would it?"

"That's opinion," Armstrong shot back.

"Well that should be fact," Arrington retorted, before acknowledging that the mood on stage had become "a little sensitive." This wasn't, after all, just Arianna Huffington clumsily shilling for her corporate parent.

Revenue from dial-up, the increasingly irrelevant Internet service, does, in fact, represent a huge part of AOL's portfolio. Last quarter, dial-up brought AOL $215.4 million, roughly 39% of its total revenue and representing about 80% of its overall profit, according to the New Yorker. If that revenue were to disappear, would AOL lose its profitability, as Arrington suggests? A decline of 24% in quarterly dial-up revenue and a drop of 86% in profit suggests as much. How could Armstrong call those facts opinion?

"I guess it's a good question, but to what point and purpose?" asks Laura Martin, an analyst at Needham & Company. "We're investing in a portfolio of assets. You're saying: Take out all the profitable bits. But I can't, I can only invest in the ticker AOL."

As Martin says, there's no point in dealing with hypotheticals. Yes, AOL's most profitable business might be a diminishing asset, but the company is using that revenue to invest in longer-term assets like the Huffington Post, Patch, and About.me. "Just like CBS takes its mature businesses and funds its higher-growth businesses--it's similar to what AOL is doing," Martin says. "My point is that [Arrington] is exactly right, and who doesn't know that? What [he] said is secret to no one."

In other words, highlighting AOL's dial-up revenue makes for good stage antics, but to even novice investors, it's a moot point. As Martin explains, when you invest in AOL, you're not investing in its dial-up revenue (unless, maybe, you're daytrading on Schwab via 56k modem); rather, you're investing in AOL's potential.

"We think you're buying an option on the fifth biggest aggregator on the web, and we think this is the right guy, along with Arianna [Huffington], to actually turn this option into a meaningful value play," Martin says. "To us, this optionality is a home run."

[Image: Flickr user macattck]

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