Gunning for a Church Stock

There are a few “sacred” stocks out there. From dinner parties to investment seminars, if you say something negative about one of these church stocks, people get incensed. They give you the same look smokers give you if you tell them “those things will kill you” right after they’ve taken a deep, gratifying puff. I’ve never been privy to the National Investment Club List of Church Stocks, but I’m sure its filled with names like Coke, GE, Wal-Mart, IBM, Intel, etc. A plea to the Church Stock Committee: Don’t let AOL on your sacred list!

The time is right to short AOL. Virtually overnight, it’s shifted from its “customer first” focus that brought it fabulous success, to a horrible, backfiring “maintain market share at all costs” focus. They’ve forgotten the cardinal online rule “put your customer first, because he’s one click away from moving over to your competition.”

The latest example of AOL wreaking havoc on its customers was last week, in the turf war against Microsoft in Instant Messaging. Everyone in the industry knows that Instant Messaging, which is basically email in “real-time,” will become as standard as email in the very near future. But AOL has been frustrating its Instant Messaging users as it fights the tide.

But this battle is small. The real battle is over dial-up access. You see, AOL has a zillion PHONE access numbers to dial into AOL, but when it comes to CABLE access, the wave of the future, AOL has no way of forcing its users to come to AOL online. AT&T spent over $100 billion developing its cable network to provide us with internet access that’s over 100 times faster than AOLs 56k connection. For it’s investment, AT&T will win our business.

The bigger problem for AOL is when everyone starts using cable service instead of their phone service for internet access, which is only about 3 years away. Here’s what will happen. You’ll pay your local CABLE company for fast internet access. Then you’ll quickly realize that you don’t need to keep paying for your AOL account anymore, and you will drop your AOL account. Simple as that.

AOL realized this too late, after AT&T was already on its cable buying spree. Once AOL realized this potentially fatal mistake, instead of trying to compete fairly, it went running to Big Government for help, saying that AOL and all ISPs should have “open access” to the cable. AT&T correctly says that it only provides the cable connection, just like AOL provides the dial-up number, and the customer is free to go anywhere on the web, including AOL’s sites.

Again, AT&T wins. Not because its better or nicer than AOL. But because its in the best interest of the customer for AT&T to win. And it sure doesn’t hurt to have the FCC Commissioner, William E. Kennard, on your side. He has repeatedly said that he is opposed to regulating open access because he wants AT&T and other cable players to have every incentive to upgrade their networks. ”My No. 1 concern, numero uno, is we’ve got to get Americans faster Internet access in their homes,” he says.

So the news last week that 6 insiders sold a combined $400+ million worth of AOL stock, including a $162 million sale by AOL CEO Stephen Case, comes as no surprise. Let’s get this straight, last week,AOL insiders were dumping like mad, while AOL customers were becoming increasing frustrated with the Instant Messenger service. AOL’s protectionist policy in Instant Messenging and its cry for government help in cable access are both anti-competitive and anti-consumer. These policies will hurt AOL in the long run. We’re betting they’ll hurt in the short run as well.

Sell AOL short. Use a very tight stop-loss of $102.50. If the shares close over $102.50, close out your short position the next day. A break down below $90 is only the beginning here.

Steve Sjuggerud
August 4, 1999

Steve Sjuggerud is Research Director of the Oxford Club. To find out more about the Oxford Club, visit them at

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