Microsoft (Nasdaq: MSFT) does a deal with RadioShack and America Online (NYSE: AOL) shares go down? I don't get it.
The agreement works well for companies actually involved. Tandy (NYSE: TAN), the would-be Internet access king, gets $100 million for Radioshack.com, MSN gets wider distribution, both sides share the revenue, and everyone's happy. Northpoint Communications (Nasdaq: NPNT) no doubt is really happy, since the deal involves heavy promotion of broadband; Northpoint already provides DSL service for both RadioShack and Microsoft.
You could argue about the actual importance of the announcement for each of the players involved, but whatever the degree, it's a good thing for them, and their stocks are reflecting that in today's trading. Fine.
But does their win mean someone else's loss?
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The market evidently thinks so -- AOL's stock price yielded more than 2 points this morning. A Merrill Lynch report claimed RadioShack was choosing between MSN and AOL, so maybe traders were disappointed that Steve Case's outfit couldn't get a foothold in the most widespread U.S. consumer electronics chain. That's trading for you -- win some, lose a lot.
AOL investors should relax. This doesn't change the big picture for America Online; if you like the stock -- at these prices, you could reasonably argue that AOL shares are overinflated, but that's a different story altogether -- if you like the stock, nothing said today should change your mind.
Don't be disheartened, because Internet access remains far from a zero-sum game. MSN's victories do not have to come at the expense of AOL, because this will be an expanding market for a long time, especially overseas where the RadioShack deal means nothing.
Tandy CEO Len Roberts talks about turning RadioShack into America's Home Connectivity Store, but talking is easy; demonstrating success is much harder. Tandy still has to prove it can carry out big plans beyond traditional consumer electronics, given the company's history of failure in areas such as microcomputer manufacturing (remember when TRS-80 was the leading non-Apple computer brand?) and retail superstores (how many Computer City shops are left anyway?). Hopefully Tandy won't seek marketing advice from MSN, a service that has struggled to boost growth despite the advantages offered by the Windows monopoly.
On the other hand, AOL's marketing prowess is established. Neither price increases nor bad service could stop AOL from becoming the largest ISP in the world. Now the AOL brand is so well-known -- not even the big TV networks can compare, according to a recent study -- that its growth is practically self-perpetuating.
In a sense, MSN/RadioShack marks the debut of a competing model for Internet access. AOL has big bets -- $800 million with Gateway, for example -- that the PC manufacturer will be the point of entry for the Internet. MSN just put a $100 million wager on a retailer, partly in the belief that consumers will seek Internet access through all kinds of devices, not just PCs.
Even if new Internet users prefer to do it through retailers instead of OEMs (and remember, one channel doesn't have to triumph at the expense of the other), America Online has choices. If Merrill analyst Peter Caruso is correct, AOL might end up partnering with Circuit City (NYSE: CC).
That's not so bad. With the exception of Divx, Circuit City has been a steady financial performer, actually more reliable over the last few years than Tandy. RadioShack may have the most stores, but it's not the only option for retail electronics buyers, and it's not the only growth venue for AOL.
Buyer's downgrade of the online retailer to a "hold" rating reflects the past more than the future. "Yes the horse is already far outside of the barn, but given the stock's recent bounce and the announcement by Amazon.com that it will enter the software market, we are uncomfortable leaving our Buy recommendation on Beyond.com at this point," Buyer writes in today's research note. "Beyond is transitioning from a predominately consumer oriented site to one more focused on the small business, government and corporate marketplace. While those are immense markets, and ones in which Beyond should be able to leverage its experience, we suspect the transition will take more than one or two quarters."
The $100 million acquisition of The Theory Center adds a potentially lucrative revenue stream for BEA, SG Cowen analysts Rehan Syed and Andrew Brosseau write in a research note released today. Note that SG Cowen, which upgraded BEA to a "strong buy" from a "buy" rating, has done investment banking for BEA and advised The Theory Center in the deal announced yesterday.
Whatever their biases may or may not be, Syed and Brosseau expect BEA to tell analysts to raise their estimates after next week's quarterly report. Demand for BEA's Web application server technology is seeing strong growth, they note. "While the stock has tripled in recent months and is expensive by any traditional metric, it still trades inexpensively relative to the richly-valued Internet infrastructure group," the analysts write. "If the group continues to trade up driven by expanding investor interest in this space, BEA should outperform the sector." 22GO>