Brokers strike rich deal with AOL
"Every single area of electronic commerce is going to get hit up in some way," predicted John Robb, an analyst with online broker consultant Gomez Advisors.
Many already have. Indeed, the fat payments started in early 1997, when Tel-Save struck a $100 million, three-year deal to become AOL's exclusive long-distance company.
AOL followed in June of last year with a three-year, $50 million deal with direct marketer CUC (now part of Cendant) to feature its Shoppers Advantage shopping club. Other deals include a $40 million, four-year deal with bookseller Barnes & Noble; a $32 million, five-year deal with Preview Travel; a $19 million, three-year deal with Amazon.com; and an $18 million, three-year deal with music-seller N2K Inc.
These deals have been applauded by investors, who expect them to become AOL's primary source of profits, and a valuable source of business for online merchants. That's because AOL, with 12 million subscribers, dwarfs every other online service. And AOL subscribers account for a third or more of the traffic on the World Wide Web.
A key to the deals so far has been a strong measure of exclusivity. Tel-Save, for instance, has such an exclusive tie that it calls its 9-cent-a-minute service AOL Long Distance.
N2K operates the exclusive music seller within AOL's entertainment area. Barnes & Noble is the most prominent bookseller in the proprietary service, while Amazon.com is the exclusive bookseller on AOL's Web site.
60,000 accounts
Today's brokerage deals are not as exclusive. Nonetheless, industry executives said it is possible for the brokerages to come out ahead. They noted that Web brokers commonly spend about $200 in marketing costs per account acquired. That means a $12 million per-year deal would make financial sense if a broker attracted 60,000 accounts, or a total of 180,000 for the three brokers.
That would make AOL the top source of new online brokerage accounts. Julio Gomez, founder of Gomez Advisors, said that online brokers added 2.5 million accounts in 1997. But only about half of those accounts came from new customers. The rest were existing customers who activated an online trading option.
Meanwhile, DLJdirect, which ranks among the largest online brokers, only has about 460,000 accounts, an official said.
Is it reasonable to expect these brokers to add another 60,000 from AOL? Possibly. AOL's personal finance area ranks among its most popular destinations, with more than 5 million unique visitors a month, returning an average of once a week. And many AOL subscribers are new to the Internet, meaning that AOL brokers have a chance to grab them before they see other brokers on the Web.
Meanwhile, the admittedly limited history of merchants who have left AOL isn't stellar. For instance, Tower Records has slipped behind N2K in online music sales, after being replaced by the company in the most prominent spot on AOL.
Travelocity, the Web travel agency of Sabre Group, still ranks among the biggest online travel agents. But Preview Travel, which replaced Sabre as the travel agent for America Online's proprietary service in 1996, has twice the traffic, according to Preview CEO Ken Orton.
"I think the truth is that once you get that traffic going, you really want to stay," Orton said.