AOL’s New Economy

Just consider the dilemma of the CEO of America Online. This company is, after all, not really much more than a utility company. It provides a connection (through regular old phone lines) and a switchboard to the Internet.

Utilities are rather boring businesses. And while they have traditionally been protected from market competition, that protection is starting to end.

America Online, of course, has never been protected from competition. So its survival has been remarkable in an age when electric companies and phone companies are looking for ways out of their traditional businesses. But a P/E ratio of 200 for a utility company is clearly way out of line. Chances are that Steve Case recognized this, too.

Of course, every CEO dreams of having his stock price soaring into the stratosphere. But the reality must be rather frightening. After all, someday the stock has to fall back to earth — and not gently, either. When that happens, all of those investors who had gone along for the ride will suddenly be ready to lynch the leader who had helped convince them of the unlimited potentials of the “new economy.”

It happened to George Hudson. He was Britain’s railway baron when, in 1845, the country’s railroad bubble burst. And it happened to the king of America’s electric utilities, Samuel Insull, after the 1929 market crash. Unable to sustain their industries’ absurdly high stock prices, they were vilified by investors when the prices sank.

But, unlike these past titans, Steve Case has realized that he — and his company — are vulnerable. And so, rather than set himself up for a fall, he is at least going to go out rich, having exchanged shares of his boring utility company for the exciting and glamorous world of an “old-line” media and communications firm.