AMERICA ONLINE INC.

Presented By: Aditi Agarwal (PGFA0903) Ankit Jain (PGFA0909) Kamal Agarwal (PGFA0919) Nudzrat Zaman (PGFA0927) Background of the Company«

‡ American online, Inc was founded in Vienna and was a leader in the development of a new mass medium. ‡ Stephen Case and James Kimsey founded Quantum Computer services which later changed its name to American Online in 1991. ‡ In 1994, AOL surpassed those of CompuServe and prodigy, two of its rivals. Aol·s Products«

‡ Range of features included:

 Online Community: Conferences, opinion polls, discussions on specific topics.  Computing: Access to many public domains and software programs.  Education and References: Allowed adults and children to learn without leaving their homes with real- time virtual interactive classes. Contd«

 News and Personal Finance: Broad range of information services relating to sports, weather, stock market and personalized portfolio tracking.  Travel and Shopping: Gave customers broad access to travel and shopping reference materials.  Entertainment and Children¶s Program: Various clubs and forums for games and sports, multi player games for both adults and children. Strategies Used«

COST LEADERSHIP DIFFERENTIATION

Supply same product or Supply a unique product service at a lower cost. or service at a cost lower than the price premium customers will pay. The services provided SPECIAL RETENTION were the cheapest as PROGRAMS including compared to it¶s regular conferences, competitors at a rate of online promotions of $9.95 for 5 hours each upcoming news and month with each events, and regular additional hour charged addition of new content @ $2.95. and services.

COMPETITIVE ADVANTAGE Question round« Q1. Prior to 1995, why was America Online (AOL) so successful in the commercial online industry relative to it¶s competitors CompuServe and Prodigy? REASONS FOR AOL·s SUCCESS«

‡ Aggressive marketing efforts using both independent marketing efforts and co-marketing efforts. ‡ Easy access to AOL¶s online services. ‡ AOL invested in specialized retention programs to increase customer loyalty and satisfaction. ‡ Build and create unique content through numerous joint ventures. ‡ Also important to AOL were special interest sites created by entrepreneurs. Contd«

‡ AOL¶s rate structure was the easiest for consumers to understand and anticipate. ‡ AOL planned to expand the range of content and services it offered continuing to improve its multimedia context of its services. ‡ It identified and exploited new business opportunities. ‡ Maintained technological flexibility. Q2. As of 1995, what are the key changes taking place in the commercial online industry? How are they likely to affect AOL¶s future prospects? KEY CHANGES IN THE COMMERCIAL INDUSTRY«

‡ The online consumer services industry was expected to grow by 30% in 1995. ‡ With the advent of the internet World Wide Web and the entrance of MSN the content providers had alternative distribution channels. ‡ The oligopoly of the big three CompuServe, Prodigy and AOL faded fast and the internet, the expanding network of WWW that threatened their growth. Q3. Was AOL¶s policy to capitalize subscriber¶s acquisitions cost justified prior to 1995? Prior to 1995, AOL capitalized direct subscriber acquisition costs such as printing and shipping of starter kits costs.

‡ The direct marketing subscriber acquisition costs were amortized over 12 months and the costs related to co-marketing efforts were amortized over 18 months. ‡ AOL principle revenues were from monthly customer subscriptions and their largest expense was the acquisition cost of obtaining new subscribers. As such, they had chosen to recover subscriber acquisition cost over the 12 or 18 month period from subscription revenues. ‡ The amortization period was developed from AOL experience and was chosen to more accurately match revenues with expenses. ‡ It is not advisable for AOL to capitalize the marketing costs because:

 Given the changes in the industry beginning in 1995, AOL should take a closer look at its policy of capitalizing subscriber acquisition costs.  The introduction of MSN as a competitor resulted in some subscribers switching services from AOL to MSN, resulting in a reduction of subscription length and revenues.  The introduction of the World Wide Web as a substitute could also result in a reduction to current and future subscribers.  After reviewing the uncertainties of the online services industry in the near future, AOL should have decreased the amortization period for the subscriber acquisition costs. Instead, AOL choose to increase the amortization period to 24 months for both direct marketing and Co-marketing efforts subscriber acquisition costs. Q4. Given the changes discussed in Q2., do you think that AOL should change it¶s accounting policy as of 1995? Is the company¶s response consistent with your view? Some Analysts labeled AOL¶s accounting policy as being ³aggressive´.

‡ AOL amortized its software development cost over 5 years, a long time in fast changing, uncertain online service industry. ‡ AOL capitalized subscriber acquisition cost when its no. one competitor CompuServe did not. ‡ Therefore, AOL should change its accounting policy. ‡ The company¶s response is not consistent to our views. Instead of reducing the amortization period from 12-18 months, AOL chose to increase the same to 24 months. Q5. What would be the affect on AOL¶s 1994 and 1995 ending balance sheets if the company had followed the policy of expensing subscriber¶s acquisitions outlays instead of capitalizing them? What would be the effect on expensing subscriber¶s acquisitions costs on AOL¶s income statement? ‡ If AOL were to write off all capitalized subscriber acquisition costs the effect on the 1994 & 1995 Balance sheet would be a $26,392,000 and $77,229,000 reduction in other assets and stockholders equity.

‡ If all the subscriber acquisition costs incurred in fiscal year 1995 were expensed in 1995, the effect on the income statement would be an increase in marketing expense and thus an increase in net loss.