Case Study

Case study 4: America online, INC.

1. Prior to 1995, why was America Online so successful in the commercial online industry relative to its competitors CompuServe and Prodigy?

 From perspective of consumers, AOL’s rate structure was the easiest one to understand and anticipate.

 The interface was easy to use, which extended AOL’s services to the growing customer group without technical knowledge.

 Aggressive marketing program enabled AOL to attract subscriber base at large. Successful marketing programs attracted new subscribers.

 AOL also established relationships with high quality content-providers.

2. 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?

 The lurking threat from Microsoft, which served as a bookstore. It attracted every author being his own publisher. Microsoft even provided 70% of the commission fees to the content providers, while AOL only allowed 20%. AOL would eventually lose its origional market share and customer base.

 World Wide Web imposed limitation on the role of online consumer services companies. Everyone online, with a computer, was his own publisher.

3. Was AOL’s policy to capitalize subscriber acquisition costs justified prior to 1995?

Before June 1995, AOL capitalized its subscriber acquisition costs. They were recorded as assets when it incurred and amortized over 18 month period. The capitalization was based on assumptions that the acquisition was to success and to create profit, which means these costs were considered to be recoverable. From the perspective back then, it was