American Online Case Study

The major explanations to the reason why AOL was so successful in the commercial online industry comparing to its competitors CompuServe and Prodigy are as follows:

1. AOL offered the unique and board range of features such as Online Community, Computing and the like, so their services are relatively differentiated.

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2. AOL kept good relation with its customer because of the easy access to AOL’s online service which only required to have a personal computer, a telephone line, and a computer, and also reflected in AOL’s rate structure which was the easiest for consumers to understand and anticipate, relative to its competitors.
3. The bargaining power of AOL with supplier is achieved by making strategic partnership with American Express, and so on; and completing its acquisitions of Internet software developers, along with AOL’s growing membership base, in order to strengthen its new interactive services industry by means of pursuing a number of initiatives.
4. The threat of new enchant is low, since there is not much service providers, like AOL, acted as middlemen between thousands of content providers and millions of customers, which provided lucrative profits prior to 1995.

There are several crucial changes happened in the commercial online industry in the year of 1995 and after:

1. With the advent of the Internet World Wide Web and the entrance of Microsoft Network, content providers had substitution distribution channels that offered greater control over their products.
2. Under the background that the migration of proprietary services and content to Web sites, the exclusive offerings of AOL was declining, thus it was likely reduce the market share of AOL in the industry and subsequently posed negative effect on its profitability.
3. Since everyone with a PC was his/her own publisher, customers would sign up for an Internet on-ramp service provided by other companies and they were tend to use the other companies’ browsing software to surf the world’s database, resulted in the situation that content providers were starting to make use of these distribution channels.

Based on the annual reports and footnotes, AOL’s accounting policy was to capitalize subscriber acquisition costs prior to 1995, which in my view, was not likely to be justified in that period based, for the uncertainty whether ts customers could migrate to the internet still remained since this would probably affect the growth in its subscriber and the profit of its services, although the CFO of AOL attributed the choice to the explanation that the period over which the revenue would be received was matching with the timing the expense, yet there was a rising gap between the reported income and its tax income, except for a big change in its service quality, these two numbers bear a consistent relationship to each other.

The company should shorten the length of amortisation of the acquisition costs instead of extending it. The reason of this assertion are based on the life cycle of the industry which was supposed to be relatively short and because of the constantly changing environment of the commercial online industry with huge uncertainties, which was likely to require conservative accounting policy to reflect the financial figures so as to better match revenues with expense.

Nevertheless, AOL even extended the amortization period for its subscriber acquisition cost from about 15 months to 24 months, which made it would be tend to face big risks when customers switched to other online service under uncertainty. Therefore, the company’s response seems to be inconsistent with my view.

If AOL followed the policy of expensing subscriber acquisition outlays rather than capitalizing them, there would be a huge amount of subscriber acquisition costs, leading to a comparatively decreasing profit and increase operating loss in the income statement as well as lower equity in the balance sheet for the last same period or compared to its peers, which might lose the attractive looking of the accounting figures when it was eager to raise money from the public market so as to pay its bill.

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