1. Prior to 1995, why was AOL so successful in the commercial online industry relative to its competitors CompuServe and Prodigy?
As AOL has always been focusing on aggressively attracting new clients and managed to achieve a high retention rate, due to AOL’s proven track record of customer loyalty and positive word-of-mouth, it built up a relatively large customer base (4m customers by end of Oct 1995).
AOL aggressively marketed its online service using direct mail packets with AOL software disks and entered co-marketing efforts with computer magazine publishers and PC hard- and software providers in order to distribute their software. New customers could easily activate their ...view middle of the document...
By providing special-interest sites, AOL was able to keep customers online for a longer time and increase revenues which distinguished AOL from its competitors. Customers interest in this content also contributed significantly to customer retention rates.
A simple fee structure (9.95$ per 5 hours each months and 2.95$ per each additional hour) and transparent pricing policy helped customers easily understand their costs and reduced their fear of hidden charges.
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?
With historic growth rates of 30% (1995 year over year) and an explosion of the market size being predicted for the near future, outlooks for total market potential were very good.
In implementing its strategy, as of 1995, AOL was seeking to invest in growth of existing services and to maintain technological flexibility in order to achieve the strategic goal of becoming a full range provider of interactive online services. As of 1995, AOL was very successful in positioning as middlemen between customers and content providers. At the same time, AOL remained largely dependent on membership subscription fees with its business model being potentially vulnerable to future technological developments.
The more flexible and more competitive policy of new entrant MSN (i.e. to offer content providers a higher level of control over their products and a higher level of freedom in decision making) might lead to a redistribution of market shares. Without modifying their business models, including adapting their pricing policies and contractual terms for content providers to compete with MSN, online service providers including AOL were facing the threat of losing their unique competitive advantages.
The advent of Internet World Wide Web then gave content providers an alternative choice of carrying their core activities in more preferable ways in terms of independence in publishing content, control over their products and generating direct revenues. Without AOL adjusting its business model to the new technological advances, the company is likely to encounter customer churn and consequently lose its strategic alliance network.
3. Was AOL’s policy to capitalize subscriber acquisition costs justified prior to 1995?
In general, costs that are directly related to generating future revenues can be capitalized. Prior to 1995, AOL adopted an aggressive accounting policy by capitalizing its subscriber acquisition costs of around $40 per new subscriber, including direct mail, advertising, start-up kits and bundling costs. This was justified for the following reasons:
Given, that only directly related costs (i.e. printing of prospects and production of CDs) were included in the capitalized acquisition costs and those costs could directly be matched with a newly acquired customer (because the new customer had to use the provided...