America Online Inc., Essay -- Business Case Study Marketing, solution

Strategy psychoanalysis of America Online Inc.Prior to 1995, AOL was very successful in the commercial online intentness relative to its competitors CompuServe and Prodigy primarily because of its pricing rate structure which was the easiest for customers to deduct and plan for ahead of time. CompuServe and Prodigy offered the same pricing as AOL for its exemplification service, but, charged additional fees for premium services and downloading which made it to a greater extent sticky for customers to anticipate their monthly spending. The key changes taking place in the online persistence in 1995 atomic number 18 the introduction of the Microsoft network and the coming of use of the internet World Wide Web which offered alternative channels to confine providers that provided more control over their offerings and potentially higher revenues. Microsoft Network took only a 30% commission fee (versus 80% taken by AOL from its national providers revenues) from its content provid ers and offered providers the option of choosing any format and font to display their content (versus the standard screen displays offered by AOL and its rivals). Also, the per-hour pricing policy offered by Microsoft was brilliant to AOLs. With the development underway of a way to provide on-line cash collection, the World Wide Web offered huge incentives for providers to start publishing substantive on the internet by their own means without having to go done a middle-man such as an online provider. Both of these offerings do not divine well for AOLs future prospects due to the huge incentives for customers and content providers to transmutation to these alternative distribution channels.Prior to 1995, there is substantial evidence in the case (Exhibit 2 in the case) to suggest that the benefits of the expense of the free-trial CD marketing programs in acquiring customers will accrue over multiple periods. The number lifetime of a user was projected to be approximately 32 months (prior to 1995) and this makes a strong case, in my opinion, for capitalizing these expenses, as AOL did.With the advent of competition, as discussed earlier, heighten with the difficulty of retaining retail customers, especially online, it is highly unlikely that AOLs customers are likely to stay for an extended period of time just because of the sign inducements. Hence, I would recommend that the accounting policy be changed gradu... ... $87,471 Million adjust Book range of Capital = Book Value of Capital Value of contributor Acquisition Costs Asset = $239,754 M- $130,473 M = $109,281 MillionSubscriber Acquisition Costs CapitalizedSubscriber Acquisition Costs ExpensedReturn on Assets (ROA)(19,294)(1-.34)/406,464 =-3.13%(70,131)(1-.34)/ 275,991 =-17%Return on Equity (ROE)(33,647)/217,944 = -15.44%(84,484) /87,471 = -97%Return on Capital (ROC)(19,294)(1-.34)/(21,810+217,944)= -5.31%(70,131)(1-.34)/109,281 =-42%C.3 derived function levy Benefit Subscriber Acquisition C osts in 1995 = $111,761 one zillion million millionAmortization of Subscriber Acquisition Costs in 1995 = $60,924 million evaluate Deduction if Subscriber Acquisition Costs were expensed = $111,761 million * 0.34= $ 37,999 millionTax Deduction if Subscriber Acquisition Costs were capitalized = $60,924 million * 0.34= $ 20,714 millionBy expensing instead of capitalizing, AOL is able to derive a much larger measure benefit ($37,999 million instead of $20,714 million). The differential tax benefit git be written asDifferential Tax Benefit = $37,999 - $20,714 = $17,285 million