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The Success of AOL

The Success of AOL. Easy-to-use interface to attract non-technical computer users Success in aggressive marketing programs to attract new subscribers Good relationships with high quality content-providers Heavy investment in marketing to get subscribers

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The Success of AOL

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  1. The Success of AOL • Easy-to-use interface to attract non-technical computer users • Success in aggressive marketing programs to attract new subscribers • Good relationships with high quality content-providers • Heavy investment in marketing to get subscribers • The “subscriber acquisition cost” of mailing the “starter kits”

  2. Subscriber Acquisition Cost • Asset or Expense? • Why capitalize as an asset? • Why should it be expense? • What is the key determinant? • Do the starter kits generate new customers? • Does the change in industry around 1995 affect your opinion?

  3. Changes Around 1995 • New entrants: • MSFT • Come along with operating system • Netscape • Free access • E-mail providers • More competition; increased buyers’ and suppliers’ power

  4. What did AOL do about its subscriber acquisition cost? • Capitalized as an asset and amortized to operating expense • Before 1992 • Amortized over 12 months • After 1992 • Amortized over 18 months • What does AOL say? • “accurately match revenues and expenses” because it takes more time for the starter kits to generate new customers • What do you think?

  5. Impacts on AOL’s 1995 N/I • Amount spent on subscriber acquisition cost • SCF: $111,761,000 • Amount expensed to N/I • SCF: $60,924,000 • If the whole amount were expensed, profit before tax (and actually N/I) would be less by about $50.837 million, a 151% drop

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