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

Strategy Analysis of America Online Inc.Prior to 1995, AOL was very successful in the commercial online perseverance relative to its competitors CompuServe and Prodigy primarily because of its pricing rate structure which was the easiest for customers to understand and plan for ahead of time. CompuServe and Prodigy offered the same pricing as AOL for its standard service, but, charged additional fees for premium services and downloading which made it more difficult for customers to anticipate their monthly spending. The key changes taking place in the online industry in 1995 are the introduction of the Microsoft network and the coming of use of the Internet World Wide Web which offered alternative channels to content declare oneselfrs 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 content providers revenues) from its content providers and offered providers the opti on of choosing any formatting 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 superior to AOLs. With the development underway of a way to provide on-line currency collection, the World Wide Web offered huge incentives for providers to start publishing material on the internet by their own means without having to go through a middle-man such as an online provider. Both of these offerings do not bode well for AOLs future prospects due to the huge incentives for customers and content providers to bemuse to these alternative distribution channels.Prior to 1995, there is substantial evidence in the case (Exhibit 2 in the case) to suggest that the welfares of the expense of the free-trial CD marketing programs in acquiring customers will accrue over multiple periods. The average lifetime of a user was projected to be approximately 32 months (prior to 1995) and this makes a sozzled case, in my opinion, for capitalizing these expenses, as AOL did.With the advent of competition, as discussed earlier, compounded with the difficulty of retaining retail customers, especially online, it is highly unlikely that AOLs customers are likely to stay for an all-encompassing period of time just because of the initial inducements. Hence, I would recommend that the accounting policy be changed gradu... ... $87,471 MillionAdjusted earmark Value of Capital = Book Value of Capital Value of Subscriber Acquisition be 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 Differential tax Benefit Subscriber Acquisition Costs in 1995 = $111,761 millionAm ortization of Subscriber Acquisition Costs in 1995 = $60,924 millionTax 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 tax benefit ($37,999 million instead of $20,714 million). The differential tax benefit can be written asDifferential Tax Benefit = $37,999 - $20,714 = $17,285 million