American online
American online
America Online, Inc.
Prior to 1995 AOL was more successful in the commercial online services industry than its competitors CompuServe and Prodigy. This success was attributable not only to its business practices but also to its accounting practices. AOL’s competitive strategy was differentiation. AOL offered a broader range of content and services than CompuServe and Prodigy. Also, AOL was more user friendly than its competitors with an enhanced look and feel and a subscription fee structure that made it easier for members to calculate how much their monthly fee would be. In addition to their competitive strategy, AOL had adopted an aggressive accounting policy of capitalizing subscriber acquisition costs when their competitors expensed such costs. Additionally, AOL amortized its software development costs over five years, which is a long time to amortize in the online services industry.
!995 marked the beginning of many changes in the commercial online services industry. The first big change was the introduction of a new major competitor, Microsoft Network. MSN not only allowed the content providers more freedom to display their pages however they wished, but allowed them to choose their own rate structure for their material and keep a greater percentage of the profits. The creation and commercialization of the internet World Wide Web introduced a threat of substitution to the whole commercial online services industry. With the World Wide Web, all anyone needed now to browse or publish content was a computer and an “on-ramp” service. It was anticipated that more users and providers would transition to the World Wide Web as methods for collecting payments on-line developed. As more content providers move to MSN or self-publish on the World Wide Web, AOL’s specialized content and differentiation is decreased.
Prior to 1995, AOL capitalized direct subscriber acquisition costs such as printing and shipping of starter kits and bundling costs. The direct marketing subscriber acquisition costs were amortized over 12 months and the costs related to bundling are amortized over 18 months due to a greater time lag before new subscriptions are generated. The only subscription acquisition costs capitalized were those directly related to targeting specific identifiable prospects. AOL’s principle