Question 1: Prior to 1995. why was American Online ( AOL ) so successful in the commercial online industry relation to its rivals CompuServe and Prodigy? America Online was successful due to the pricing rate construction. Compared to its rivals. American Online’s rate construction was the easiest to understand and expect. Merely paying $ 9. 95 per month. the clients of AOL are provided to utilize American Online’s full services for up to five hours. $ 2. 95 was charged for each extra hr and no extra downloading fees were charged. Although. CompuServe and Prodigy charge the same monetary value. charged extra fees for premium services and downloading. Customers would wish to take the lower monetary value service. That is why AOL was so successful in the commercial online industry.
Question 2: As of 1995. what are the cardinal alterations taking topographic point in the commercial online industry? How are they likely to impact AOL’s future chances? In 1995. the Internet Would Wide Web and Microsoft Network were started to be used. From so on. content suppliers had alternate distribution channels that offered greater control over their merchandises and potentially higher grosss. First of all. the lone manner to make internet browsers was through one of the large three on-line service. AOL. CompuServe and Prodigy. Microsoft kept 30 per centum committees out of fees by moving as a jobber between these three companies and clients. As the coming of the Internet and the entryway of Microsoft Network. many content suppliers were get downing to take advantage. Thus the monopoly of AOL was damaged. and merely retain around 20 per centum market portion.
Question 3: Was AOL’s policy to capitalise subscriber acquisition costs justified prior to 1995? Prior to 1995. AOL spent a big sum of cost in pulling new endorsers by utilizing independent selling attempts and co-marketing attempts. Customers gain entree to AOL’s online service easy by personal computing machine. telephone line and computing machine modem. In add-on. each new history member could bask the first 10 hours of entree for free. These types of publicities were cost more than $ 40 per new clients. Furthermore AOL invested in specialised keeping plan and participated in legion joint ventures. In this state of affairs. it could retain the endorsers and increase their trueness and satisfaction.
Question 4: Given the alterations discussed in inquiry 2. do you believe AOL should alter its accounting policy as of 1995? Is the company’s response consistent with your position? As the rapid usage of the Internet. the biggest hazard AOL face was losing customers’ royalty. Because endorsers would wish to take Microsoft’s lower per hr pricing alternatively of AOL’s heavy-usage pricing. In this instance. I think AOL should alter its accounting policy as of 1995. In order to increasing gross borders. AOL amortized its package development costs over five old ages and extended the amortisation period for its subscriber acquisition costs from 15 months to 24 months. Furthermore. the cost for endorsers acquired through direct marker plans were amortized over a 12 months every bit good as over 18-month period for co-marketing attempt.
Question 5: What would be the consequence on AOL’s 1994 and 1995 stoping balance sheets if the company had followed the policy if expensing subscriber acquisition spendings alternatively of capitalising them? What would be the consequence of write offing subscriber acquisition cost on AOL’s 1995 income statement? Followed the policy. AOL matched the timing of disbursals with the period over which the gross would be received. The cost would be written off as capital points over a period of old ages while the package development costs was amortized over 5 old ages. Because AOL need hard currency instantly for free test disbursals. the company would publish portions when its stock monetary value was low.