Question 1: Prior to 1995, why was American Online (AOL) so successful in the commercial online industry relative to its competitors CompuServe and Prodigy? America Online was successful due to the pricing rate structure. Compared to its competitors, American Online’s rate structure was the easiest to understand and anticipate. Only paying $9.95 per month, the customers of AOL are provided to use American Online’s entire services for up to five hours. $2.95 was charged for each additional hour and no additional downloading fees were charged. Although, CompuServe and Prodigy charge the same price, charged additional fees for premium services and downloading. Customers would like to choose the lower price service. That is why AOL was so successful in the commercial online industry.
Question 2: As of 1995, what are the key changes taking place in the commercial online industry? How are they likely to affect AOL’s future prospects? In 1995, the Internet Would Wide Web and Microsoft Network were started to be used. From then on, content providers had alternative distribution channels that offered greater control over their products and potentially higher revenues. First of all, the only way to reach cyberspace browsers was through one of the big three online service, AOL, CompuServe and Prodigy. Microsoft kept 30 percentage commissions out of fees by acting as a middleman between these three companies and customers. As the advent of the Internet and the entrance of Microsoft Network, many content providers were beginning to take advantage. Thus the monopoly of AOL was damaged, and just retain around 20 percent market share.
Services Marketing A service is the action of doing something for someone or something. It is largely intangible (i. e. not material). A product is tangible (i. e. material) since you can touch it and own it. A service tends to be an experience that is consumed at the point where it is purchased, and cannot be owned since is quickly perishes. A person could go to a caf'e one day and have excellent ...
Question 3: Was AOL’s policy to capitalize subscriber acquisition costs justified prior to 1995? Prior to 1995, AOL spent a large amount of cost in attracting new subscribers by using independent marketing efforts and co-marketing efforts. Customers gain access to AOL’s online service easily by personal computer, telephone line and computer modem. In addition, each new account member could enjoy the first 10 hours of access for free. These types of promotions were cost more than $40 per new customers. Moreover AOL invested in specialized retention program and participated in numerous joint ventures. In this situation, it could retain the subscribers and increase their loyalty and satisfaction.
Question 4: Given the changes discussed in question 2, do you think AOL should change its accounting policy as of 1995? Is the company’s response consistent with your view? As the rapid use of the Internet, the biggest risk AOL face was losing customers’ royalty. Because subscribers would like to choose Microsoft’s lower per hour pricing instead of AOL’s heavy-usage pricing. In this case, I think AOL should change its accounting policy as of 1995. In order to increasing gross margins, AOL amortized its software development costs over five years and extended the amortization period for its subscriber acquisition costs from 15 months to 24 months. Moreover, the cost for subscribers acquired through direct marking programs were amortized over a 12 months as well as over 18-month period for co-marketing effort.
Question 5: What would be the effect on AOL’s 1994 and 1995 ending balance sheets if the company had followed the policy if expensing subscriber acquisition outlays instead of capitalizing them? What would be the effect of expensing subscriber acquisition cost on AOL’s 1995 income statement? Followed the policy, AOL matched the timing of expenses with the period over which the revenue would be received. The cost would be written off as capital items over a period of years while the software development costs was amortized over 5 years. Because AOL need cash immediately for free trial expenses, the company would issued shares when its stock price was low.
Introduction Organizations should establish and communicate clear principles by which employees are paid. At a minimum, organizations need to ensure that their compensation policy adheres to employment legislation. Policy guidelines should reflect the thinking, values, and basic strategies of the company, and they must be set consciously and thoughtfully by top management. Before setting ...