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

Strategy Analysis of America Online Inc. prior to 1995, AOL was rattling successful in the commercial online industry relative to its competitors CompuServe and prophecy in the beginning 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 stipends for superior services and downloading which made it more difficult for customers to anticipate their monthly spending. The observe changes taking place in the online industry in 1995 are the understructure of the Microsoft network and the coming of use of the Internet World Wide wind vane which offered alternative channels to content providers 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 offe red providers the option of choosing both format 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 net 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 futurity prospects due to the huge incentives for customers and content providers to switch to these alternative distribution channels.Prior to 1995, there is substantial evidence in the case (Exhibit 2 in the case) to suggest that the benefits of the expense of the free-trial CD marketing programs in acquiring customers leave accrue over multiple periods. The average lifetime of a user was projected to be approximately 32 months (prior to 1995) and this makes a strong 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, specially online, it is highly unlikely that AOLs customers are likely to stay for an extended period of time just because of the initial inducements. Hence, I would recommend that the explanation policy be changed gradu... ... $87,471 MillionAdjusted Book Value of upper-case letter = Book Value of Capital Value of contributor skill cost Asset = $239,754 M- $130,473 M = $109,281 Million referee eruditeness Costs CapitalizedSubscriber scholarship Costs ExpensedReturn on Assets (ROA)(19,294)(1-.34)/406,464 =-3.13%(70,131)(1-.34)/ 275,991 =-17%Return on loveliness (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 millionAmortization 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 rather of capitalizing, AOL is able to gain ground 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