America Online, Inc.: Disclosure Strategy

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America Online, Inc. Disclosure Strategy

• Presented by
• Shermika Nelson
• Darina Semenova
• Chris Sullivan

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• Discuss AOL Business Model

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Online Business Model Components
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AOL Value Proposition / Cluster
Target Segments
Key Benefits Offered
Unique Capabilities
Value Proposition

• The Mass Market

• Ease-of-use
• Unique online experience
• Superior customer support

To provide the mass market with various online
services

• Personalization
• Exclusive content
• Safe secure environment
• Shop at AOL
• AOL credit cards
• Numerous perks

AOL

• Advertising space with high traffic
• Access to all segments
• Cyber mall
• 57th and Fifth Avenue

• Advertising companies
• High-quality
• Companies that lack Internet strategy
• Retail merchants

To provide access to the mass market and to
specific market segments for advertising
companies and retail merchants

• Strong brand name
• Subscriber base
• Subject-specific channels
• Multiple partners

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Marketspace Offering
Value Cluster

• Identify the scope of the offering
• Identify the customer decision process
• Map the offering to the consumer decision process

Marketspace Offering
Resource System
Financial Model
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Marketplace Offering Scope of the Offering
Continuum of Scope

• Cross-Category Dominance
• Focus on a large number of categories
• Various online services to the mass market
• About 300 retail merchants
• Multiple subject-specific channels
• Continuous innovation and differentiation

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Marketplace Offering Customer Decision Process
AOL

• Need access to the Internet services
• Need to introduce products to the mass market

Problem Recognition
Prepurchase

• Search for offerings
• Promotional materials
• TV commercials
• Size of the customer base / traffic
• Disclosures
• Package offers

Information Search
Evaluation of Alternatives

• Evaluation of alternatives
• price, accessibility, ease-of-use, etc.

Purchase
Purchase Decision

• Purchase decision
• Conditions offered
• Content

Satisfaction

• Post-sales support
• Customer service
• Education

Postpurchase
Loyalty

• Post-sale perks

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Marketplace Offering AOL Egg Diagram

• High-speed Internet access with various
  family-friendly services
• Visible marketing
• Package deals
• Coupons
• Season special deals

• Encyclopedia
• Kids games
• AOL keywords search tips

Customer Decision Process

• Need Recognition /
• Demand Triggering

• Promotional materials/ packages
• Exclusive content
• Daily news
• Stock market
• Horoscope
• Weather
• E-Mail
• Music downloads
• Subject-specific channels
• Brand names
• Easy to buy /sell process

Service Offering

• Education Internet effective user
• Professional help with advertising

• Search for Offerings

Post-Sale Support

• Account management
• 24/7 web/phone support
• Feedback

• Evaluation of Alternatives

• Post-Sale Support and Perks

• Price
• Content w/ personalization options
• Interface
• Search capabilities

Perks

• Points earned with each purchase
• Free hours
• Member specials
• Monthly lottery
• Discounts on music downloads

• Purchase Decision

• High traffic
• E-commerce transactions
• Special shopping features
• Shopping basket

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Resource System
Value Cluster

• 1. Core benefits in the value cluster
• 2. Capabilities that relate to each benefit.
• 3. Link resources to each capability.
• 4. Identify to what degree the firm can deliver
  each capability.
• 5. Identify partners who can complete
  capabilities.

Marketspace Offering
Resource System
Financial Model
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AOL Resource System
24/7 online/ phone support
Free Hours
Points Earned
Education
Customer Feedback
Personalization
Coupons
Service Center
Perks
Safe Secure Environment
Shop basket
Superior Service
Popular Website
High Traffic
Advertising space w/ high traffic
Technology
Ease-of-use
Customer Base
Personalization
Partners
Interface
Unique experience
Cyber mall
Strong Brand Name
Stores
Exclusive content
All segments access
News
Music
Shop at AOL
Stocks
Subject-specific channels
Sports
AOL credit card
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Financial Model
Value Cluster
Marketspace Offering
Resource System

• Define and select the most appropriate revenue
  model to pursue

Financial Model
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Revenue Model
Advertising

• Multiyear strategic commerce deals
• Revenues from diverse companies

Rent

• Retail merchants

• Charging a fee or taking a portion of the
  transaction sum for facilitating a
  customer-seller transaction

Transaction
Subscription

• Monthly subscription fees

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Develop a new set of metrics that AOL could
implement, given its change in strategy
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Life Cycle of a Company
AOL
Startup/Beta
Customer Acquisition
Maturity
Monetization
6 Months - 1 Year
1 Year - 2 Years
2 Years - 5 Years
5 Years

• Maximize advertising revenue by winning high
  quality advertisers
• Focus on long-term relationships
• Keep strengthening the power of the brand
• Control costs and optimize marketing expenditures

Strategy
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AOL - Maturity Stage Proposed Metrics

• The company would provide actual numbers for each
  quarter of the year ended and projected numbers
  for the following one to two years.

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Analyze the pros and cons of each metric Make
and defend a recommendation for one of them
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Pros and Cons

• If the year is not successful and the numbers go
  down
• Mad shareholders
• Lower stock prices
• Competitors can report higher numbers
• Media AOL is dying, the new strategy didnt
  work

• AOL is strategically sound
• Attractive to advertisers
• Advertising major source
• It is financially strong
• It is growing and getting stronger

• Declining numbers
• AOL brand name is getting weaker
• If large companies dont want to advertise at
  AOL, why would we?

• AOLs market share is growing
• More revenues should be expected
• AOL brand name is strong and popular

• Study customers behavior offer exactly what
  they want
• Knowledge of what to advertise and when to
  advertise
• Not for disclosure, but for sale

• Declining numbers
• Customers are bored with the content
• Need more differentiation

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Recommendation

• Disclose Marketing Costs Expenditures
• Thats where AOL tripped but it wont happen
  again
• No matter if the numbers are declining or rising,
  AOL tells the truth, thus, it is trustworthy
• Declining numbers confirm AOLs new strategy
• It is more focused on being online media, rather
  than service provider
• It found more effective way to target customers
• To disclose or not to disclose
• thats the question

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Discuss AOLs policy to capitalize subscriber
acquisition costs Discuss its effect on financial
statements
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Policy Justification

• From the accounting stand point, AOL did not
  justify its policy
• No reasonable basis from any of the AOL data to
  support its claim that the average subscriber was
  retained for 40 months and generated 700 in
  revenue
• The historic studies were in large part derived
  from the company's subscriber usage reports,
  which were misleading as they were based on
  projections and supposition
• AOL was operating in a volatile, developing
  market that was subject to unpredictable,
  potentially material adverse developments
• AOLs competition was increasing many other
  companies started offering similar services at
  better prices
• Evolving business model
• From the AOL management stand point, it did
  justify its policy
• The policy improved the matching of expenses and
  revenues
• AOL was growing rapidly
• High response rate from customers (four to six
  times higher than the normal response rate)
• Customers most critical asset

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Effects on the Financial Statements
If AOL wrote-off customer acquisition costs

• Balance Sheet
• Major asset would be eliminated
• Stockholders equity decreased
• Stock collapsed
• See Ex.2 of the case

If AOL expensed costs during the period they
incurred

• Income Statement
• Increase in costs
• Net income would become net loss
• AOL reported profits where it was supposed to
  report losses

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THANK YOU

• Questions?