Aol Case Study - 1

Topics: Revenue, AOL, Million Pages: 6 (1731 words) Published: April 25, 2011
AOL's estimated earnings for `96 are $38 million on estimated revenues of $1 billion. But there's a catch. In the last couple of years, AOL has made $100 million in acquisitions that some analysts feel are languishing. Observers have also criticized the way AOL treats some of the costs of attracting new members as capital expenses. They say that AOL is more dependent than ever on attracting new members and retaining old ones, a process that has become more costly.

According to Cowen & Co., in the last quarter of 1995 AOL added 1.8 million new members, but lost 950,000, leaving a net gain of 880,000. And despite the May 8, 1996 release of slightly higher-than-expected 3Q earnings, AOL's stock price fell 18% over a two-day period, in part due to comments by Mr. Case about the need to improve "the retention of the customer base." Cowen estimates that acquiring a new subscriber costs about $93.00 each.

Steve Case interview

Red Herring: AOL has been criticized for engaging in "creative accounting" for example, treating the costs associated with acquiring new subscribers as capital expenses. What's your answer to this criticism?

Steve Case:Well, we've been doing this for 10 years, and we don't think it's unusual at all.

A Letter from Interactive Week

If AOL logged a net gain of 1.7 million subscribers after spending $200 million, it comes out to $117 for each subscriber added!

Apparently AOL bought their way to the #1 spot--with money they didn't have! A few weeks back AOL released their third quarter numbers. AOL accountants haven't expensed those marketing costs against incoming revenue, and AOL has $276 million in "deferred subscriber acquisition costs". Because of this it's been said that AOL pays their bills through stock sales. But AOL stock lost 27.3% of its value between May 7 and May 22...

"AOL takes it on the chin" wrote Interactive Week in a previous issue. Gradually industry insiders are recognizing that AOL's finances are in a precarious position.

As early as 1994, Steve Case was naming 5 million members as AOL's "critical mass", with the hope that advertising revenues could generate income for the company. AOL now flashes advertisements to every member logging on to the system. (Sometimes, at the expense of user privacy.)

AOL acts nonchalant. They claimed a profit in their quarterly statement--suspiciously coming within analyst projections by exactly one cent. Then they announced that they intended to reduce marketing spending, which might cut into their profitability.

But the subscriber growth rate was already decreasing. Furthermore, competition from AT&T, the Microsoft Network, and internet service providers around the country forced AOL to lower their prices--starting in July, 20 hours on the service will on ly net AOL $20.00. And in the last 3 months they took in just $13 million in advertising revenue -- vs. $285 million in online service revenue.

Which wouldn't threaten AOL--except that they have over $300 million in deferred costs spent to reach the 5 million subscriber mark. "If AOL can't sell stock, its got big trouble," Allan Sloan wrote in Newsweek. In the May 27 issue of Newsweek, S loan revists AOL. "In an interview last month, Case claimed not to be worried," he writes. He calculates AOL has spent $315 million which has not yet been covered by their profits!

At the bottom of this page is a graph illustrating the dramatic drop in the value of AOL's stock. Between May 7 and June 20, AOL stock lost 43.57% of its value.

AMERICA ONLINE STOCK continued its slide on Friday when Merrill Lynch analyst Lou Kerner lowered his earnings estimate for AMER from $1.15 to $1.00 for the year ending June 1997. According to reports, Kerner lowered his estimate based on impact of the recently announced $20/20 hour plan which will be available effective July 1. Kerner said that he estimated the impact of the new pricing plan to be about a 9%-10% reduction in AOL's average...
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