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America Online

Prodigy, two rival online service providers, making AOL the number one consumer on-
line service in the United States. By the end of October 1995, AOL had a subscriber base
of more than four million members.

AOL™s Products
The broad range of features offered by the America Online service was designed to meet
the varied needs of its four million members. A key feature of the online service was the
ease with which members with related interests could communicate through real-time
conferences, e-mail, and bulletin boards. Members used the interactive communications
facilities to share information and ideas, exchange advice, and socialize. It was America
Online™s goal to continue developing and adding new sources of information and content
in support of these member activities. The range of features offered by America Online
included the following:
• Online Community. In addition to its e-mail service, AOL promoted real-time on-
line communications by scheduling conferences and discussions on specific topics,
offering interactive areas that served as “meeting rooms” for members to partici-
pate in lively interactive discussions with other members, and providing public bul-
letin boards on which members could share information and opinions on subjects
of general or specialized interest.
• Computing. AOL provided its members access to tens of thousands of public do-
main and “shareware” software programs, to online help from 300 hardware and
software developers, and to online computer shopping and online computer maga-
zines such as MacWorld, PC World, and Computer Life.
• Education and References. AOL™s online educational services allowed adults and
children to learn without leaving their homes. AOL contracted with professional in-
structors to teach real-time interactive classes in subjects of both general academic
interest and adult education (such as creative writing and gourmet cooking). Regu-
lar tutoring sessions were offered in English, biology, and math. Education and
reference services included the Library of Congress, College Board, CNN, Smith-
sonian, Consumer Reports, and Compton™s Encyclopedia.
56 Strategy Analysis

Strategy Analysis

• News and Personal Finance. AOL offered a broad range of information services,
including domestic and international news, weather, sports, stock market prices,
and personalized portfolio tracking. Members could search news wires for stories
of interest, access mutual fund information through Fidelity Online and Morning-
star, and execute brokered trades online through PC Financial Network. Subscribers
had access to over 70 newspapers, periodicals, and wire services, including The
New York Times, Chicago Tribune, San Jose Mercury News, Time, Scientific Amer-
ican, Investors Business Daily, and Reuters.
• Travel and Shopping. AOL members also had access to travel and shopping refer-
ence materials and transaction services. Subscribers could send customized greet-
ing cards through Hallmark Corporation, send flowers through 1-800-Flowers,

America Online
shop for CDs and tapes online at Tower Records, book vacation packages with Pre-
view Vacations, and access account data and travel information and services with
American ExpressNet. Additionally, AOL had introduced its own interactive shop-
ping service, 2Market, which featured goods and services from numerous catalogs
and retailers.
• Entertainment and Children™s Programming. AOL provided various clubs and fo-
rums for games and sports, multi-player games, and other related content for both
adults and children. Specialized content was provided by such organizations as Mu-
sicSpace, the Games Channel, Disney Adventures, Comedy Clubs, Nintendo Pow-
er Source, Kids Only, Hollywood Online, Warner-Reprise Records, American
Association for Retired Persons, MTV, Cooking Club, Environment Club, and
Baby Boomers™ Forum.

Customer Acquisition and Retention
AOL™s biggest expenditure was the cost of attracting new subscribers. AOL aggressively
marketed its online service using both independent marketing efforts, such as direct mail
packets with AOL software disks and television and print advertising featuring a toll-free
telephone number for ordering the AOL software, as well as co-marketing efforts with
computer magazine publishers and personal computer hardware and software producers.
These companies bundled the AOL software with their computer products, facilitating
easy trial use by their customers. With the AOL software in hand, the customer needed
only a personal computer, a telephone line, and a computer modem to gain access to
AOL™s online service. Accompanying each program disk was a unique registration num-
ber and password that could be used to generate a new AOL account. Customers could
activate their accounts by providing AOL with their credit card account number. The ¬rst
ten hours of access by this new account were free, after which AOL automatically billed
the customer™s credit card account the standard monthly rate until the customer canceled
the AOL account.
These types of promotions were expensive, costing more than $40 per new subscriber
in 1994. Thus, to retain these new subscribers and increase customer loyalty and satis-
Strategy Analysis

2-25 Part 2 Business Analysis and Valuation Tools

faction, AOL invested in specialized retention programs including regularly scheduled
online events and conferences, online promotions of upcoming events and new features,
and the regular addition of new content, services, and software programs. AOL™s goal
was to maximize customer subscription life.
Critical to customer retention and usage rates was the content available on AOL. To
build and create unique content America Online participated in numerous joint ventures.
During 1995 its alliances grew to include American Express, ABC, Reuters, Shoppers
Express, Business Week, Fidelity, Vanguard, and the National Education Association.
Also important to AOL were the newest stars of cyberspace, special-interest sites created
by entrepreneurs such as Tom and David Gardner, who created Motley Fool and Folly-
wood, two of the most popular sites offered on America Online. These hot special-inter-
America Online

est sites kept customers on line, running up metered time and revenues. Traditionally,
AOL had kept 80 percent or more of the revenues generated by these sites and had de-
manded exclusive contracts with the entrepreneurs creating them. However, content pro-
viders now had the option of setting up sites on the Internet World Wide Web. While they
could not yet collect fees from Web browsers, this new distribution channel was chang-
ing the balance of power between AOL and its content providers.2
Compared to its competitors, AOL™s rate structure was the easiest for consumers to
understand and anticipate. A monthly fee of $9.95 provided access to all of America On-
line™s services for up to ¬ve hours each month. Each additional hour was $2.95 and no
additional downloading fees were charged. CompuServe and Prodigy offered the same
standard pricing but charged additional fees for premium services and downloading.
Microsoft Network (MSN), the newest entrant into the online services industry, offered
a standard monthly plan of up to three hours for $4.95, with each additional hour costing
$2.50. Content providers on MSN also applied charges to customers based on usage
rates. The additional fees charged by AOL™s competitors made it more dif¬cult for their
customers to anticipate their monthly spending.

Strategy for Future Growth
Through a tapestry of alliances and subsidiaries AOL™s goal was to establish a central and
de¬ning leadership position in the worldwide market for interactive services. Toward
this end, AOL had signed new strategic partnerships with American Express, Business
Week Online, and NTN Communications; shipped the 2Market CD-ROM shopping ser-
vice with an online connection; and completed its acquisitions of Internet software de-
velopers BookLink Technologies, Inc., NaviSoft, Inc., and Internet backbone developer
Advanced Network & Services (ANS). These deals, along with AOL™s growing member-
ship base, its enhanced look and feel, and its ability to program content to appeal to users,
uniquely positioned America Online to lead the development of the new interactive ser-
vices industry. In implementing its strategy, AOL pursued a number of initiatives:

2. “On-Line Stars Hear Siren Calls to Free Agency,” Steven Lohr, New York Times , November 25, 1995.
58 Strategy Analysis

Strategy Analysis

• Invest in Growth of Existing Service. America Online planned to continue to invest
in the rapid growth of its existing online service. AOL believed it could attract and
retain new members by expanding the range of content and services it offers, con-
tinuing to improve the engaging multimedia context of its service and building a
sense of community online. At the same time, by offering access to a large, grow-
ing, and demographically attractive audience, together with software tools and ser-
vices to develop content and programming for that audience, AOL believed it
would continue to appeal to content and service providers.
• Exploit New Business Opportunities. AOL intended to leverage its technology,
management skills, and content packaging skills to identify and exploit new busi-
ness opportunities, such as electronic commerce, entry into international markets,

America Online
and the “consumerization” of the Internet with its highly graphical interface soft-
ware and its World Wide Web browser, which used high-speed compression tech-
nology to improve access speed and graphic display performance.
• Provide a Full Range of Interactive Services. Through acquisitions and internal de-
velopment, AOL had assembled content development, distribution capabilities, ac-
cess software, and its own communications network to become a full service,
vertically integrated provider of interactive services. As a result, AOL believed it
was well positioned to influence the evolution of the interactive services market.
• Maintain Technological Flexibility. AOL recognized the need to provide its servic-
es over a diverse set of platforms. Its software worked on different types of personal
computers and operating systems (including Macintosh, Windows 3.xx and Win-
dows 95) and supported a variety of different media, including online services, the
Internet, and CD-ROM. AOL intended to adapt its products and services as new
technologies become available.
While AOL currently generated revenues largely from membership fees, AOL™s man-
agement believed that these initiatives would allow the company to increase the propor-
tion of its revenues generated from other sources, such as advertising fees, commissions
on merchandise sales to consumers, and revenues from the sale of production and net-
work services to other enterprises.

The online consumer services industry represented $1.1 billion in revenues in 1994 and
was expected to grow by 30 percent to $1.4 billion in 1995. Eleven million customers
subscribed to commercial online services worldwide and this number was expected to
explode in the next ¬ve years. Industry leaders America Online, CompuServe, and Prod-
igy served about 8.5 million of the existing subscribers (4.0 million, 2.8 million, and 1.6
million, respectively). This oligopoly had very successfully acted as middlemen be-
tween thousands of content providers and millions of customers. They were the publish-
ers, closely controlling the product and paying content providers, the writers, only
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2-27 Part 2 Business Analysis and Valuation Tools

modest royalties. However, with the advent of the Internet World Wide Web and the en-
trance of Microsoft Network, content providers now had alternative distribution chan-
nels which offered greater control over their products and potentially higher revenues.
Forbes discussed this topic in its August 28, 1995 issue:
Until recently the only way to reach cyberspace browsers was through one of the
big three on-line services, America Online, CompuServe and Prodigy. That oli-
gopoly is set to fade fast, and it™s not just Microsoft that threatens. It™s the whole
Internet, the pulsating, undisciplined and rapidly expanding network of World
Wide Web computers that contain public data bases.3
While the big three acted as publishers, Microsoft had decided to act more like a
America Online

bookstore, one in which every author (content provider) was his/her own publisher. Cus-
tomers of MSN paid $4.95 per month for up to three hours (each additional hour was
$2.50). Then, each content provider charged whatever it wanted for its material, so much
per hour, per page, or per picture. Microsoft kept a 30 percent commission out of the pro-
vider™s fee and passed along the rest to the content provider. In addition to offering con-
tent providers a larger share of the revenues, MSN also offered content providers greater
control over their own products. In contrast to the standardized screen displays and icons
of the big three, MSN permitted content providers to use any font and format they
wished. Thus, while Microsoft still acted as a middleman, it played a very limited and
passive role in determining content and fees charged for that content.
Beyond Microsoft lurked the vast potential of the Internet World Wide Web, where
the middleman™s role was shrunk still further. On the Internet, everyone with a computer
was his/her own publisher. Customers would sign up for an Internet on-ramp service, of
the sort offered by PST, Netcom, or MCI. Once on the net, the subscriber used browsing
software like Netscape or Spyglass to roam the world™s databases. While it remained dif-
¬cult for self-publishers on the Internet to collect fees from browsers who read their
pages, that was expected to change quickly as banks, Microsoft, and other intermediaries
worked on systems to provide on-line currency.
Many content providers were beginning to take advantage of these alternative distri-
bution channels. For example, Wired magazine, unwilling to settle for just 20 percent of
the revenues from subscribers spending time on its pages on AOL, created HotWired on
the Internet. Andrew Anker, chief technologist at Wired, believed that HotWired would
soon be more lucrative than the America Online venture and he noted that on the Internet
his ¬rm had greater control of its own product. General Electric™s NBC decided to switch
from AOL to Microsoft Network. “While we had many users visiting us on America On-
line, we weren™t making much revenue,” explained Martin Yudkovitz, a senior vice-pres-
ident at NBC.4
With the migration of proprietary services and content to Web sites, the unique offer-
ings of the big three services were declining. However, the online services were still bet-

3. “Who Needs the Middleman?,” Nikhil Hutheesing, Forbes , August 28, 1995.
4. Ibid.
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