1.

Prior to 1995, why was America Online (AOL) so successful in the commercial online industry
relative to its competitors CompuServe and Prodigy?
In addition to the email service, AOL improve real-time online communication scheduling meeting and
discuss specific topics, offering interactive area, as a "meeting room" members to participate in lively
interaction with other members of the discussion, and to provide information and opinions with another
members.
Under these changes, ALO's consumption structure is superior to those of the other two companies. Online
service charges are $9.95 per month, often five hours. If overtime, $2.95 per hour is charged. And the
download fee does not require extra charge. CompuServe and Prodigy offer the same standard pricing, but
charge extra service fees and download fees. MSN, the latest company to enter the online services industry,
offers a standard monthly plan of up to $4.95 per hour, with a cost of $2.5 per hour. The content provider of
MSN also collects fees from users according to their usage rate. The extra fees charged by AOL's
competitors make it harder for customers to anticipate their monthly payments.
Therefore, price advantage is the biggest advantage that ALO compares with CompuServe and Prodigy.

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, Newsweek’s business section on the commercial version of the online company is a network
service, Internet, multimedia and other interactive technology as the core of the new leader of big media,
the company provides many services for consumers, such as real-time calls, e-mails, magazines and
newspapers, the Internet shopping. Not only that, the business also extends to Internet access software, the
production and distribution of original content, interactive marketing and trading capabilities, and networks
that support data transmission. In terms of sales, the company USES membership fees, advertising, online
sales and online services. Network sales and service flexibility, leading the development of mass media
trends. By the end of October 1995, AOL had a subscriber base of more than four million members.

The goal of AOL is to establish a core and clear leadership position in the global interactive service market.
To that end, aol signed a new strategic partnership with American express, businessweek and NTN
communications. Provide 2Market cd-rom shopping service for Internet connection; It also completed the
acquisition of Internet software developer BookLink Technologies, Inc., NaviSoft, Inc., and Advanced
Network & Services (ANS), a leading Internet developer. These transactions, combined with AOL's
growing membership base, it enhance the look and feel, and its content's ability to attract users, unique
positioning of the AOL, leading the development of new interactive services. In implementing its strategy,
AOL took a series of measures :v invested in the growth of existing services. AOL plans to continue to
invest in the rapid growth of its existing online services. AOL believe that by expanding the scope of the
content and services provided by the applicant, it can attract and retain new members, continue to improve
its service and attractive multimedia environment, and establish a sense of community on the Internet.
AOL, meanwhile, by providing a huge and growing, population of appealing to the audience, as well as the
software tools and services, for the audience to develop content and programming, AOL believe that it will
continue to attract the content and service providers. Develop new business opportunities. AOL aims to use
its technology, management skills, and content packaging techniques to identify and develop new business

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 opportunities, such as electronic commerce, to enter the international market, and the Internet
"consumption" highly graphical interface of the software and the world wide web browser, using high-
speed compression technique to improve access speed and the performance of the graphics display. Provide
a full range of interactive services. Through acquisitions and internal development.

The portal of Word Wide Web and Microsoft Network entered the business networking industry. These
changes threaten AOL's future prospects. In the online world, including AOL, CompuServe and genius,
play the role of middleman between providers and consumers. On the internet, every person that has a
computer was his/her own publisher. Micrsoft acted as a bookstore which means one in which every
content provider was his/her own publisher. it kept only 30 percent of the commission fees and passed the
rest of commission to the content providers as well as offering them offering them greater control over their
own products.AOL only offers 20 percent of commission fees to the content providers. therefore, the arrival
of Microsoft and the emergence of the Internet will potentially exoect to cause AOL's market share and
customer base to go down.

3. Was AOL’s policy to capitalize subscriber acquisition costs justified prior to 1995?
Before 1995, AOL spent a lot of money on attracting new users, using independent marketing and co-
marketing eddorts. Users can easily access AOL's online services through personal computers, phone lines
and computer modems. In addition, each new account member can enjoy the first 10 hours of access free.
These types of promotional costs exceed $40 per new cunsomers. In addition, AOL invested in the
specializaed retetion project and participated in many joint ventures. In this case, they ensure customer
loyalty and satisfaction.
The capitalization of marketing costs is low because they cannot be separated from the operation of the
enterprise. However, AOL has capitalised and amortised the cost of its acquisition, because these costs are
the most important cost to AOL. They are leaders in the industry, and it is clear that the cost of attracting
subscribers will benefit AOL in its amortization period. Recognizing these costs, aol followed the matching
principle -- admitting fees, because capitalized costs were being consumed. For a period of time (12 months
or 18 months), they spread the cost to the expected benefit (average customer is in aol for 30 months or
more). CompuServe and Prodigy also follow similar accounting policies.

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?
Aol mainly uses two methods to make acquisitions.
Firstly, free trial fee (i.e., in the first month, the 10 hours of free services produced these costs, it USES the
marketing costs associated with customer acquisition, including direct mail, advertising, starter kit and
bundling costs. As noted in its annual report prior to 1 July 1995, capitalization takes place on two
timelines, according to the acquisition approach. The cost of direct marketing.
And the second, the plan is to be repaid in installments within 12 months. Through cooperation with PC
makers and magazine publishers for user cost, amortization within 18 months, because the bundling
activity history shows that response time is longer. In both approaches, the cost of acquiring subscribers
increased to 24 months.

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 According the case, In my opion, AOL will be the right choice to change its accounting policy in 1995.
First of all, Microsoft is a new type of industry, and its existence is unlimited. Microsoft will infiltrate
different industries. Secondly, the company's accounting policies have changed not only Maori, but AOL
has extended the software development cost for five years, and the cost of acquisition has been extended
from 15 months to 24 months. In addition, the cost of the user acquired through the direct marking program
was amortized over a 12-month period, and joint marketing was conducted during the 18-month period.
Therefore, I support the plan of accounting policy change as of 1995.

5. What would be the effect on AOL’s 1994 and 1995 ending balance sheets if the company had
followed the policy of expensing subscriber acquisition outlays instead of capitalizing them? What
would be the effect of expensing subscriber acquisition costs on AOL’s 1995 income statement?
Under the reform of capitalization, the capital gains of the company have greatly increased from $154584
in 1994 to 404464 in 1995. This indicates that the capitalization model has had a great effect on the
development of the company. However, if the company buys expensive user purchases rather than
capitalization, the impact on balance sheets in 1994 and 1995 would be a fall in asset values. In 1995 and
1994, the company recorded deferred user acquisition costs.
The effect of expensing subscriber acquisition costs on AOL’s 1995 income statement is the difference
between the asset values recorded in 1994 and 1995. 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 trail expenses, the company would issued shares when its stock price
was low

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