AOL Hangs On to Lead With Marketing Blitz

With stock prices falling and competitors gaining, the Internet service giant takes the offensive

Before you can say "hyperbole," America Online Inc. just became "The World's Most Popular Internet Online Service," at least according to its World Wide Web page (

Only a few days earlier, the annual report it filed with the U.S. Securities & Exchange Commission described the Dulles, Va., company as "the global leader in the interactive services market." That document, the fiscal 1996 10K, plus its revamped Web site, shows the online giant -- its stock down more than 50 percent from a 52-week high of $71 per share -- taking a three-prong approach: attacking head on its newfound competition, the Internet service providers; using the extended period of "Deferred Subscriber Acquisition Costs" it started last year to boost net income by $48 million; and refashioning its business model.

According to Ulric Weil, senior technology analyst for Friedman, Billings, Ramsey & Co. Inc., North Arlington, Va., the business model adjustment reflects AOL's acceptance that "the subscriber base is simply a means to an end. They were obsessed with the idea that you build the base and everything will come up roses. Yes, they still target $10 million by year-end. But now they understand the need to explore other revenue opportunities, to focus the business case on content in the broad sense, that is, advertising, transactions and virtual malls and stores."

Shifting from rifles to shotguns and aiming its marketing weapons over the heads of CompuServe, Prodigy, Genie and Delphi, AOL is mounting a take-no-prisoners campaign at the nation's more than 3,840 Internet service providers. From its home page come the words, "Find out why AOL is the Internet... and more.

"The Internet is too valuable a tool to be left to the techies of the world. America Online works hard at making Internet tools that everyone can use without sacrificing any of the features experienced users enjoy. You don't have to be a programmer to enjoy all that the Internet has to offer -- all you need is AOL!"

All of this supports AOL's own Internet service, Global Network Navigator. Launched last October, GNN targets the user who wants full Internet service. Membership, which includes 20 hours of service per month, costs $14.95. Each hour in excess is $1.95.

For comparison, many Internet service providers such as Erol's Internet Services, Springfield, Va., CAIS Internet, McLean, Va., and Netcom On-Line Communication Services Inc., San Jose, Calif., are dropping limits on monthly service and simply charging a flat fee.

Arcane Accounting: "Deferred Subscriber Acquisition Costs"

On a different battle front, where figures count more than flamboyance, AOL continued its practice of deferring so-called subscriber acquisition costs. In other words, rather than immediately expense them, the company writes off the cost of getting new subscribers for as long as two years when they use direct response advertising. One example of such advertising is the 3.5-inch computer diskettes the company sends in the mail or that come bound in magazines.

The practice drew attention in the first quarter of fiscal 1996, when AOL changed the amortization period from 12 and 18 months to 24. The company's annual report leaves open the possibility of changing it yet again, for example, if the rate drops at which it attracts subscribers. The result for fiscal 1996? "The effect of this change in accounting estimate for the year ended June 30, 1996, was to increase net income by $48.1 million ($.45 per share)."

New Business Model

AOL generated almost $1.1 billion in fiscal 1996 from 6.2 million subscribers worldwide. That number was more than twice the subscribers in fiscal 1995. Alongside membership and usage, the company also makes money from ads and merchandise, transaction fees, royalties and by providing network and production services to different enterprises.

To sustain its growth, AOL started offering online service in several European countries last year and in Canada at the beginning of 1996. It soon will serve Japan through a joint venture with Mitsui & Co. (40 percent ownership), Nikkei (10 percent) and America Online (50 percent). The Japanese companies funded the launch with $56 million.

The company admits in its annual report that revenues generated from sources other than subscribers, that is, merchandise sales, data network services, online transactions and advertising, marketing and production services and development and licensing fees, will be increasingly important to meet its business objectives.

Even more dour, AOL plans to increase spending on getting subscribers with less results, that is, "the company anticipates lower direct response rates, and as a result, cost per registration for the AOL service is expected to increase." In fiscal 1996, expenses for marketing went from $77 million to $212 million, a 176 percent increase over fiscal 1995.

Among the other revenue sources the company will start counting on are subsidiaries such as AOL Enterprise, which develops and markets interactive services for businesses. These can be customized network solutions, so-called PAOLs, or private AOLs, which organizations use to generate fees -- membership, usage, transaction and production development -- and niche ad sales.

Another revenue source is AOL Productions, a multimedia production studio, which handles interactive content and design for AOL, its advertisers and media partners. The company is also beefing up AOLnet, the proprietary TCP/IP network it started in late fiscal 1995 and which now carries 65 percent of its traffic. AOLnet is supported by Sprint Corp., Advanced CO Systems Inc., an AOL subsidiary, and BBN Corp. One purpose for AOLnet, among others, is to reduce data communications costs. During fiscal 1996, it grew from 20,000 to 140,000 modems. AOL networks, including AOL Globalnet, now reach nearly 810 cities in 87 countries through more than 1,400 local telephone numbers.

Other initiatives mentioned in the annual report include agreements with several personal digital assistant manufacturers, including Sony, Motorola, Tandy and Casio, to bundle a palmtop edition of AOL's client software with their products; participation in trials with cable TV as the vehicle into PCs; and agreements with AT&T Wireless Services and MobileMedia for mobile access to AOL services.

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