America Online, Inc.

ALSO KNOWN AS: AOL FOUNDED: 1989

Contact Information:

HEADQUARTERS: 22000 AOL Way
Dulles, VA 20166
PHONE: (703)448-8700
FAX: (703)265-2039
URL: http://www.aol.com

OVERVIEW

America Online (AOL) was originally started as a service provided by a company called Quantum in 1989. Quantum changed its name in 1991 to America Online, offering PC users Internet access, e-mail, and an array of information and services. America Online, Inc. ranks as the world's top online service provider.

American Online, Inc. has three major divisions. First is its AOL Networks unit. This segment is accountable for consumer access to the Internet. AOL Studios, a second division, creates new online features. A third division, ANS Communications, arranges high-speed networking for its customers. The company's reorganization into these three divisions was part of its strategy to build online advertising and commerce revenues.

COMPANY FINANCES

In 1997, America Online's total revenues were __BODY__.68 billion, __BODY__.43 billion (85 percent) of which was derived from its online service revenues. This represented a substantial increase from total 1996 revenues of __BODY__.09 billion and online revenues of $991 million. Though data for the full year of fiscal 1998 (ending 6/98) was not available, America Online had already increased revenues over 1997 in its first three quarters, earning __BODY__.80 billion as of 3/31/98.

In May of 1998, AOL stock was trading between $85 and $90 per share. The company's 52-week high was $92.25 and its 52-week low was $24.12. AOL earnings per share were $.32.

ANALYSTS' OPINIONS

Many analysts see online services as a market with tremendous growth possibilities. Given the Internet's growth in recent years, America Online and other companies providing online service face new market concerns. Briefly, there was controversy stemming from America Online's financial position. Using questionable accounting practices, the company postponed marketing costs, showing higher profits as a result. In September of 1996, the company absorbed a $385 million write off to account for these postponed expenses. That left some analysts to question the company's actual financial status. Even with cost cutting efforts (AOL's flat rate offer), America Online just began to see green again in early 1997. Still, many analysts saw this as a positive sign for the company since much smaller online companies couldn't possibly compete with such low prices. Other critics say America Online will run out of money before it can accommodate all of its customers. The only way for the company to turn a profit, they say, is to charge for prime services and generate advertising profit with company sponsors.

America Online Inc. also faced scandal with flooded lines as a result of drastic price reductions. This led some analysts to see a positive indication of the company's advantage in a profitable market. Most users did wade through the flood of the masses trying to get online during the price war. Users like America Online's user-friendly format, and critics say it's the easiest to use on the market. While America Online's software is not updated as rapidly as downloading from the Internet, it has been praised for giving its customers more than their money's worth.

AOL surpassed analyst estimates for the first three quarters of the 1998 fiscal year, however, and its stock rose from the $30 per share range up to $115 per share. The company was adding approximately 10,000 users per day. Analysts at Zacks Investment Research reached a general consensus rating of "moderate buy" for AOL, expecting the company to continue its growth.

HISTORY

Stephen Case, America Online Inc.'s CEO, was a development manager at Pizza Hut when he became interested in a new online service called Source in the early 1980s. His interest led him to Control Video, a company that ran an online service for those using Atari computer games. In 1985, after financial struggles, the company was renamed Quantum Computer Services and began a new service called Q-Link, an online service for those using Commodore computers. By 1987 Quantum made agreements with Apple and Tandy due to Q-Link's popularity, and a service called America Online was introduced in 1989 for IBM-compatible and Apple computers. Quantum Computer Services changed its name in 1991 to America Online.

Stephen Case became the company's CEO in 1992 and launched an aggressive marketing campaign in an effort to beat competitors like Prodigy and CompuServe. Other features were added to America Online including Time Warner's Time magazine, General Media International's Omni magazine, and news from Turner Broadcasting's CNN. The company also added a Windows form of its online software.

By 1995 America Online tapped into the Internet, allowing its users access to unlimited information as well. That same year the company introduced Global Network Navigator, a service solely geared toward the Internet. America Online also signed an exclusive marketing deal with Intuit, inventor of Quicken financial software. American Online went on to sign similar deals with AT&T, Netscape, and Microsoft. In an effort to remove some of its competition, the company reduced its rates in 1996, causing its lines to flood with response. As a result, many users were denied access due to busy signals. The company faced law suits and millions in reimbursement costs to customers.

STRATEGY

Since Stephen Case took over as CEO, America Online Inc.'s strategy has been one of continued growth at any cost. He hoped to reach 10 million subscribers by 1998, and actually reached 12 million—14.5 million including the company's acquisition of CompuServe, with 2.5 million additional customers. Another part of his strategy has been the endless searching for ways to increase the company's revenues. Increasing competition and technology have motivated American Online to surge ahead.

In May of 1998, America Online announced it would acquire NetChannel, Inc. a Web-enhanced television company. The company claimed the acquisition would further its "AOL Anywhere" strategy of making the AOL brand available on all emerging interactive platforms. It would also allow them to capitalize on NetChannel's experience and technology to accelerate AOL's own development of a branded service offering interactive content developed for television.

Among other strategies was AOL's drive for increased revenue. In March of 1997 America Online announced it planned to incorporate company-sponsored advertisements in its chat rooms (online discussion areas for individuals and groups of 23 people or less). These chat rooms, called "People Connection," totaled 14,000 possible areas of simultaneous discussion. The hope had been that companies would buy space in these rooms to advertise their various products or services. Ads were being rotated every 60 seconds in windows in these designated discussion areas.

AOL's growth strategy applied to its approach overseas as well. Case hoped to become the leading universal consumer online service some time after 1998. He entered a joint operation with German media master Bertelsmann in 1995. With services operating in France, Germany, and Britain, the two hoped to dominate the European market by 1998. Plans to move into Asia, Japan, Australia, and/or India surfaced as well.

April 15, 1997 marked the day America Online had planned to introduce its online service in Japan using Japanese language, content, and customer benefits. America Online aimed to make Japan its biggest international market. Japan held 5.7 million potential online members. Other market figures included the estimated 500,000 America Online members in Europe and the 100,000 members of America Online Canada (AOL Canada). Overall, international subscribers accounted for 750,000 market members.

INFLUENCES

Since Q-Link's popularity in 1985, America Online has geared itself toward expansion. Acquiring business deals with big names like Tandy, Apple, and Commodore, America Online established itself as an online developer. At a time when the market was growing due to increasing technological capabilities, America Online expanded quickly.

America Online created a service for Apple Computers called Applelink Personal Edition, which Apple planned to introduce with the Macintosh and Apple II's. Apple's decision to cancel the deal left America Online (then called Quantum Computer Services) with time, money, and energy invested in a new service with no market outlet. The company decided to release the service under the name America Online, but faced financial frustrations concerning marketing its service. With little money to spend on advertising, the company decided to launch its service (1989) by using mailers, exhibiting software at trade shows, and by putting its name on magazine covers.

After five years, America Online acquired 5 million subscribers. The company was growing so fast it was in the number three slot of online service companies, behind Prodigy and CompuServe. America Online soon passed both companies to be the number one online service company in the world. By early 1998, America Online had 12 million subscribers, plus CompuServe's 2.5 million subscribers.

Not only did America Online grow rapidly, but so did the competition, forcing the company to compete with companies like AT&T and Microsoft Corp. In a continuing effort to increase its customer volume, America Online offered free trial offers of software sending diskettes out in the mail all across the country. This direct marketing effort proved to be wildly successful. The company also reduced its prices in 1996 from $9.95 for five online hours, plus $2.95 for each additional hour, to a flat rate of $19.95 for unlimited online hours. No company to date had such competitive prices.

America Online increased its customer volume faster than it anticipated—500,000 new subscribers in the month of December alone joined in. The number of online visits by customers went from 6 to 11 million in a matter of months in late 1996. The company, anticipating some growth, added modems and connection lines, but still was unable to meet customer demand. Busy signals turned signed up customers away, causing attorney generals in 20 states to threaten the company with law suits if it continued to make promises to its customers it couldn't keep. After attempts to fix the overload failed, the company offered refunds to dissatisfied customers, totaling a loss of $24 million. Despite these setbacks, most America Online users stuck through the frustrations for the lower price.

CURRENT TRENDS

America Online continued its aggressive approach to growth by keeping the flat rate price of $19.95. It also made other attempts to increase customer volume by adding new communication lines at a fast pace. In 1996, the company had 143,000 modems in its U.S. "AOLnet"—by the end of 1997, they had 350,000 modems. Also, the company hired Bob Pittman, co-founder of MTV, to devise a strategy to keep new members from turning to another online service, as the turnover rate had reached 25 percent in 1997. He developed plans for the company to feature hot options, similar to his creations with cable channels. These options would include company-generated content as well as agreements with new programmers.

Other attempts by America Online to increase customers and revenue have included joint efforts with big name rivals like Microsoft and AT&T. America Online agreed to boost Microsoft's Internet browser software in exchange for packaging America Online's software with every copy of Windows '95. AT&T agreed to supply a communication link to the company from its WorldNet service. And in 1997 American Online acquired one of its chief competitors, CompuServe. America Online planned to maintain CompuServe as a separate service, primarily due to the two services' separate target audiences—AOL targeted the mass market, while CompuServe targeted the business and professional audience.

PRODUCTS

AOL service includes news, entertainment, information, online shopping, buddy lists, and AOL's web site, which provides AOL NetFind and AOL Instant Messenger services. The newsstand section offers more than 90 magazines accessible to AOL subscribers online. AOL also provides chat rooms for real-time conversations with other members (and sometimes with celebrities) and email service for sending mail, data files, Internet hyperlinks, photos, and sound files to AOL members and worldwide Internet users. As part of its online service, the company provides parental and mail controls and a secure Internet browser.

One of the company's newest products, announced in May of 1998, was "You've Got Pictures!," a joint project with Kodak. According to the company's press release, You've Got Pictures! will "make online pictures as easy to obtain as prints, as easy to send as e-mail and easier to organize, store and personalize than ever before."

CORPORATE CITIZENSHIP

America Online has a philanthropic division named the AOL Foundation. The Foundation's mission is "To pioneer the development of strategies and programs that leverage the power of the emerging global medium to benefit society by improving the lives of families and children, and empowering the disadvantaged." The Foundation's first major grant program was announced in February of 1998. It was called the Interactive Education Initiative and represents an effort to develop and spread effective uses of technology in schools. Another example of the company's charitable activities was its participation in the fight against breast and ovarian cancer as a part of Revlon's Run/Walk for Women.

GLOBAL PRESENCE

Adding local services in Britain, France, Germany, and Canada, America Online's international enterprises have grown by half a million since their 14 month-old beginning. Standing as the largest online service company in the world, America Online Inc. has made tremendous efforts to work out the bugs to open its communication lines aiming to maintain this title. America Online currently offers special versions of AOL for residents of Canada, Germany, France, the United Kingdom, Sweden, Japan, and Australia. Global partnerships for international consumer online services include Bertelsmann AG, Europe's largest media company. In Japan, AOL has forged alliances with Mitsui, one of the world's largest trading companies, and Nikkei, one of the leading Japanese publishing firms.

SOURCES OF INFORMATION

Bibliography

"ABC News Announces Plans to Launch a 24-Hour Online News Service In Partnership With America Online, Netscape and Star-wave." Yahoo!, 3 April 1997.

Alsop, Stewart. "A Few Kind Words for America Online." Fortune, 17 March 1997.

"America Online, Inc." Hoover's Online, 20 May 1998. Available at http://www.hoovers.com.

"America Online, Inc. to Acquire NetChannel, Inc." America Online Press Release, 6 May 1998. Available at http://www-db.aol.com/corp/news/press/view?release=348.

"America Online to Launch Service in Japan." Reuters, 25 March 1997.

"AOL and Kodak Announce "You've Got Pictures!" America Online Press Release, 19 May 1998. Available at http://www-db.aol.com/corp/news/press/view?release=353.

"AOL Chief Faces the Music." Cable News Network, 24 January 1977. Available at http://www.cnn.com.

"AOL Membership Passes 8 Million Mark." Fox News, 17 January 1997.

"AOL Plans Ads in Chat Rooms Stock Climbs." Reuters, 5 March 1997.

Cortese, Amy. "America Online's Global Push." Business Week, 22 April 1996.

Dubrowski, Jerry. "Disney's ABC, AOL, Netscape Form Online News Partnership." Reutrers, 3 April 1997.

Eng, Paul. "The Online World of Steve Case." Business Week, 15 April 1996.

Gunther, Marc. "The Internet Is Mr. Case's Neighborhood." Fortune, 30 March 1998. Available at http://www.pathfinder.com/fortune/1998/980330/aol.a.html.

Himowitz, Michael J. "Cyberspace: The Investor's New Edge." Fortune, 25 December 1995.

"Internet Market Changing After AOL's Flat-Rate Troubles." Fox News, 7 March 1997.

Jackson, David S. "AOL Buys Some Time." Time, 10 February 1997.

Yudkowsky, Chaim, and Terry Brock. "AOL Is Moving Fast to Make Sure It Stays No. 1." Washington Business Journal, 30 September 1996.

For an annual report:

on the Internet at: http://www.aol.com/corp/inv/reports or write: Secretary, America Online, Inc., 22000 AOL Way, Dulles, VA 20166.

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Investigate companies by their Standard Industrial Classification Codes, also known as SICs. America Online's primary SIC is:

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