American online

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AOL INC (originally known as America Online)

CASE PRESENTED BY: GROUP 4

                        SONAM GANAPATHY

                        CHLIRIM ZAKU

                        MISBAH REHMAN

                        HARSH SHAH

                        MAYANK KAPOOR

COMPANY OVERVIEW

AOL INC (simply known as AOL) is a mass media corporation based out of New York, a subsidiary of Verizon Communications. The company own and operates websites such as The Huffington Post, TechCrunch and Engadget, and spans digital distribution of content, products, and services, which it offers to consumers, publishers, and advertisers. It has also positioned itself as major player in the Ad Tech business. Through its Ad platform business, it caters to both the sell side and the buy side. Thus placing itself both as a B2B and B2C player.

Aol generates a majority of revenue from its Advertising business. The other sources of revenue for it are the subscription revenue and the revenue generated from leasing its intellectual property rights. In this case we study the 2014 annual report of Aol and answer important questions related to deferred costs.

Q1. What do AOL’s “Deferred subscriber acquisition costs, net” represent?  How does AOL account for these costs?

AOL’s “Deferred subscriber acquisition costs, net” represents the amount of money AOL spends on direct response advertising. This does not include any indirect costs associated with acquiring customers. Direct response advertising consists solely of the costs of marketing programs which result in subscriber registrations without further effort required by AOL. These costs relate directly to the solicitation of specifically identifiable prospects and include the printing, production and shipping of starter kits and the costs of obtaining qualified prospects by various targeted direct marketing programs and third parties. 

AOL accounts for its subscriber acquisition costs by deferring them in order to match the associated online services revenue. The deferred costs are amortized over a period and are determined by calculating the ratio of current revenues related to direct response advertising versus the total expected revenues related to this advertising, or twenty-four months, whichever is shorter. All other costs related to the acquisition of subscribers, as well as general marketing costs, are expensed as incurred

Q2. How much money did AOL spend on “Deferred subscriber acquisition costs" in 1996? How much of this was expensed?

AOL spent $314,181 thousand on “Deferred subscriber acquisition costs” in 1996. It expensed $126,072 thousand of it toward amortization of subscriber acquisition costs.

Q3. According to Note 2, AOL changed the amortization period over which “Deferred subscriber acquisition costs” are charged. What effect did this change have on 1996 Net income?

The net income increased by $48.106 million in the year ended June 30, 1996. According to note 2, AOL modified the components of subscriber acquisition costs deferred and changed the period over which it amortizes the cost. The company changed the method from 12 and 18 months to –