IntroductionAmerica Online, Inc. (AOL) has been a leading provider of online services around the globe. It was discovered in Vienna and became a leader in establishment of new mass medium, which entailed online services, multimedia, internet and other interactive technologies. America online, Inc. also provided its members with a wide range of features, such as electronic mail, real-time talk, electronic news papers and magazines, internet access and online shopping and classes. As a way of expanding, America Online Inc. involved in other businesses, such as interactive marketing and transactions abilities, and networks so as to support data transmission.
AOL obtained its revenues mainly from consumers’ membership fees, content providers and merchandisers. To understand this company fully, it is essential to analyze and evaluate essentials information relating to its financial statement. This paper therefore seeks to analyze and evaluate America Online Inc. by conducting business strategy analysis, accounting analysis, financial analysis, forecasting analysis and valuation analysis. Business strategy Business strategy analysis is an essential starting point for assessing any financial statement of a company. It normally permits analysts to evaluate the firm’s economics at qualitative level so as to enable the accounting and financial analysis to be based within business reality.
Business strategy analysis also assists in identification of a firm’s profit drivers and essential risk. This in turn normally assists in analyzing the sustainability of the current performance of a firm and develops realistic predictions for future performance. Strategy analysis normally entails industry analysis, competitive strategy analysis and corporate strategy analysis. Therefore, to conduct business strategy analysis in America online Inc. it will be essential to analyze its industry, corporate strategy and competitive strategy.
Online consumer services industry is dominated by three main firms. These firms include America online, CompuServe and Prodigy. These firms serve almost 8.5 million of the prevailing subscribers. Among the 8.5 million subscribers, 4.0 million subscribers are served by America online, 2.8 million subscribers are served by CompuServe and 1.6 million are served by Prodigy. The market therefore for online consumer services is oligopoly one and has successfully worked as middlemen among thousands of content providers and millions of customers. America Online, CompuServe and Prodigy are believed to be publishers who keenly control the product and who pays content providers and writers modest royalties.
However, with the introduction of internet World Wide Web and the establishment of Microsoft network, content providers currently have optional channels that greatly control their products and provide higher revenues. Palepu (2007) argues that profits of an industry are normally determined by the amount of money customers are willing to provide for industry’s product or service. The main determinant of price is the level of competition among the providers of similar services or goods.
It is believed that if a market is perfectly competitive, prices will be equal to marginal cost and the chances of making supernormal profits will be low. On the other hand if the market is an oligopolistic there will be a high chance of making abnormal profits. For America online Inc. there is a high chance for it to make abnormal profits in the short run, since the industry operates in an oligopolistic market. As compared to CompuServe and Prodigy, America Online Inc. occupies a large market share, thus making it a price leader.
Being a price leader therefore makes it able to charge prices that will ensure the company earns abnormal profits. However, with the entrant of Internet World Wide and Microsoft Network, America Online profitability will reduce.