The Rise and Success of AOL

Paper Summary:

Analysis of the success of AOL. A discussion of how competitive advantage in the industry is determined. AOL's delivery of high-speed internet is given as a reason for its success as well as product innovation, technology patents, PC market share, low cost and appeal to both novice and experienced users.

From the Paper:

"AOL has achieved competitive advantage in several key areas, including quality, innovation and customer responsiveness; in terms of efficiency, AOL has struggled to achieve and maintain a competitive advantage. In 1996, for example, the firm experienced difficulties in retaining its general audience of subscribers because of the threat posed by the burgeoning Internet service provider (ISP) industry. This was due to the emergence of national (or major) players offering services and amenities similar to those of AOL and local and regional services offering limited amenities in the form of e-mail and Internet access. Though often without the "bells and whistles" of AOL and other national providers, local ISPs represented major threats by providing lower-cost access and more timely dial-up (Semilof, 1996). Over time, AOL elected to employ a blitz marketing strategy to enhance customer responsiveness, while also offering a "one-price" monthly access fee (Direct Marketing, 1998). Innovation, in the form of new services and amenities, as well as enhanced access and dial-up speed, have been key elements in the firm's strategy for maximizing competitive advantage for the past three years this also speaks to issues related to efficiency as AOL has worked to respond to customer complaints regarding slow access and online waits. Recently, as Electronic Advertising and Marketplace (1999) reported, AOL has elected to pursue innovation and customer responsiveness by engaging in co-marketing strategies with partners such as eBay, an online auction service; other partnering agreements that have been beneficial to AOL include more than 60 Internet sites including HotBot, InfoSeek, WebTV and Netscape. Finally, innovation is clearly an AOL priority in that the firm is moving to get inside every possible "information appliance," including pocket organizers, Plan computers, the PCS smart phone, TV, and mini-Web terminals via its partnership with Gateway Computer Systems (Yang, 1999). Via innovation, AOL hopes to increase customer responsiveness and realize efficiencies through multiple selling - turning an existing customer base into a more diversified base.
Competitive advantage in the industry is determined via two measures: 1) customer responsiveness, measured in terms of subscribers; and 2) innovation, determined by product and service differentiation and the speed with which innovative technologies and new devices/uses are brought to market. The industry is the center of rivalry between giant Microsoft and its advantage obtained via its Windows monopoly in PC operating systems on the one hand, and AOL on the other. AOL made its $4.7 billion in revenues in 1998 on dial-up Internet access services, advertising sales, and e-commerce; Microsoft, conversely, banked its $19 billion in cash reserves because it created first-to-market software and operating platforms that have become ubiquitous (assuming the shape and influence of a virtual monopoly (Yang, 1999). AOL has elected to focus its efforts to date on the consumer access market, leaving the field open to Microsoft and others in the business applications sector (News Bytes News Network, 2000). This suggests that for AOL, competitive advantage is very much linked to such variables or building blocks as customer responsiveness and innovation; AOL accounts for 40 percent of consumer access subscribers. Overall, each of the building blocks of competitive advantage have played and are expected to continue playing roles of some significance in shaping the industry as a whole. Innovation will most probably drive competition in the future (Vickers, 2000); information appliances will be initially a niche market, and as costs for products come down, a more expansive market segment."

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