America Online, Inc

Founded in 1985, America Online, Inc., based in Dulles, Virginia, is the world's leader in interactive services, Webbrands, Internet technologies, and e-commerce services. America Online, Inc. operates with two worldwide internet services: America Online, with more than 20 million members, CompuServe, with more than 2.2 million members and several leading Internet brands. Today, worldwide membership of the AOL service has crossed 29 million and members are averaging almost 70 minutes online.

According to Barry Schuler, Chairman and CEO of America Online service, "The membership growth and the rise in daily usage show that AOL is becoming an increasingly central part of our members' lives. As we begin the next Internet revolution, and we see increased broadband adoption during the next few years, we look forward to providing new services and additional benefits to our members."

History

The history of AOL is interwoven with that of the company's forty three year old Chairman, Steve Case. After a brief spell in marketing at Procter and Gamble and Pizza Hut, Case joined Control video, the forerunner of AOL, in 1983 as marketing assistant. At the time, Control Video was a gaming service for Atari Computer owners, Case was introduced to the founders of Control Video by his older brother, Dan, who was then an associate with San Francisco investment bank on the Hambrecht and Quist and represented the bank on the company's board.

Soon after Case was hired Control Video ran out of money. The board promptly fired the existing management team and brought in as CEO Jim Kimsey, an entrepreneur who had been working part time at control Video. Under Kimsey's direction Control Video was reborn in 1985 as Quantum Computer Services, an online service for owners of Commodore Computers.

Right from the start, Kimsey groomed Case to succeed him. Case played a role in raising $5M in venture capital for Quantum, and he was the force behind Quantum's business expansion. By early 1990's Quantum, which changed its name to America Online in 1991 was trying hard for a share of the still small but rapidly growing commercial on line service business. The two market leaders at the time were Prodigy and CompuServe. In need of capital to expand its service, in 1992 AOL undertook an initial public offering, which raised $66 million. At the time, AOL had $27 million in annual revenue, 200,000 subscribers and 250 employees

Soon after AOL went public in 1992, Case and Jan Brandt, AOL’s marketing wizard (presently Vice Chairman and Chief Marketing Officer of America Online inc.) implemented her “ubiquity strategy”- sending out software disks by direct mail to millions of computer owners, offering them free trials of AOL. The tactic seemed to work. Membership rose rapidly from 155000 at the time of the IPO to 4.6 million at the start of 1996. But AOL could not handle the hyper growth, in more ways than one.

The only way that AOL could record the occasional profitable quarter was by treating its enormous marketing costs as capital expenses and amortizing them. Reacting to criticism, AOL took a $385 million write off in October 1996. That wiped out all their so-called profits.

Case was also losing control of his organization. AOL had grown haphazardly from a few hundred employees to over 9500. As he himself put it “ the place was entrepreneurial to the point of confusion. Everyone got to do what they wanted”. In February 1998 AOL acquired CompuServe, one of its main competitors.

Case decided it was time to hire help. He hired Bob Pitman, a boy wonder who had quit college to work in radio, later becoming a star programmer at NBC. Pitman had co-founded MTV and helped create the “I want my MTV ” advertising campaign.

Pittman attacked costs laying off hundreds of employees from CompuServe and AOL Studios. He used AOL’s scale to drive hard deals with backbone providers like WorldCom gradually pushing AOL’s cost of connect time down from 95cents an hour to 50 cents an hour. AOL’s cost of acquiring a new customer dropped from $375 to $90.

However it was amply clear to both Case and Pittman that cost cutting alone would not make AOL a profitable business. The key was to leverage AOL’s massive subscriber base for all it was worth squeezing money out of advertisers, retailers, programmers and anyone else who wanted access to the millions of subscribers on AOL.

The first major deal made was with Dan Borislow owner of the long-distance company Tel-Save. His vision was to cut costs dramatically by signing up customers, billing them and charging their credit cards online. Borislow paid $100 million for exclusive rights to AOL’s subscribers for three years.

A large number of deals followed. CUC International paid $50 million for AOL to carry its online discount shopping service, Preview Travel paid $32 million to become an online travel agent, 1800-Flowers paid $25million and N2K paid $18 million. The rest is history. For a complete chronological look of AOL’s growth please visit http://www.corp.aol.com/whoweare/who_timeline.html

Business Model

America Online has four major lines of businesses: the Interactive Services Group, the Interactive Properties Group, the AOL International Group, and the Netscape Enterprise Group.

The Interactive Services Group develops and operates branded interactive services, including: AOL service with approximately 23.2 million members, CompuServe service with approximately 2.8 million members, the Netscape Netcenter, an Internet portal, the AOL.com Internet portal, the Netscape Communicator client software, including the Netscape Navigator browser, the AOLTV service, an interactive television service for mass-market consumers and the AOL Wireless services, which deliver features and content of the AOL service and branded properties to wireless consumers.

The Interactive Properties Group is built around branded properties that operate across multiple services and platforms, such as: Digital City, Inc. an local online network and community guide on the AOL service, ICQ communications portal, AOL Instant Messenger (AIM), a Web-based communications service, Moviefone, Inc a movie guide and ticketing service, Internet music brands Spinner.com, Winamp and SHOUTcast and MapQuest.com, a leader in destination information solutions

The AOL International Group oversees the AOL and CompuServe services and operations outside the United States, as well as the Netscape Online service in the United Kingdom.

The Netscape Enterprise Group focuses on providing businesses a range of software products, technical support, along with consulting and training services. These products and services enable businesses and users to share information, manage networks and facilitate electronic commerce. The Netscape Enterprise Group operates primarily through iPlanet E-Commerce Solutions, a Sun-Netscape alliance. This strategic alliance between America Online and Sun Microsystems, Inc., a leader in network computing products and services, was formed in November 1998 and began operating in March 1999.

Marketing Force

Interactive Services and Interactive Properties Groups:

These two groups’ marketing activities are conducted for its multiple brands through a common infrastructure. The marketing goals of the Interactive Services and Interactive Properties Groups are to attract and retain members or users and to develop and differentiate the Company's family of brands. To support these goals, the Company markets its products, services and brands through a broad array of programs and strategies, including broadcast television and radio advertising campaigns, direct mail, magazine inserts and advertisements, co-marketing, retail distributions and bundling agreements. Promotions include 700 minutes free when you sign up, downloading of AOL 6.0 free. The monthly cost is $21.99 for the service.

The Company also markets through more innovative means, such as through extensive online and offline cross-promotion and co-branding with a wide variety of partners. Through bundling agreements, the Company's interactive online services and products are on a range of computers made by personal computer manufacturers. The multi-year agreements provide that pre-installed software will be available by clicking on an icon during the computer's initial setup process.

The Company utilizes targeted or limited promotions and marketing programs and pricing plans designed to appeal to particular groups of potential users of its interactive online services and to distinguish and develop its different brands. For example, in connection with the positioning of the CompuServe service in the United States as a value-oriented brand, in June and July 1999 the Company announced marketing initiatives for its CompuServe service with two computer manufacturers and a number of additional retailers. Under these promotions, consumers signing up for three-year memberships to the CompuServe 2000 service at $21.95 per month will receive a rebate of $400 in connection with the purchase of designated merchandise. This promotion is designed to appeal to consumers who are purchasing computers for the primary purpose of getting online and to make the purchase of a personal computer and Internet access easier and more affordable.

AOL’s businesses utilize specialized retention programs designed to increase member and user loyalty and satisfaction (stickiness). These retention programs include regularly scheduled online events and conferences; the regular addition of new content, features and software programs and online promotions of upcoming online events and new features. The Company also provides a variety of support mechanisms such as online support and 24-hour telephone customer support services.

Netscape Enterprise Group:

This group’s marketing efforts and activities are conducted primarily through joint marketing efforts of iPlanet E-Commerce Solutions, a Sun-Netscape Alliance. The marketing goals of the Company's Netscape Enterprise Group are to position iPlanet E-Commerce solutions as the leading provider of electronic commerce applications and Internet infrastructure software to power the Net economy.

Advertising focuses on iPlanet's leadership position in the industry and the breadth and innovation of the iPlanet E-Commerce Solutions product portfolio. Advertising media includes the Company's interactive online services and properties, traditional print and broadcast advertising campaigns and bundling agreements. A dedicated sales force also markets the products and services sold or provided through iPlanet directly to potential customers. The Netscape Enterprise Group utilizes customer-marketing programs designed to increase customer loyalty and customer satisfaction. These programs include the iPlanet Customer Program featuring a secure customer extranet and specialized joint marketing activities, a new customer quality initiative and customer support and services.

Merger of AOL and Time Warner

-Building a New Medium for the New Millennium

On January 10, 2000 - America Online, Inc. and Time Warner Inc. announced a strategic merger to create a fully integrated media and communications company for the Internet Century in a stock combination valued at $350 billion. Named AOL Time Warner Inc. with combined revenues of over $30 billion, this new enterprise will deliver branded information, entertainment and communications services across rapidly converging media platforms. The merger combines Time Warner's vast array of media, entertainment and news brands and its advanced broadband delivery systems with America Online's extensive Internet franchises, technology and infrastructure, including premier consumer online brands, a huge community in cyberspace, and highly developed e-commerce capabilities. Consumers will not be required to purchase service from an ISP that is affiliated with AOL Time Warner in order to enjoy broadband Internet service over AOL Time Warner cable systems. As Steve Case stated during the merger "This is an historic moment in which new media has truly come of age. We've always said that America Online's mission is to make the Internet as central to people's lives as the telephone and television, and even more valuable. By joining forces with Time Warner, we will fundamentally change the way people get information, communicate with others, buy products and are entertained - providing far-reaching benefits to our customers and shareholders.”

Steve Case is now Chairman of the Board of the new company. He plays an active role in helping to build and lead AOL Time Warner, focusing particularly on the technological developments and policy initiatives driving the global expansion of the interactive medium. Gerald M. Levin, previously Time Warner's Chairman and Chief Executive Officer, is now AOL Time Warner's Chief Executive Officer. He sets the company's strategy and oversees the management of the company.
A comparison of the companies at the time of the merger.

	America Online, Inc.	Time Warner Inc.
Employees	12,100	70,000
FY 1999 revenue	$4.8 billion	$26.8 billion
FY 1999 net income	$762.0 million	$168 million
Shares outstanding	2.35 billion	1.5 billion

Partners of AOL Time Warner

Technology Alliance:

AOL Time Warner has been looking for competitive partners to increase its ability to provide customers with high-speed access to Internet. Juno Online Services, Inc. is one of the nation's leading Internet access providers who had a definitive agreement with AOL Time Warner covering the provision of Juno's high-speed Internet access service, Juno ExpressSM, over AOL Time Warner's cable system.

At the same time AOL Enterprise provides the best value for large corporations looking to reduce the cost of remote Internet access for their mobile users. AOL Enterprise develop Remote Internet Access Services in Partnership with Leading Security Companies such as Aventail Corporation to provide corporate customers with reliable, secure & cost-effective remote internet access and systems management solutions. Also AOL reached agreement with Lotus and Oracle Corporation to provide Internet access to corporate customers.

Marketing and Promotional Alliance:

An important component of the Company's strategy in its businesses is to continue increasing revenues from advertising and commerce sources and from the direct sale of merchandise, as well as from additional sources such as transaction and licensing fees. The Company continues to establish a wide variety of relationships with advertising and commerce partners to grow and diversify its non-subscription-based revenues and to provide subscribers on the Company's interactive services with access to a broad selection of competitively priced, products and services. The Company has also expanded the scope, range and types of businesses involved in advertising and commerce relationships. Many of the Company's advertising and commerce contracts are with industry leaders such as Coca-Cola, Kodak, Sears, Nortel Networks, Continental Airlines, Swatch Group and Citigroup. The Company has entered into advertising arrangements that include multiple brands within the Company's family of brands. The Company has renewed and extended or expanded relationships with existing advertising and commerce partners.

AOL offers its advertising and commerce partners a variety of customized programs, which include premier placement or select sponsorship of particular online areas or Web pages for designated time periods. As merchants recognized the value in reaching the Company's large, growing and active subscriber base and users of its Web-based properties, the Company was able to earn additional revenues by offering selected merchants exclusive rights to market particular goods or services within one or more of the Company's online services and properties. In those transactions, the Company provides its commerce partners certain marketing and promotional opportunities and in return receives cash payments, the opportunity for revenue sharing, cross-promotions and competitive pricing and online conveniences for subscribers.

With such a broad range of promotional partners, AOL achieved fantastic increase in advertising and commerce revenues (100% increase each year from 1998 to 2000). The advertising alliance with more corporations is strategic important to AOL Time Warner.

Competition

"We face competition from a wide range of other companies in the communications, advertising, entertainment, information, media, Web-based services, software, technology, direct-mail, and electronic commerce fields for subscription, advertising, and commerce revenue, for the development and sale of electronic commerce infrastructure and applications, and in the development of distribution technologies and equipment," AOL summed up in a recent filing with the Securities and Exchange Commission.

Competitors for subscription revenues include:

§         Online services such as the Microsoft Network, AT&T Worldnet and Prodigy.

§         National and local Internet service such as  EarthLink, Juno, NetZero and Bluelight.com.

§         Long distance and local telephone companies offering Internet access as part of their telephone service, such as AT&T Corp., Sprint.

§         Cable television companies

§         Cable Internet access services such as Road Runner and Juno

Competitors for advertising and commerce revenues include:

§         Online services such as the Microsoft Network, AT&T Worldnet and Prodigy Internet.

§         Web-based navigation and search services provided by companies such as Yahoo! Inc., the Walt Disney Internet Group, Lycos, Inc.

§         Cable Internet access services such as Excite@Home and Road Runner

§         Web sites focusing on content, community and similar features such as Amazon.com and eBay

Competition in the development of distribution technologies and equipment includes:

§         Broadband distribution technologies used in cable Internet access services such as Excite@Home and Road Runner

§         Advanced   telephone-based   access services offered through digital subscriber line technologies   offered by local   telecommunications companies

§         Television-based   interactive services, such as those offered by Microsoft's WebTV

Competitors   in the   development   and sale of electronic   commerce infrastructure and applications include:

§         Providers of electronic commerce infrastructure such as server software, including IBM corp, Microsoft, Oracle, Novell, Inc., and Software.com, Inc. Open Market Incorporated, Ariba, Inc., CommerceOne, Inc., Sterling Commerce, Inc. and BroadVision, Inc.

Some of the present competitors and potential future competitors of the Company may have greater financial, technical, marketing or personnel resources than the Company. In addition, as a result of acquisitions, some competitors are able to offer both Internet access and other services, such as cable television or telephone service, and such consolidation may continue. The competitive environment could have a variety of adverse effects on the Company.

Critical Success Factors

Number of subscribers: AOL Time Warner's online properties reached 75% of Americans who went online from home in January 2001, and accounted for nearly one third of all time spent online. On March 8, 2001, America Online Inc announced that the worldwide membership of its flagship AOL service has surpassed 28 million with AOL members averaging almost 70 minutes on the service daily, up from 63 minutes a year ago.

Easy to access: The AOL Anywhere site, enabling members to access their AOL account anytime and anywhere from multiple devices.

Advanced Technology: AOLbyPHONE, allowing members to access and customize their favorite interactive applications, including weather, personal finance and sports, through simple spoken commands over the telephone. AOL PLUS, providing full-motion video and streaming audio from leading content partners to members connecting to AOL at high speeds.

Wide Coverage of Content: The digital transformation of Time Warner's unsurpassed media properties -- including magazines, television networks, music and movie studios made AOL Time Warner best positioned to capitalize on the convergence of media, entertainment and communications. The merger with Time Warner brings AOL a wide variety of established content -- news, movies, television and music -- which will be cross-promoted by, and will cross-promote, AOL's bevy of online businesses.

AOL today

America Online, Inc. is the world's leader in interactive services, Web brands, Internet technologies, and electronic commerce services. Today, worldwide membership of the AOL service has crossed 29 million with a peak of 2.2 million simultaneous users. Over 194 million emails are sent, 245 million stock quotes are checked, 9.9 million Web URL’s are served and 656 million instant messages sent every day. Members are averaging almost 70 minutes online, up from 64 minutes a year ago

CompuServe has over 2.8 million members worldwide. Member time online has increased over 44% in the last 12 months with a 112% increase in weekly member hours and a 63% increase in peak simultaneous users in the last six months alone.

Digital City: The Local Online network has over six million visitors monthly with over 200 markets nationwide covering over 600,000 entertainment events and venues.

ICQ: The “Communication Community” has more than 80 million registered users with an average of over 9 million daily users. Average daily usage is about three hours per member. 67% of ICQ member registrants live outside the US.

MapQuest: The Mapping and Navigation Service has over 9 million unique visitors monthly and over 1750 business partners. More than 10 million maps downloaded everyday

Moviefone: The Movie Guide & Ticketing Service has over 150 million user sessions on phone and Web per year. 20% of all moviegoers use Moviefone in 150+ cities nationwide. Services cover approximately 27,000 screens in 150 cities and are used by 1 in every 5 moviegoers across the country.

Netscape Netcenter: It has over 34 million registrants and is the top 5 among all the web sites.

Winamp & Spinner: Has over 42 million registrants worldwide with 13 million unique visitors per month to Winamp.com. With over 24 million Spinner songs listened to weekly, 120 thousand downloads daily and a visitor average 1.5 hours of daily Spinner listening time Winamp looks posed for a bright future.

Performance of AOL Time Warner

On January 11, 2001, America Online, Inc. ('America Online') and Time Warner Inc. ('Time Warner') completed their previously announced merger pursuant to the Second Amended and Restated Agreement and Plan of Merger among the companies and certain of subsidiaries dated as of January 10, 2000 (the 'Merger'). The combined company is named AOL Time Warner Inc. ('AOL Time Warner').

AOL Time Warner classifies its business interests into six fundamental areas: AOL, consisting principally of interactive services, Web brands, Internet technologies and electronic commerce services; Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of interests in filmed entertainment and television production; Networks, consisting principally of interests in cable television and broadcast network programming; Music, consisting principally of interests in recorded music and music publishing; and Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing.

Revenues

Subscription Revenues

Currently, America Online's Interactive Services Group generates subscription revenue primarily from subscribers paying a monthly membership fee. At December 31, 2000 and 1999 respectively America Online had approximately 26.7(2000), 20.5(1999) million AOL brand subscribers, of which approximately 21.5(2000) and 17.4(1999) million were in the United States. For the year ended December 31, 2000, subscription revenues increased 23% over the year ended December 31, 1999 which is primarily attributable to the increase in the average number of U.S. subscribers.

Advertising and Commerce Revenues

An important objective of America Online's business strategy is a continued emphasis on growing the advertising and commerce revenues. The trend of the revenue composition showed that the subscription fee is bringing less proportion of revenue, and advertising and commerce is driving the increase of revenue more than before. During the year ended December 31, 2000, utilizing its large, active and growing user base, America Online continued to build on its industry-leading advertising and commerce revenue base through a series of major alliances with leading brands and retailers. The revenue of this segment increased 91% from 1999 to 2000, which is much faster than the subscription revenue.

For a look at the revenues of America Online for the years ended December 31, 2000, 1999 and 1998 please see Exhibit 1.

For a look at the current financial position please visit http://www.aoltimewarner.com/investors/index.shtml

Costs

Cost of Revenue

Total cost and expense as percentage of total revenues has been decreasing during three years, which are 76.4%, 85.7% and 97.3% respectively in 2000, 1999 and 1998. This is mainly due to the efficiencies that America Online continues to realize as a result of its size and scale, as well as lower negotiated rates with its network providers. The growth of higher margins of advertising and commerce revenues also contributes to the decrease of cost percentage.

Sales and Marketing Expense

America Online's strategy continues to emphasize brand advertising across multiple brands, as well as cost-effective bundling agreements, where its products are widely distributed with new personal computers, the Windows operating system and other peripheral computer equipment and software. Additionally, America Online continues to market its products via direct mail programs.

Exhibit 2 shows the costs and expenses of America Online for the years ended December 31, 2000, 1999 and 1998.

The following table and discussion highlights the income of America Online for the years ended December 31, 2000, 1999 and 1998:

Net Income

Net Income is almost same in Year 2000 and Year 1999, however it should be noticed that AOL operating income more than doubled that in 1999. So AOL’s earning ability in continued operation is still very good in 2000.

Exhibit 3 highlights the income of America Online for the years ended December 31, 2000, 1999 and 1998:

There is amount of risk existed to AOL Time Warner. The company operates in highly competitive, consumer driven and rapidly changing Internet, media and entertainment businesses that are dependent on government regulation and economic, political and social conditions in the countries in which they operate, consumer demand for their products and services, technological developments and (particularly in view of technological changes) protection of their intellectual property rights.

Forecast of AOL Time Warner

For AOL Time Warner's America Online businesses, the ability to develop new products and services to remain competitive; the ability to develop or adopt new technologies; the ability to continue growth rates of the subscriber base; the ability to provide adequate server, network and system capacity; the risk of increased costs for network services; increased competition from providers of Internet services.

For AOL Time Warner's cable business, more aggressive than expected competition from new technologies and other types of video programming distributors, including DBS and DSL; increases in government regulation of basic cable or equipment rates or other terms of service (such as 'digital must-carry,' open access or common carrier requirements

For the risks related to the successful integration of the businesses of America Online and Time Warner, including the costs related to the integration; the failure of the Company to realize the anticipated benefits of the combination of these businesses the difficulty the financial market may have in valuing the business model of the Company; and fluctuating market prices that could cause the value of AOL Time Warner's stock to fail to reflect the historical values of America Online's or Time Warner's stock.

Although with these risks AOL Time Warner faced, the company has been doing very well during three years. The table shown below is a recent forecast by analysts of Earnings Per Share. To analysts AOL is very strong in earning ability with forecasted EPS for Year 2001 almost thrice that of Year 2000.

Yearly Earnings Forecasts

Fiscal Year End	Consensus EPS* Forecast	High EPS* Forecast	Low EPS* Forecast	Number of Estimates	Over the Last 4 Weeks Number of Revisions Up Down
Dec 2001	1.2	1.29	1.04	31	18	2
Dec 2002	1.516	1.76	1.31	21	7	4
Dec 2003	1.63	1.63	1.63	1	0	0

Our suggestion for AOL-Time Warner is that it should focus on international expansion. It should try and forge alliances with cable companies and content providers in foreign countries such as Australia and the UK. Doing so at an early stage AOL would preempt the market and gain by being the first mover in an untapped segment by virtue of its superior technology.

In the US AOL could forge alliances with companies such as Qualcomm which are ushering in the 3^rd generation of wireless devices. By partnering with such firms AOL would have access to the latest technology and thus maintain its competitive advantage.

Exhibits

Exhibit 1:

	YEARS ENDED DECEMBER 31
	2,000		1,999		1,998
	(DOLLARS IN MILLIONS)
Revenues:
Subscriptions	$4,777	62.0%	$3,874	67.6%	$2,765	71.4%
Advertising and commerce	2,369	30.8%	1,240	21.7%	612	15.8%
Content and other	557	7.2%	610	10.7%	496	12.8%
Total revenues	$7,703	100.0%	$5,724	10000.0%	$3,873	100.0%

Exhibit 2:

	YEARS ENDED DECEMBER 31,
	2,000		1,999		1,998
	(DOLLARS IN MILLIONS)
Total revenues	$7,703	100.0	$5,724	100.0	$3,873	100.0
Costs and expenses:
Cost of revenues	$3,874	50.3%	$3,324	58.1%	$2,538	65.5%
Sales, general and administrative	1,902	24.7	1,390	24.3	1,034	26.7
Amortization of goodwill and other intangible assets	100	1.3	68	1.2	49	1.3
Merger, restructuring and contract termination charges	10	0.1	123	2.1	50	1.3
Acquired in-process research and development	--	--	--	--	80	2.1
Settlement charges	--	--	--	--	18	0.4
Total costs and expenses	$5,886	76.4%	$4,905	85.7%	$3,769	97.3%

Exhibit 3:

	1 YE 12/31/00	1 YE 12/31/99	1 YE 12/31/98
Operating income	1,817	819	104
Other income, net	67	815	41
Net income	$1,152	$1,027	$115
Basic net income per common share	$0.50	$0.47	$0.06
Diluted net income per common share	$0.45	$0.40	$0.05