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									                                                                                    Bryce Iwata
                                                                                    Acc 660

                                           America Online Inc.

        In 1995, America Online Inc. (AOL) experienced its first net operating loss of $33.6 million
since its incorporation in 1992. There were many factors that contributed to the financial deficiency. It
was this deficiency that spurred controversy with AOL’s stock price and its accounting practices.
        AOL’s stock price was well overpriced. Some investors were speculating that AOL would be
very profitable in the future, which sparked the high stock prices. However, there were also many
investors that thought the prices were inflated and the bubble would burst. These investors decided to
sell the stock short and profit from the decline in price.
         Investors who sold their stock short had good reasons. The industry has many competitors like
CompuServe and Microsoft. Also, there was a threat of new entrants since it was easy to get into the
industry. There were also alternatives to the AOL product that were a lot cheaper or free. Other
indications of inflated stock prices were that Apple Computer hedged its investment in AOL, which
locked in its profits to 5.7 percent. Also, AOL’s executives sold some of their stock for sizeable profits.
         AOL’s accounting practices were also questionable. AOL amortized its software development
over a period of five years. This is unusual since the software is usually obsolete in less time. Also,
AOL capitalized its subscriber acquisition cost, which its competitor CompuServe did not. Other things
that AOL capitalized was the marketing costs associated with acquiring a customer. By amortizing
these costs, AOL was able to spread its expenses over a period rather than recognizing it in the year it
        AOL had many questionable events with its accounting practices and its financial performance
that lead to the sharp decline in its stock price. Prior to the price decline, investors were buying the
stock at a high price based on speculation that the company will do better financially. However, some
people knew the prices were inflated and sold their shares short. These people ended up making a lot of

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