South-Western - Management  
AOL to Reveal Its Risky bet on Broadband
Topic Strategy
Key Words strategy, competitive advantage
News Story

AOL is expected to reveal its strategy for dealing with plummeting advertising and slowing subscriber growth. It warns that profits may fall as it transitions toward the broadband market.

Earthlink, a competitor, had been transitioning to broadband for the past three years and had suffered financially in spite of an impressive number of broadband subscribers. The reason is that broadband is less profitable because of the high prices Earthlink must pay to cable and telephone companies that control residential high-speed Internet connections.

AOL's large array of exclusive content is what sets it apart from providers like Earthlink, but AOL may face similar challenges. It is expected that the company will focus on selling its $14.95 a month service that allows users of other high-speed Internet access providers to use AOL's content, email, and instant messaging. AOL currently has about 3.7 million customers paying fees for both kinds of accounts.

AOL is also expected to outline cost-cutting strategies and plans for new premium services and exclusive material for subscribers. Although it has expanded its dial-up customer base during the past two years die to extensive marketing, those costly efforts are likely to be scaled back. Since AOL must pay cable operators high fees for broadband access, it can improve its profit margin by selling the $14.95 service.

Questions
1.

For AOL to sustain its competitive advantage, it needs to offer something to users that they can't get elsewhere. In other words, it needs to offer resources that the customer wants and can't get elsewhere. When this article was written, what rare or unique resources did AOL offer to customers that gave it a competitive advantage?

2.

What is the biggest danger AOL faces to losing its competitive advantage, and what could it do to avoid this loss?

Source Julia Angwin, "AOL to Reveal Its Risky bet on Broadband," Wall Street Journal December 3, 2002, p. C3.
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