1. Prior to 1995, why was America Online (“AOL” or the “Company”) so successful in the commercial online industry relative to its competitors CompuServe and Prodigy?

AOL’s success prior to 1995 resulted from its early capitalization on opportunities in an immature internet services provider industry. To illustrate this, consideration should be given to certain of the “five forces” on industry structure and profitability.

Rivalry among Existing Firms – Three internet service providers – AOL, CompuServe and Prodigy – served approximately 77% of the market. The development and rapid growth of the industry meant that the competitors were able to grow independently (i.e., without needing to take market share from each other). AOL actively marketed its products “using a broad array of programs and strategies… through independent marketing programs, such as direct mail, magazine inserts and inserts in publications, advertising, and a variety of co-marketing efforts… with numerous computer hardware, software and peripheral production companies…[who] bundle America Online software with their products, thus facilitating easy trial use of the Company's services.” Basic product design, marketing, and pricing for the services were reasonably consistent among the top three competitors, with AOL’s pricing method representing the simplest of the top three competitors. AOL also developed Apple and Windows-based solutions to enable it to reach additional consumers. Through the rapid growth in the market and its marketing and product/service efforts, AOL was able to garner the largest market share of the top three providers.

Threat of New Entrants – Up until 1995, the threat of new entrants was relatively low as the cost of developing alternative solutions was significant and still in an emerging stage. AOL was able to grow its business both organically, through an