To all,
Since competitive-pricing may turn out to be the catalyst that arrests
AOL's subscriber growth, let's see if there is any insight to be had
from developing a crude competitive-pricing model.
Basically, the question becomes "is subscribing to AOL a better value
than accessing the internet directly through an ISP?"
if
a = AOL
i = internet
x = combined AOL/internet performance factor
y = relative internet performance factor
r = relative pricing
then is
x(ya + i) - r > i ?
It depends on the nature of x, y, and r.
Let's make the following assumptions:
i = 1.0
a = .5i in other words, all of AOL is independently half the value
of the ENTIRE internet, which I think is being extremely
generous. This figure is further broken down into .3i for
content and .2i for ease of use.
y = .9 relative to a regular isp, AOL is slow and does terrible in
customer surveys. The system bottlenecks, loses e-mail or
takes too long to deliver it.
x = .9 inability to access e-mail, AOL, or the internet at all on
demand during peak periods.
r = .47i determined by taking AOL's new unlimited price and dividing
it by the the best mainstream price available, MCI's 14.95
monthly unlimited, and subtracting 1 to reflect the premium
AOL now demands. 21.95/14.95 - 1 = .47
Plug in all the bits and you get
x(ya + i) - r > i ?
.9(.9(.5i) + i) - .47i > i ?
.9(.45i + i) - .47i > i ?
.9(1.45i) - .47i > i ?
1.305i - .47i > i ?
.835i > i ? ==> nope
So, I guess AOL plus the internet is a now worse deal than just the
internet! :o)
Doesn't seem logical, does it? Aside from the relative performance
of the two platforms, AOL's new pricing is what really skews the value
equation. Note that before the price increase and MCI's 14.95 tie in
offer, the 'r' factor would be zero. (19.95/19.95 - 1 = 0). In that
case, the equation is completely in AOL's favor: 1.305i > i ?
Mathematicallly, this is why I think AOL's price increase will
eventually cause problems, especially if their competitors choose to
price in the opposite direction, which I think they will because they
can use it as a loss-leader for other core services.
Right, wrong, useful, useless, complete waste of time, who cares? |
