"Certain market costs". The suit was about a LOT more;
Full text of suit at:
securities.stanford.edu
#s 45-92 provide detail
#s 125-206 specify the legal claims (anti-trust, fraud, etc.)
- AOL was concealing its true increasingly high "churn" rate and
falsifying its average subscriber life and lifetime revenue through
various secret practices. AOL allowed thousands of subscribers to
remain subscribers even though they were delinquent in paying their
accounts or had established "free" accounts through improper and
fraudulent practices. Also, when trial subscribers notified AOL they
wanted to cancel the service at the end of their free "trial period,"
AOL permitted them to take additional free trial period and offered
various other incentives, including, among other things, extending free usage time, even if as a result of the incentives AOL would make no money on a particular subscriber -- practices which were inconsistent with the representations AOL made to justify AOL's deferral (and capitalization) of hundreds of million in subscriber acquisition costs.
----------------------------------------------------------------------- 16. Total membership figures were constantly misstated by at
least 500,000 subscribers. Revenue projections were also inflated
as a result of projecting membership rates based on current
membership numbers which included free trial members and
cancellations. Similarly, raw subscriber usage data indicated that
the publicly touted 40+ month average subscriber life had to have
been based on skewed data and projections taken from selected
slices of the subscriber usage reports, and that the actual average
subscriber life, based on the raw data, was substantially shorter.
Subscriber usage reports went to Accounting only after having been
manipulated to include projections based on unsupported expected
future revenue, rather than an historical actual revenue; moreover,
as defendants knew, any revenue projections were especially
sensitive to churn rates, and AOL had no reliable consistent data
on actual churn rates.
--------------------------------------------------------------
In order to promote the offering, AOL's top officers,
including defendants Stephen M. Case and Lennert J. Leader,
conducted a "roadshow" in late September and early October, 1995,
with representatives of the lead underwriters. They met with
institutional investors, security analysts and brokers in major
cities throughout the country, where they repeated their false
representations about a 40+ month average subscriber life and
average lifetime membership revenue of $700+, and also represented,
among other things, that AOL's retention, or "churn," rate was
stable or improving. The defendants were careful, however, not to
disclose internal AOL information and statistics about retention
rates and churn. Internally, churn data was analyzed by category,
i.e., retention rates for subscribers who had been members 90 days
or more, 45 to 90 days and 30 to 45 days. Disclosures to
outsiders, including on AOL's roadshow for its October 1995 public
offering (as well as in AOL's periodic conference calls with market
analysts), about the churn rate never included explanations about
such distinctions and were instead based on misleadingly
incomplete, partial information.
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