July 4, 1999
FROM NYT ARTICLE:
Now, AOL Everywhere
The Newest Giant Takes On Phones, TV and Microsoft
By SAUL HANSELL
ULLES, Va. -- Over the last year, the walls of America Online's
rapidly expanding headquarters here have been dotted with
plaques. They declare that the company's mission is "to build a global
medium as central to people's lives as the telephone or television . . . and
even more valuable."
But wait. Aren't telephones
everywhere? And don't
Americans watch seven
hours of TV each day? How
can Stephen M. Case,
America Online's chairman,
dare to think that his
company -- which just a few
years ago lurched from one
crisis to the next and was
largely a chat service for
lonely teen-agers -- belongs
in the same league?
The answer is that America
Online, confounding the
skeptics, has emerged over
the last two years as the biggest, most powerful company on the Internet.
Indeed, an astounding 39 percent of the time Americans spend online is
spent using services the company controls, 10 times the share of its
nearest competitor, Microsoft. AOL expects to hit $5 billion in sales this
year, more than the next 20 Internet companies combined and roughly
the size of NBC's. And the company's market value of $110 billion is
bigger than that of any other media concern in the world.
So now Case, who has been talking for years about taking on television,
has a plan to realize the ambitions of his most audacious rhetoric -- for
AOL to leap off the computer and be everywhere, all the time.
The plan has these parts:
The company will try to roughly double the number of subscribers, now
17 million, to its flagship America Online service over the next five years
or so. And it will aim to add several times as many users overseas and
through its other brands, like Compuserve, ICQ and Netscape.
It will develop new services to lure users to stay online as long as three
hours a day -- the current average is 55 minutes -- and, in the process,
make advertising revenues as important to the company as subscriber
fees.
And it will set out to subsume all other media by delivering its service on
television screens, cellular telephones and myriad other devices, in
addition to computers.
"Our goal is to establish AOL as a more important part of tens of millions
of people's everyday life," Case said a few weeks ago, nibbling jelly
beans in his office. "And to do that, we have to move beyond the P.C. in
the den."
If America Online performs as
planned, fending off media giants and
the rapidly growing army of
well-financed Internet start-ups, Case
may be able to fulfill yet another
ambition: for AOL to be the most
valuable company in the world. That
would mean achieving a market value
surpassing that of its longtime rival,
Microsoft, now worth some $400
billion, or almost four times its current value.
Outlandish? That depends on how you look at it. America Online's
estimated $378 million in earnings for 1999 are barely 6 percent of
Microsoft's, so the company has a long way to go by traditional
measures. But for an Internet stock, it remains cheap. After a 300
percent run up over the last year, it is selling for about 31 times revenue,
far less than the 150 times for Yahoo. America Online closed Friday at
$115 1/4.
Overtaking Microsoft is an especially fitting goal, because much of
Case's plan resembles the playbook of none other than Bill Gates,
Microsoft's chairman.
And just as Microsoft has come to dominate the operating systems for
personal computers, AOL, Microsoft and many other companies are
fighting to control a new and crucial form of operating system, in essence
for daily life. As people wire their families, their finances, their jobs --
even their household appliances -- into one vast network, whoever ties it
all together will have much say in how the electronic future unfolds -- and
possibly capture much of the profit.
"Windows is the past," Case says flatly. "In the future, AOL is the next
Microsoft."
Like Microsoft as well, AOL has adopted a "fast follower" strategy. It
can afford to invest in the sort of long-term projects that smaller
companies cannot. But to avoid becoming too bureaucratic and
introverted, it hopes to buy some of the most creative start-ups. Indeed,
its $4.2 billion acquisition of Netscape Communications last year was
meant to inject Silicon Valley culture into AOL and to create a home
base from which to acquire more West Coast start-ups, which might balk
at moving to Virginia.
"America Online has a grand vision and a size that lets them achieve it
like no one else," said Edward A. Bennett, the former head of Prodigy,
whose online service AOL vanquished. "Because they have so many
customers, they can sell more products and services to them. And they
get the pick of the content and services because everyone else out there
who is smaller comes to them for exposure to their audience."
Microsoft certainly isn't ceding any ground. It is
spending billions of dollars to insure that
Windows is widely used in Internet-linked
devices ranging from cable television boxes to
cellular phones. And a big part of its antitrust
fight with the Government is over its desire to
funnel Windows users to its Internet browser
and the services that flow from it.
Case's big plans also come up against the
ambitions of AT&T, the nation's largest
long-distance, wireless telephone and cable
television company. With its direct control over
connections to millions of homes, AT&T would
love to drive traffic to its own online services,
especially Excite@home, a consortium of cable
companies developing a high-speed Internet
service.
Of course, the World Wide Web may defy any big company's efforts to
dominate it; most Goliaths meet their Davids. But so far, America Online
has grown stronger from every challenge.
"I was the one who two years ago said, 'Bye-bye, AOL,' " said Halsey
Minor, the chairman of Cnet, a technology news and shoping Web site
that just decided to pay $14.5 million to America Online for promotion
on its computing channel. "What they have done is extraordinary. They
have created a great business."
Going Where the Users Are
o understand how Steve Case turned America Online from
laughable to extraordinary, follow a typical suburban teen-ager
after school. You'll see that e-mail and chat rooms are as important to his
social system as cruising the mall and talking on the phone. If his parents
want to cancel AOL in favor of another service, he may howl, because
all his friends are on AOL.
But most parents don't want to cancel AOL anyhow. For the many
adults who are unsure of their technological sea legs, America Online has
positioned itself as the great life vest of cyberspace.
"I don't know one engineer in
Silicon Valley who uses
AOL," said Milo Medin, the
chief technical officer and
founder of Excite@home.
But, he conceded grudgingly,
"every one of them has told
20 not-technical people that
AOL is the best way to get
on the Internet."
Such endorsements can
hardly be credited to Case's
discipline as a day-to-day
manager. Distant and taciturn, he has often allowed his subordinates to
wander off on uncoordinated pursuits. The company has flip-flopped on
numerous important issues and strategies and nearly collapsed in early
1997, when its phone lines were swamped.
But America Online prevailed, in large part because Case didn't waver
on two central ideas: first, that the most important use of an online service
is communicating with people, and, second, that it is better to be easy to
use than to have the most sophisticated technology.
Moreover, Case's detachment -- along with AOL's intergalactic stock
price -- has allowed America Online to recruit what is generally regarded
as the deepest bench of top-quality executives in any Internet business.
Most important is Robert W. Pittman, the president and chief operating
officer, who gave the company much-needed management discipline and
a flair for marketing. There is the flamboyant Theodore J. Leonsis, once
the company's No. 2 executive, who is now running the ICQ chat service
and a few other youth-minded brands.
There is also Miles R. Gilburne, the head of corporate development, who
concocted some of the world's most complex acquisition deals. And on
the rise is Barry M. Schuler, who now runs most of the programming
services and is spearheading the company's forays into the world of
electronic devices beyond the PC.
"The company is finally all marching in the same direction," said Jonathan
E.
Sacks, now the head of the America Online flagship service. "It's not like
this is a cult, but the management has done a good job in rallying
everybody around a single and powerful vision. Finally, the company has
become comfortable in its own skin."
Many Buyers, Many Brands
o listen to Bob Pittman is to hear parables about business --
especially about the importance of a well-promoted brand. He
draws from his experience as a disk jockey, as a founder of MTV and as
the head of the Six Flags theme parks and, later, the Century 21 real
estate system.
Consider his explanation for structuring America Online to offer a series
of products, each with a separate brand, rather than unifying all of its
services under a single banner.
"The last time I did this was at MTV," he explained in his Mississippi
drawl. "We started VH1. Then we took Nickelodeon and reformed it as
a channel for older kids. It was no longer spinach, but pizza."
In his vision, the America Online service will remain the mass-market
brand. But there will be others for more specialized audiences:
Compuserve, repositioned as a budget brand; ICQ, a chat service for
college types too cool to use AOL; Netscape's Netcenter Web site, for
business users. Coming next is a Netscape-brand online service filled
with the latest Web technology, to follow Netcenter users home.
Besides drawing more
customers, the company
hopes the multibrand strategy
will help fight off
competitors, like Freeserve,
which is offering free Internet
access in Britain or Free-PC,
giving away both access and
a computer in the United
States.
Instead of cutting prices on
the flagship brand's service,
the company can use other
brands, notably
Compuserve, to match
competitors' deals.
Last week, it announced a
plan to provide free computers with three-year Compuserve
subscriptions.
"We can use our core infrastructure, bought and paid for by AOL, to
create new brands with a real cost advantage," Pittman said.
Cable television is also on Pittman's mind as he considers America
Online's bottom line. The company takes in, for each subscriber, $19.44
a month in subscription fees and $4.50 a month in advertising. He hopes
that those numbers will eventually be about equal -- and that both will
grow as AOL lures users to spend more time and money online. Indeed,
Pittman looks at broadband access and services like the company's
planned interactive television service as the equivalent of premium cable
channels like HBO.
"If you really love AOL, would you pay $10 a month for AOLTV and
five bucks a month to get your AOL e-mail on your Palm Pilot?" Pittman
asked. "I am loath to predict the future, but people pay 50 or 60 bucks a
month for cable. I think people see us as comparable, so we have a lot of
headroom to deliver value."
The Well Connected Life
ehind Barry Schuler's desk is a
blue and red box older than
many of AOL's employees. It is an
IMSAI 8080, one of the very first
personal computers, and it is a signal
that in a company devoted to the
technological novice, Schuler is a true
bit-head. He recently put wireless
networks in his houses in Virginia and
San Mateo, Calif., enabling his laptop
to automatically collect his e-mail
whenever he walks in.
Schuler joined AOL in 1995, when
the company bought his firm, called
Medior, which designed games and
CD-ROM's Until a recent promotion,
his job was to run the AOL service,
and he used his designer's eye to help
give it a cleaner, more consistent
look.
The latest version of the software,
called 5.0, is to be introduced this fall.
Instead of simplicity, its focus is the
addition of new features intended to
keep users online.
One feature inspiring high hopes here
is called You've Got Pictures, a joint
effort with Kodak to let people send
snapshots by e-mail. Another is My
Calendar, which lets users keep their
appointment books online. But why
bother, when a hand-held electronic
organizer -- or a paper calendar --
may be simpler? As always, the
answer is communication. The service
will let a group arrange the soccer
carpool by bringing together all the
drivers' schedules.
Each of these offerings is meant to
weave the details of everyday life into
AOL's services, so that users will not
switch to other providers but instead
will be exposed to more advertising
and more opportunities to buy
products inside AOL. The photo
service sells reprints on mugs; the
calendar service hawks movie tickets
from Moviephone, recently acquired by the company.
"The whole game is about building the online habit," Schuler said.
That is also where electronic appliances figure in America Online's plans.
AOL is jockeying with many competitors for position in an ever more
wired world that is connecting the Internet to the microprocessors in
everything from microwave ovens to cell phones.
Many other companies are focusing on helping users stay abreast of
information tidbits: stock quotes, say, or news headlines. But building on
its heritage as the online community's favorite place to chat, AOL is
focusing on communication, building on its existing "buddy list" system,
which now shows users which of their friends are online and available for
instant messaging.
Say you want to crow about that great play in the N.B.A. finals. With
one mouse click, you will be able to track down a fellow fan, whether
he's working on his computer, watching television or sitting in the stadium
with his cell phone. All this will take a while. But AOL users will be able
to check their e-mail on their Palm Pilots by the end of this year.
The most ambitious of the planned services is AOLTV, the company's
version of a concept -- interactive television -- that has largely flopped in
other incarnations. Since paying $425 million for the business in 1997, for
example, Microsoft has sold just 800,000 subscriptions to its Web TV
service, which is marketed mainly as a way for people who don't have
computers to get onto the Internet.
By contrast, starting next year, AOLTV will be sold mainly as a
$10-a-month add-on for AOL subscribers. It will allow Web surfing, but
the focus will be on services tied to watching television, like an elaborate
program guide and live chat rooms that can be superimposed on the
screen during popular shows.
"People are already writing e-mail, sending instant messages, watching
television and talking on the phone at the same time," said Anne M.
Borsch, the head of the AOL Devices unit. "We're just making it easier
for them to do it all in one place."
Getting Ahead of Broadband
ow that it's clear that the company won't be done in by the Web,
the biggest worry for AOL investors is broadband, the new
generation of high-speed online connections.
So far, America Online is locked out of offering broadband access
through cable television systems, which are generally seen as the most
promising of several broadband technologies.
The company's responses to questions about its broadband strategy are
contradictory. Pittman spent a good deal of a recent meeting with Wall
Street analysts arguing that the threat from broadband is overblown.
America Online's research, he said, shows that demand for high-speed
service, especially at the current price of $40 to $50 a month, is modest.
"Broadband doesn't sell itself," Pittman said in an interview. "There is a
small group that says 'Yeah, it's faster.' " But high speeds don't make a
difference to the activities that AOL members use most, he added,
saying, "Your e-mail doesn't get any better with broadband."
Even so, America Online is hardly staying on the sidelines. It is about to
introduce its own AOL Plus broadband service, to be marketed initially
to telephone customers of Bell Atlantic and SBC Communications. And
AOL's $1.5 billion investment last month in Hughes Electronics means
that Hughes will offer AOL Plus and AOLTV over its Direct TV satellite
system.
The new 5.0 software will have special audio and video features for users
on fast connections. The company has also hired a former television
executive to develop broadband programming. And it has begun an
extensive lobbying campaign in Washington, pressing regulators to force
cable companies to open their systems to AOL.
America Online's hot-and-cold rhetoric about broadband makes sense
when seen as part of an elaborate game of chicken in which it is
negotiating the price and terms for gaining access to cable systems.
Excite@home, which has contracts granting it exclusive control over
high-speed cable services at AT&T and 20 other cable companies until
at least 2002, argues that it has the momentum to be a powerful rival to
AOL -- even though it now has only 500,000 subscribers.
"More than half our new customers are ex-AOL users," said Tom
Jermoluk, Excite@home's chief executive.
Ultimately, though, America Online is betting the cable companies need it
more than it needs them.
Pittman argues that if anyone can sell broadband, it is America Online,
because the most likely prospective buyers are its 17 million members.
"We realize that we're one of the few who can write the big check," he
said.
Isn't that a little close to the sort of offer-you-can't-refuse tactics that got
Microsoft in hot water?
Not to worry, says Case, raising the bar slightly higher on his hyperbolic
ambitions -- and throwing a dig at Gates and company.
"Hopefully, we will establish AOL as the most valuable and the most
respected company," he said. "We won't settle for just one of them."
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