How AOL rose from the ashes
By Beth Lipton and Jim Hu
Staff Writers, CNET News.com
August 6, 1999, 4:00 a.m. PT
special report Three years ago America Online was under siege, facing legal
threats by several states and a class-action suit by subscribers furious over service.
Yet AOL has emerged relatively unscathed, boasting 17 million members and almost 80
million registrations for instant messaging, as well as a market value approaching $100
billion. With its purchase of Netscape Communications and a new alliance with Sun
Microsystems, AOL now counts the likes of Microsoft and AT&T as its competition.
Which begs an obvious question: How did America Online go from a digital whipping post
to an Internet superpower? The answer, according to those within
the company and beyond, lies in a combination of marketing
hubris and an obsession with the Internet novice.
"AOL did it by just sheer marketing chutzpah and pushing disks
down everyone's throat," said Bruce Kasrel, an analyst with
Forrester Research. "They had really done a good job making their
name synonymous with the Internet to the masses--and, as the
masses come more and more online, they go to AOL. People get
addicted and they stay hooked."
Indeed, the company has proven itself a survivor, but often in
conflicts where its own worst enemy was itself--through service
problems and perceived arrogance. Now, AOL faces its toughest
challenge yet in unprecedented corporate clashes.
Just yesterday, AOL's stock fell sharply after reports that
Microsoft is considering low- or no-cost Net access service. AOL
closed down 4 percent at 83.94, after earlier touching a low of 76.94.
The growing list of formidable opponents includes AT&T on access to cable pipes and,
most recently, Microsoft and others on how and when to standardize instant messaging
technologies. And once outside the realm of online communities and Web portals, it
remains unclear how AOL will measure up to its gargantuan rivals.
"We face competition from a wide range of other companies in the communications,
advertising, entertainment, information, media, Web-based services, software, technology,
direct-mail, and electronic commerce fields for subscription, advertising, and commerce
revenue, for the development and sale of electronic commerce infrastructure and
applications, and in the development of distribution technologies and equipment," AOL
summed up in a recent filing with the Securities and Exchange Commission, amazingly all
in one sentence.
The filing went on to list a litany of companies AOL considers competitors, including
Microsoft (for its MSN portal and WebTV subsidiary), MindSpring, EarthLink, AT&T, Sprint,
the Baby Bells, other cable television operators, and Excite@Home.
"At the moment I think Microsoft is more Net aware than AOL," especially after its
experience in customizing its browser, said William Randolph Hearst III, a partner at
venture capital firm Kleiner Perkins Caufield & Byers and a member of the Excite@Home
board of directors. "So I think they are ahead."
Naturally, AOL and its supporters beg to differ, especially in light of the current messaging
standoff. "Microsoft essentially tried to hack our systems and get our consumers to give
their passwords so they could mimic our environment. And you could understand why,"
said Ted Leonsis, AOL's president for interactive properties, at a BancBoston Robertson
Stephens conference this week.
"It's such a big lead in the viral-marketing nature of that gaining of name space. You can't
stop it," Leonsis added. "Once you fill in your 'Buddy List' and you send it via email to a
friend, they'll tell ten people, and they'll tell ten people...It's just the law of big numbers."
AOL executives and analysts credit the company's success to its focus on consumers
rather than technology, an approach that they contend is the
exact opposite of the way Microsoft does business.
Long before the portals began including free email and other
services as one-stop shops, AOL was offering consumers a
complete package when they first signed on. For Net
newbies, that turned out to be more appealing than the
typical challenge of finding a Net service provider, choosing
a browser, finding an email provider, and so on.
America Online "didn't make the brand stand for high
technology like CompuServe did," Forrester's Kasrel said.
"AOL was saying, 'Simple, simple, simple,' and 'Stupid,
stupid, stupid'--and it worked. And for a lot of people that
was a very compelling message."
In spite of its commanding lead in Internet access through personal computers, AOL
understands fully that its market share could dwindle once the Web becomes widely
available through TV access or other high-speed services.
That's why instant messaging is so important. The company claims 40 million users on its
AOL Instant Messenger (AIM) service and another 38 million on ICQ, which it acquired
along with parent company Mirabilis in June 1998. For the moment, AIM and ICQ users
can't communicate with each other, a barrier that the company said will be
dismantled by the fall.
"I think the big difference here is that AOL offers its product free to the masses
already.It would be one thing if they charged, but they don't," said William Gurley, a
venture capitalist with Benchmark Capital. "Who is being locked out by their
unwillingness to cooperate? Not the customer. Just their competitors."
As America Online attempts to expand to interactive television, handheld devices,
cellphones, and pagers--known as its "AOL Anywhere" strategy--its instant
messaging service could present phenomenal opportunities. For example, a person
watching ER in Los Angeles who wants to discuss the show with a friend in Seattle
potentially could send instant messages over a digital TV connection, scene by
scene.
Challenges ahead
However, AOL is hardly alone in recognizing those opportunities. In fact, cable and
other high-speed Net access technologies present one of AOL's most difficult
roadblocks. The firm is mired in a national fight for access to cable lines owned by
AT&T and other operators.
"The real challenge for them is broadband," said Mark Mooradian, an analyst with
Jupiter Communications. "If AOL can't offer broadband and
others can, that's something people will abandon them for."
Another obstacle is the PC industry's move toward free Net
access provided with new computers, or vice-versa. Either way,
the trend is troubling for AOL, which says it has no plans to discount subscriptions
to its proprietary service in the near term even though its CompuServe subsidiary is
active in this competition.
In the meantime, AOL seems destined to become a living testament to the adage
that whatever doesn't kill you, makes you stronger.
"I don't know if this instant message skirmish will end up being the flashpoint for
war," Ticketmaster Online-CitySearch chief executive Charles Conn said, "but I do
think there will be some substantial conflict over control of the Web very soon."
News.com's Jeff Pelline and Mike Yamamoto contributed to this report.
Go to: Microsoft: Resistance is futile
Related news stories
• AOL offers rebate on IBM PCs July 15, 1999
• AOL releases open-source software July 9, 1999
• AOL deal signals sea change for PCs June 30, 1999
• The week in review: AOL everywhere, from satellites to PalmPilots June 26, 1999
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