February 16, 1998
America Online's Triumvirate in
Cyberspace
By SAUL HANSELL
ULLES, Va. -- Theodore J. Leonsis knew something was wrong
late last month when during a two-day period, the constant stream
of electronic messages from Stephen M. Case, his boss and the chief
executive of America Online, came to an abrupt stop.
"It was radio silence," Leonsis
recalled last week. "That means
something was troubling him."
Eventually, on January 29,
Leonsis, who was in New York to
launch America Online's new
entertainment guide service, got a
call from Case, who said that he
was having doubts about a deal
that had been in the works for
more than a year. The plan was to
spin off to outside investors part of
the AOL Studios unit that Leonsis
runs. Moreover, Case told
Leonsis to have a talk with Robert W. Pittman, who as the executive in
charge of AOL Networks, the main online service, was Leonsis' peer.
At a lunch in New York that afternoon, Pittman explained that AOL
wanted to absorb, rather than spin off, the studio unit. "Wouldn't you like
to play a bigger role in the mother ship?" Leonsis recalls Pittman asking.
A week later, America Online announced that Pittman had been
promoted to chief operating officer. Leonsis now reports to him.
Case's sudden about-face on whether AOL Studios should be spun off
and how the company's management should be organized were but two in
a series of careening hairpin turns -- including changing his entire business
plan -- on the road America Online has followed to its domination of
cyberspace.
Shy, awkward, occasionally not focused, Case is hardly the classic
master manager. But his instinct about what people want from an online
service proved to be savvy at enough key moments that he managed to
outmaneuver the likes of IBM, the News Corp., CompuServe, AT&T
and even Microsoft.
Most important, perhaps, Case, 39, has
attracted a group of eccentric, flamboyant
executives very different from himself, who
contributed key skills that Case lacks.
Leonsis, 42, who joined the company in
1994, is the gregarious entrepreneur who
proclaimed that America Online was not so
much a glorified CB radio for geeks as it was show business. Pittman, 44,
the founder of MTV, brought a mature marketing vision -- that America
Online needed to think of itself as a major national brand -- as well as
traditional bottom-line values.
"You can't talk to Ted without talking about content," said Robert
Frankenberg, the former chief executive of Novell and a member of
America Online's board. "Steve is the one asking what the member
experience is like. And Bob asks, 'How do we make money off this?'"
Profits have been scarce for the
company, as the cost of luring new
customers and the 7,500 of its 9,500
employees who answer their questions
has outstripped its rapidly growing
revenue. In the last three months of
1997, America Online earned $20.8
million on sales of $592 million. The
value of its stock has tripled in a year;
it closed Friday at $114.25.
Most significantly, the company's
advertising revenue nearly doubled
from a year ago and now represents
18 percent of total revenue. Case
ultimately hopes that advertising and subscriber fees will represent half the
company's sales.
Together, the trio, but especially Pittman, navigated treacherous waters a
year ago, when headlines blared that customers could not connect to the
service. In 1997, it signed up 2.9 million new customers, more than all its
competitors combined. Its 11 million members now spend 250 million
hours a month online, flirting, trading stock tips, complaining about
computer bugs, surfing the World Wide Web and, increasingly, buying
things.
Of course, victory in cyberspace can be enjoyed for a nanosecond or
two. In many ways, America Online is still a gangling adolescent stumbling
toward maturity after an especially awkward growth spurt. Littered along
its path of experimentation and self-discovery are dozens of discarded
postures, philosophies and wounded partners.
At first, the company sponsored entrepreneurial partners who developed
creative programming. Now, it wants to own its programming.
Last year, the company bid to buy all of
CompuServe, including its big data network.
Abruptly, Case decided to sell America Online's
own data network and buy only CompuServe's
online service.
For years, America Online made money by
charging an hourly connection fee. A year and a
half ago, it went to a $19.95 flat monthly fee,
changing the focus of its business plan to
advertising. Last Monday, the company
increased the rate to $21.95.
"Our strategy has been in place for more than a
decade," Case said in his office in a lofty former
warehouse here, his moccasin-clad feet propped
on a nearby chair. "The goal has always been to
build a mass medium that is as important in
everyday life as the telephone or television. How
we execute the strategy has always been in flux."
Case shares the youthful class-nerd look of
Microsoft's chairman, Bill Gates. But if Gates is
the math jock who let everyone know that his
differential equations were more complex than
theirs, Case seems more the wallflower and
eager to be liked.
What he knew -- and what no one else, not
even Microsoft, saw as clearly -- was that the
most important use of an online service was for
people to communicate with each other through
e-mail, chat rooms and, more recently, the
hugely popular instant messages that users can
send directly to their friends' screens. Case also
encouraged the tendency of his customers to say
immediately and stridently what they thought of
the service. Now a staff of two dozen people
read his e-mail.
Leonsis came aboard when America Online
acquired Redgate Communication, a company
he had founded, in an ill-fated attempt to offer
shopping catalogs on CD-ROMs. The
consummate idea-a-minute entrepreneur,
Leonsis set out to add pizazz to the online
experience.
"A lot of people think outside the box. Ted lives
outside the box," said Kenneth J. Orton, chief
executive of Preview Travel, an online service in
which AOL has a stake.
"It was an insane free-for-all," said one executive
Leonsis hired. "People were literally running
down the hallways from meeting to meeting
trying to keep up. Kids barely out of graduate
school were running multimillion-dollar
divisions."
During this period, America Online developed a reputation as a very
difficult company to do business with. One company executive tells of
flying to Virginia to meet with Leonsis five times and having every
appointment canceled. "The place was the Wild West," said a publisher
who provided content for America Online at the time.
Then in October 1996, Pittman, already a board member, strode into
town, aiming to lay down the law. The busy-signal crisis hit almost
immediately, and he circled the wagons, while organizing a massive effort
to install half a million modems.
"I told people I was Robin Hood," Pittman recalled."I would rob from
someone else to get you what you needed." The cash shortage that
ensued prompted Leonsis to seek outside investors for the Studio
division.
Eventually, the busy signals subsided, and Pittman began to try to tame
the chaos in the company. "Dealing with AOL, you had the feeling of a
bunch of kids playing at business," said the head of one of the service's
many content providers. "Pittman is their first adult supervision."
Playing the grown-up was a change for Pittman, who had built a career as
a boy wonder. Never finishing college, he became program manager of
WNBC in New York before the age of 25, and then went on to MTV.
He still collects motorcycles, flies airplanes and hunts wild boar.
Who are the Users?
Statistics about America Online users who access the service from home.
But Pittman was far more disciplined than he seemed, say those who have
worked with him over the years. "Bob always referred to himself as a
sociology student looking at consumer trends," said Mayo S. Stuntz Jr.,
who worked for Pittman at MTV. "He was one of the first analytical
programmers, using very sophisticated political research techniques to
understand the market and guide the programming."
"When I first got here, I scared them," Pittman said of America Online's
middle-level executives, "because I looked at the numbers so much." The
number that Pittman stared at most was how much it cost for the "carpet
bombing" mailings of sign-up disks for the online service. Pitman cut back
sharply, figuring that the service's brand would bring in customers.
He was right. The cost of signing up one new customer, after covering for
the frequent defections, has fallen to $77 from $375 in 1996. (America
Online has stopped releasing the actual percentage of customers who
cancel service. Analysts estimate the churn rate -- the ratio of people who
cancel the service after the free trial or in the next two months -- has fallen
from 75 percent to 40 percent.)
While Pittman was making disks less ubiquitous,
he also dumped the slogan "The Future.
Available now." Pittman figured that the reason
people went online was to save time, be it for
socializing or shopping. And the reason they
chose America Online was that it was easy to
use. Pittman's new campaign was more
straightforward: "So easy, no wonder it's No. 1."
Further, with the sale of its data network to
Worldcom, Pittman was able to slash the
company's cost of connecting a member to 45
cents an hour from 90 cents an hour.
With subscriber fees then capped at $19.95, the most important number
Pittman looked at was advertising revenue, mainly from exclusive deals
with companies that wanted to sell things to America Online's growing
and very affluent members.
Setting the tone, he got a little-known telephone company, Tel-Save, to
pay $100 million up front, plus ongoing commissions, for the right be the
exclusive purveyor of long-distance on the service. Other big deals
followed for sellers of books, flowers, music and the like. He also started
charging independent publishers -- partners whom the service had once
tried to nurture -- hefty fees for prominent promotion of their sites.
These changes have pleased big advertisers and
publishers but have left smaller players frustrated
-- and users have not been shy about voicing
their displeasure about increased advertising.
Dissatisfaction with the company is reflected in
myriad anti-AOL Web sites, mailing lists and
several class-action lawsuits, both from disgruntled consumers and from
publishers. Last year, the company settled an action by a group of state
attorneys general, offering refunds to customers who could not connect to
its service.
Pittman says America Online's position leading the charge into an
unknown future makes it a lightning rod for criticism and that ultimately
most users will forgive these imperfections. "This is America, and brands
win," he said.
On the company's executive floor, Pittman's radical changes appear to be
taking hold because Case welcomes the help. "Bob is a better day-to-day
manager than I am," Case said. "He has a better sense of the financial
implications of things. I, because I have been doing this for so long, have
a deeper sense of what members want."
Case now says he wants to devote himself more to policy issues and
future strategy to take advantage of new technology like high-speed cable
modems and Internet appliances like WebTV.
The toughest battle for America Online now, analysts say, is in the office,
where services like Yahoo have a big lead. America Online is preparing
improved features for the currently bland AOL.COM Web site. Yahoo,
meanwhile, has joined with MCI to turn its search service into something
more akin to America Online's total-programming package.
As for Leonsis, "I'm not crushed," he said last week of his new role
working for Pittman. "It means I was right that content is so important it
has to stay with the main company."
Still, he is clearly sensitive to his change in status. As Leonsis wandered
last week onto a balcony to have his picture taken with Pittman and Case,
he pointed to two construction trailers on a parking lot next to the
company's vast new computer center across the street.
"There are the new offices of Studios," he joked. "But don't you worry. A
year from now, that will be a skyscraper." |
