America Online has been on a rocket ride, rapidly becoming the largest online service provider in the world. Now it would like to morph into an "interactive service company" - before Microsoft and the Web eat its lunch.
Once upon a time - 10 years ago, to be exact - going online was about as far from most folks' idea of a good time as it could possibly get. Modems were exotic, pricey accessories. Even if you had one, there wasn't a whole lot you could do with it. Information highway? Forget about it - a scattered collection of dead-end streets was more like it. The Internet was just beginning to emerge from the clutches of the Pentagon, and the entire commercial online market consisted of a paltry 500,000 pioneering propeller heads, scrolling text at 300 baud and spending an arm and a leg for the privilege.
Signing on was complicated, expensive, and dull.
So it wasn't exactly front-page news when, in the spring of 1985, a tiny start-up out of Vienna, Virginia, called Quantum Computer Services Inc. announced it was going into the online business. The initial press release - which hardly anyone really paid attention to - promised that QuantumLink, as the service was called, would be "useful, affordable, easy to access, and entertaining." The company vowed to increase popular demand by charging a modest monthly fee for an array of services. Custom software would offer color graphics and sound. In other words, getting connected would be cheap and fun. What a concept.
It took a while, but Quantum Computer Services kept its promise. Better known these days as America Online Inc., the once-obscure start-up has shot past its deep-pocket rivals CompuServe and Prodigy to become the most popular online service on the planet. AOL has increased its membership fifteenfold in the last three years, sending revenues - and the price of the company's stock - soaring. This summer, more than 3 million Americans were sending e-mail, arguing in forums, flirting in chat rooms, and wandering the Net on AOL, with thousands more signing up every day. The service expects to have more than 5 million subscribers online next year.
Under the leadership of CEO Steve Case, a 36-year-old marketing specialist who acquired his corporate chops pushing hair conditioner and fast-food pizza, America Online arguably has done as much as anyone - maybe more - to bring the infobahn to Main Street, USA. But the current numbers are just a drop in the bucket as far as Case is concerned. It's your mom, your dad, your grandparents, your boss, your secretary, your mechanic, and your third cousins back in the hills that he's after - the estimated 93 percent of American households, according to the San Francisco-based research firm Odyssey, that aren't yet signed on. Case sees online services evolving over the next decade into a mass medium engaging tens of millions of people, for whom logging on will become as much a part of everyday life as making a phone call. And he's determined to transform AOL into flashy, interactive multimedia that will lead the way. His ultimate goal: nothing less than America, Online!
It's not going to be easy. These days, it seems like everyone with a server and a modem is also greedily eyeing the Great UnWired, envisioning humongous dollar signs. Analysts project the commercial online market will grow to 10 million people by the end of 1995, a number expected to more than double in the next two years as new players enter the fray. The Number One contender - that little start-up out of Redmond, Washington - has a slight advantage over its rivals: when Windows 95 makes its debut (supposedly by the time you read this), untold millions of PC owners will be able to log on to The Microsoft Network with a mouse click. AT&T Corp., no slouch itself when it comes to marketing prowess, is also gearing up to push its Interchange Online Network (which already exists as a kind of host network for independent services) to a customer list 80 million strong.
IBM and Sony are reportedly planning new online offerings as well, while the existing players, ranging from CompuServe to Delphi, are redoubling efforts to take AOL down a peg. And the dark horse looming over everything is the Internet itself, which some say has the potential to doom not just AOL, but all the proprietary services, to the ash heap of online history.
Most would find that kind of intense competition overwhelming. Nevertheless, America Online has managed to beat the odds for quite some time now.
Inside a modern, four-story brick building at a suburban office park in Vienna, Virginia, a technician slides his security card into a lock, opening the door to a control room where banks of servers handle upward of 1 million online sessions a day. The momentary roar of cooling fans is especially jarring in the low-key atmosphere here at AOL headquarters. The staff is young and casual, the look leaning toward T-shirts, jeans, and rayon dresses. A nervous job applicant, pacing in the lobby, wears the only suit in sight. He may have a decent shot, as the company has been adding new employees in droves. More than 2,000 people work at America Online and its various subsidiaries and support centers, up from 300 employees two years ago.
The company recently expanded into a building next door. Steve Case holds court in his spacious new office on the second floor, overlooking the parking lot. Sparsely furnished with a desk, a small, scratched-up conference table, and a couple of plants, it's clearly a work-in-progress. In one corner, a credenza cluttered with computer books bears a bottle of champagne commemorating AOL's millionth subscriber, a milestone reached in August 1994. A bank of windows fills the room with natural light.
Case is leaning over his desk, fiddling with his computer as I enter. Tall, broad-shouldered, with a roundish face topped by a collegiate haircut, he's trimmer than he appears in photos. With his beige khakis and pressed denim shirt - no tie - Case looks like he just stepped out of the Gap ad he appeared in last spring. Only today he's traded in the penny loafers for a pair of white leather tennis shoes.
The day of my visit, the company announced that it had passed the 2.5 million subscriber mark, roughly tripling its membership in a year. As Case and I shake hands, I venture that he must be feeling pretty good. "Not bad," he says. "But there's always something we could be doing better."
At the moment, it's hard to imagine what that something might be. Net fanatics may hate AOL for unleashing millions of untrained newbies who have spammed newsgroups and clogged servers from one end of cyberspace to the other. (Check out alt.aol-sucks for a taste of the venom.) But turning America on to the joys of cyberspace pays. With the average user now spending US$17 a month, AOL's revenues have zoomed from $40 million in 1993 to an estimated $375 million in 1995. By the end of next year, Case expects AOL to become the online industry's first billion-dollar company.
Growth like that has certainly grabbed Wall Street's attention. Anyone smart enough to put $10,000 into AOL stock when the company went public in March 1992 was sitting on roughly $160,000 in July this year. Long the subject of takeover rumors, the company would be worth $2 billion to $3 billion on the open market, analysts estimate. Not that AOL management is looking to sell out. Just ask Microsoft co-founder and zillionaire Paul Allen, who gave up his stake in AOL last year - pocketing an estimated $39 million in the process - after his unwanted efforts to gain control were thwarted by Case and his partners.
In fact, it's America Online that is doing the acquiring these days. Case has spent more than $160 million over the last year and a half to buy a slew of technology outfits as part of AOL's expansion into multimedia and the Internet, which management sees as the keys to the company's future (more on that later). And it's not just American households that Case is after. Last February, AOL formed a $100 million joint venture with German media conglomerate Bertelsmann to bring the America Online vision to Europe. If all goes as planned, European versions of AOL could be up in Germany, England, and France by the end of the year. Case and company are currently looking for a partner of similar stature to expand into Asia.
"It's an amazing success story," says Rod Kuckro, editor of Information & Interactive Services Report, an industry newsletter. "Steve Case looks like a genius. He's the Ted Turner of online services."
The secret of AOL's success? Dead-stupid simple: figure out what people want most - and give it to them. "It's easy to use, it's affordable, and it's got all the content you could want," says Paul Sweeney, a media analyst at the Wheat First Butcher Singer brokerage firm in Richmond, Virginia. "They've done - hands down, without a doubt - the best job around of marketing and promoting their service."
Tell me about it. An AOL disk even found its way into my mom's mailbox the other day. But it's not just about bombarding the country with millions of floppies and reminders to sign up a friend in return for 10 free hours of your own. It's also about image. Critics who dismiss the service for emphasizing breadth over depth miss the point: AOL is about pop culture, not pocket protectors. Shrewd alliances with partners ranging from the American Association of Retired Persons to MTV have made AOL the service for Everyman. You want "information"? Fine, check out CompuServe. But if you want to swap opinions on Medicare cuts or hang out with Courtney Love online, AOL's the place to go.
"What they have done successfully, which their competitors have not, is identify their target market," says Sweeney. "It is not the business market, not the professional market, not the high-end user. It's the average Joe - the mass market."
Credit Case for that. A native of Hawaii, who holds a political science degree from Williams College in Massachusetts, he's no technogeek. Case is a salesman at heart, feet planted squarely in the mainstream. "The center of my world is consumers," Case says. "Every day, I wake up and say, How can we make America Online more interesting, more useful, more fun, more affordable, so that it will attract a broader audience? Because I still remember that excitement 13 years ago when I first connected to an online service. I thought it was magical then, I still think it's magical today."
OK, so he can sound like a talking press release. But Case has been obsessed with the spending habits of the masses since the day he left college. His first job after graduating in 1980 was with Proctor & Gamble Co., figuring out new ways to sell hair-care products. Next came a gig with PepsiCo Inc. in Kansas, conducting customer surveys and focus groups in the Pizza Hut division.
Case never did figure out the next big thing in fast-food pizza. But it was while marooned in Wichita in 1982 that he bought his first computer, a Kaypro. Inspired in part by Alvin Toffler's vision of a Wired future in The Third Wave, Case added a modem and signed on to The Source, an early online service. Getting connected was a hassle, but he was hooked. Following his new passion, Case left Pepsi later that year for Control Video Corporation, a start-up that aimed to take advantage of the Atari craze of the early 1980s by delivering home videogames over the phone. But just as the product was making its debut, the videogame market crashed, taking the new company with it. Case still insists it was a good idea. "It's almost exactly what Sega's now doing with the Sega Channel," he says, a bit wistfully. "So some of these things are just a matter of timing."
Or fate. For it was at Control Video that Case met Jim Kimsey and Marc Seriff, his co-founders at America Online. Kimsey, a West Point grad and Vietnam vet, got his start in business by parlaying $2,000 in savings into four successful restaurants before helping found Control Video. Seriff, an engineer who had worked on the Arpanet (which evolved into the Internet), was the techie of the trio.
The fledgling online entrepreneurs formed Quantum and went looking for a niche. The commercial market then consisted of barely 500,000 bodies, divided largely between technical and business users on CompuServe and Dow Jones News/Retrieval. So Case and his partners figured a service for home users might be just the ticket. Lacking the cash to go it alone, they formed an alliance with Commodore International Ltd., then the largest home PC company in the country. Quantum provided a dedicated online service for Commodore users and software that took advantage of the Commodore 64's graphical interface. In return, Commodore agreed to bundle the QuantumLink service with its computers and modems.
Thus, a business strategy was born. "We weren't smart enough 10 years ago to call it convergence," Case says. "But our instinct was that there would be a requirement for collaboration. We knew we couldn't win by outspending the competition, so we had to come up with another approach."
That approach wasn't enough to save Commodore, which went into decline and finally folded in April 1994. But with Kimsey as money man and president, Seriff in charge of technology, and Case handling marketing, Quantum crossed into the black in its second year of business. "We recognized early on that the killer app was people," says Case. "We always viewed this as a participatory medium, not just another way to distribute data." Acting on that conviction, the company emphasized interactive features like real-time chat and live celebrity appearances long before its competitors did. New services emerged out of alliances with Apple, Tandy, and IBM, and in 1989, the various offerings were folded together under the name America Online. In 1991, management introduced a point-and-click interface for DOS users, and named Case president of the company.
By the time AOL went public in 1992, the upstart had built a membership more than 150,000 strong. But the company really took off the following year, thanks in part to a huge miscalculation by one of its larger rivals: faced with rising costs and mounting losses, Prodigy abandoned its flat-fee structure and raised its rates, infuriating its 2.5 million-plus subscribers. AOL's hardball response: cut prices and run ads urging Prodigy users to "jump" to America Online. "Make no mistake about it," noted an industry publication at the time. "AOL means war."
America Online won. While Prodigy foundered and CompuServe slept, AOL offered improved Internet access and beat them to market with a Windows interface, adding hundreds of thousands of new subscribers in the process. AOL's rivals later added those features, but Case and company had all the momentum, which they took advantage of by pursuing alliances with big-time media companies eager to get in on the cyberspace craze. America Online offered its new partners a way to make a little money while experimenting with the medium. AOL not only obtained loads of new content but also subsidized ads and access to customer lists for its direct-marketing efforts; all this in return for a small percentage of user fees and royalties based on new subscribers. With the likes of Time Warner, ABC, and The New York Times jumping on the bandwagon, AOL tripled its membership to more than a million and a half by the end of last year. (Wired has had a presence on AOL since 1993.)
It hasn't all been smooth sailing. Hypergrowth has periodically overwhelmed America Online's system capacity, resulting in endless busy signals, frozen screens, and e-mail that could take longer to deliver than the US Postal Service. Frustrated subscribers even endowed the company with a new nickname: America On Hold. Not exactly the user-friendly image Case has worked so hard to project.
Still, most members seem willing to cut AOL some slack. And rather than threatening to kick complainers off the service whenever something has gone wrong - as Prodigy did after the pricing fiasco two years ago - Case has publicly apologized and moved quickly to deal with the situation. The software glitches that were making the system crawl are fixed, Case insists, and the new high-speed network the company is building should eliminate the access problem once and for all. But he concedes that finding the right balance remains a challenge. "It's a little bit like putting a new engine on a Concorde jet in midair," Case says. "It's more complicated to focus on quality when you're growing so rapidly. But we can do both."
Maybe. The capacity problems might indeed be a thing of the past, observers say, but not necessarily because of any major improvements in AOL technology. The fundamental question facing America Online is not whether it can keep up with excessive demand in the future. It's whether there's going to be any demand at all.
"Look, Case did a brilliant job the past two years of leveraging the brand names of his content providers to build subscriptions," says Michael Rinzel, an analyst at New York City-based Jupiter Communications LLC. "He was able to do that in a market where the content providers didn't have much power, because they didn't have much choice as to where they could sign up. And consumers didn't have much choice where they wanted to go for an easy service. But now that's going to change."
"We're concerned, we're concerned," Case concedes with a shrug when asked about the new competition. "I share Andy Grove's (CEO of Intel) belief that only the paranoid flourish." Well, as the saying goes, it ain't paranoia if they're really out to get you. And no doubt about it, some powerful rivals are out to eat AOL's lunch.
First of all, the company's traditional competitors are finally waking up. CompuServe bought Spry Inc.'s Internet expertise for an eye-popping $100 million and added new pop-media content like People and Sports Illustrated. Prodigy beat the com-petition to market with a Web browser, announced plans to ditch its clunky interface, and hired Ed Bennett, the Viacom executive who once ran the cable channel VH-1, to hip up the service. Even the smaller players - Delphi, GEnie, and eWorld - are joining the battle for a piece of the action, with all three planning to upgrade their offerings in the coming months.
Still, Case can probably deal with those guys; after all, he's been beating the pants off them for years now. It's the new kids on the Net - ranging from multibillion-dollar behemoths like Microsoft, AT&T, and MCI to a broad array of Internet service providers like Netcom and PSI - that pose the more troubling threat.
Their target: AOL's business model.
Case and his team built America Online by offering users a bundled service: network access, interface, and content are presented in a single package. Members pay $9.95 a month for five hours of unlimited access, then $2.95 for each additional hour online. Based on how long members spend in each content provider's area, AOL's partners get paid generally 10 to 20 percent of revenues. These partners also receive a "bounty" for subscriptions that results from their marketing efforts on AOL's behalf.
The new competitors are attacking that model at its core, offering users potentially cheaper access and enticing content providers with the chance to make a lot more money than they're getting out of Case. And none is doing it more aggressively than - Surprise! - the monster from the Northwest. "AOL has done a lot to move us to a world where people say, 'You don't have an e-mail account? Go get one, it costs $10 a month,'" says Bill Miller, director of marketing for The Microsoft Network. "We'll probably make it even easier for people to make that decision."
Too easy, according to Steve Case. Analysts at market research firm International Data Corp. estimate that Windows 95 could be running on up to 65 million PCs by the end of 1996, all of them a mouse click away from The Microsoft Network - a huge advantage that Case claims is patently unfair. He argues that the relationship between the PC and the operating system is akin to that of the telephone and the dial tone. "If you go down to Circuit City and buy a phone, you don't have AT&T and Bell Atlantic hardWired into it - you have to make a choice," Case says. "The fact that Microsoft has an 85 percent market share of this dial tone and wants to hardwire their own service into it in an anti-competitive way is not a good thing."
Washington may be listening. The Justice Department already struck a blow at the service by derailing Microsoft's merger with Intuit; with its home-banking potential, Quicken could have been the killer app that made the network invinc-ible. Flush with victory, the trust busters are now looking at the service itself.
Whatever the legal outcome, The Microsoft Network promises to be a for-midable rival for America Online. Microsoft's strategy: lure users and content providers with an "a la carte" service that minimizes connect-time charges. Microsoft is expected to charge around four dollars a month for basic services like e-mail, chat, Internet access, and some news. While it remains unclear how much extra independently generated content will cost, content providers will receive at least 70 percent of whatever they earn, however they earn it. "We've given flexibility back to the independent content providers," says Microsoft's Miller. "We're saying, 'You decide how you make money. And to the degree that you make money, either by selling advertising or by selling goods or by charging customers, you keep most of it.'"
Despite the prospect of all those bodies on which to experiment, The Microsoft Network's content providers so far consist mainly of computing companies offering tech support, an assortment of obscure information providers, and a few consumer outfits like QVC and Kodak. But in what could be a glimpse of things to come, NBC recently became the first big media name to bail on America Online and enter into an exclusive relationship with Microsoft. "A real challenge is how long AOL can keep the interest of companies like The New York Times, who is now beginning to see its own way through the world of cyberspace," notes Peter Krasilovsky, an analyst at Arlen Communications Inc., of Bethesda, Maryland. "Certainly, the 10 to 20 percent they've been giving to information providers will have to go up."
If the attraction of The Microsoft Network isn't strong enough to lure away AOL's users and partners, there's a more tantalizing suitor waiting down the road: the Internet itself. With the advent of the World Wide Web, as Forrester Research analyst Mary Modahl points out, standard technologies make it possible to unbundle the three components of an online service - network, interface, and content - allowing companies to compete at each level. That should result in lower access prices, better interfaces, and, most ominously, content providers abandoning AOL for the Web. "Over time, we think the companies that develop valuable products and know-how will find the Web a more congenial atmosphere," Modahl asserts, "because they'll have better technology and lower costs than they'll be able to get in a deal with a proprietary online service."
At present, AOL's interface limits the ability of its partners to promote their own brand names. "There's no differentiation of content providers on AOL," says Modahl. "Elle magazine looks just like Wired magazine, and that looks just like The Atlantic Monthly, which looks just like Disney.
The reason is that AOL's user interface is the main determinant of the way content looks." Publishers on the Web, however, can create signature areas, competing on their own merits and cutting out middlemen like AOL - and Microsoft, for that matter - altogether.
Most of AOL's big partners already have their own home pages. Though few have figured out how to make Web sites pay, they are testing the waters. The San Jose Mercury News has begun charging for services at its site, and The New York Times has a Web page that features ads from AT&T and Advil. "We're interested in trying different online venues in search of the optimum balance between consumer and advertising revenue," says William Adler, spokesman for The New York Times's Information Services Group. "We realize that nobody knows all the answers to that balance, so the wisest thing to do is gain experience in all these areas."
Steve Case doesn't buy it. While publishers may hope they'll be able to charge for their services on an a la carte basis, Case says, his 10 years of experience with the consumer mind-set tells him that the key 93 percent of unconnected households aren't likely to go along. Just look at cable TV. "Sixty million people subscribe to basic cable, and the best brands in the cable world - MTV, CNN, ESPN - were all built as part of cable's basic package," Case says. "The success of pay-per-view has been dismal. So the cable phenomenon is really a phenomenon that's been driven by simple, affordable bundled pricing. Why would it be any different in the online world?"
Further, Case believes that Microsoft and the Internet players are not going to be cheaper or easier to use, and therefore, are not taking the approach that's going to build a mass market. He's convinced that his opponents' strategy of "disintermediation" - unbundling systems and letting users "roll their own" packages - is going to be too much of a hassle for Mr. and Mrs. Average Online Consumer. "I don't see any evidence to suggest that this is what the 93 percent wants," Case says. "I think a subset of the 7 percent wants that. The people I talk to who don't yet use online services don't use them because they are still a little scared of them. Making it more complicated for people to connect and use the service, giving them a bewildering array of options to pick from - it's hard to imagine that's going to help."
This doesn't mean AOL is ignoring that stubborn "subset" with the gumption to go it alone - far from it. America Online is set to launch a stand-alone Net access service of its own, built around a network infrastructure obtained through the purchase of Advanced Network & Services. (Since 1990, Advanced Network & Services has built and maintained a large chunk of the Internet under contract to the National Science Foundation.) If users need something to cruise with, InternetWorks - the browser AOL acquired when it bought BookLink - is at their fingertips. And to help them find what they're looking for, AOL recently scooped up the Global Network Navigator, a Web site that's essentially a large directory of Web sites. Content providers who want to experiment with home pages of their own can take advantage of the groovy publishing tools offered by recent acquisitions NaviSoft and WAIS. (See page 161 for details on AOL acquisitions.)
Industry observers generally applaud AOL's aggressive moves into the Internet market. But such bet-hedging can be tricky, and the company has to avoid cannibalizing its core service in the process. "It's analogous to the challenges IBM faces, promoting and nurturing the PC business while having most of its revenue come from the mainframe side," says analyst Modahl. "History has shown that companies find such situations extremely tough to manage."
Case is confident AOL can pull it off. The company's posture is that the Internet represents an opportunity, not a threat, even for the core service. For one thing, the explosion of Web sites opens AOL to tons of new content - none of which it has to pay for. By highlighting the most popular sites and grouping them by subject area, AOL can provide a "best of breed" offering for subscribers who have neither the time nor the inclination to explore on their own. And the company's decision to integrate its Web browser into the existing AOL interface was a particularly slick move. Since members can access the Web from inside AOL content areas, home pages seem as much a part of the service as any of its proprietary offerings. The message to users: America Online and the Web are one and the same.
Whether AOL's attempt to co-opt the Internet will pay off remains to be seen.
In the meantime, the company is determined to make hay while its new competitors find their footing. The plan: diversify the revenue stream by bringing more commerce and advertising to the AOL community while luring millions of new users through investments in multimedia technology and innovative content.
That job belongs to Case's new sidekick Ted Leonsis, president of AOL Services Company. A brash entrepreneur who founded the multimedia house Redgate Communications Corp. - which AOL picked up last year for $35 million - Leonsis has been working for more than a decade to bring marketing into the digital age. With a personal motto of "Make dust or eat dust," Leonsis promises to bring a certain chutzpah to the task at hand.
"I find it so ironic that Wired has referred to AOL as a dinosaur," says Leonsis, flashing that aggressiveness the moment he gets on the phone. "It's very funny that a petroleum-based product like a magazine can call an online service that has an integrated Web browser irrelevant." In fact, he says, America Online is already evolving into a new stage of development. "We think we can build a big franchise and get into tens of millions of homes as an interactive service company," Leonsis asserts, "as opposed to an online service provider."
What exactly will an interactive service company do? According to Leonsis, it will present users with more "personalized" information, backed up by snazzier sound, graphics, and video as multimedia tech-nology matures and bandwidth broadens. "Content is no longer king," he declares. Rather, building communities around that content is the key. To more effectively cater to the interests of its members, AOL is shifting away from a publishing model - plastering the screen with random content - toward "programming" for its demographic, a la TV channels. The move is part of a much bigger push to get users to buy things - or at least expose them to companies that want to sell them something. Virtually all of AOL's revenues currently come from subscriber fees. Leonsis says that by next year, the company expects 20 percent to come from other revenue streams: product launches, transactions, and interactive marketing - don't call it advertising.
The transition is already underway. While AOL continues to add media partners to its service, its press releases are trumpeting consumer brands like Oldsmobile and American Express. And AOL recently startled the advertising world by announcing a program to design custom areas for "marketing partners" - at least one of which was priced at $300,000 a year. Leonsis says a dozen companies have already signed up.
AOL is mindful of the potential backlash from users over selling soap in cyberspace, and blatant come-ons are out. Rather, the idea is to create "electronic marketplaces" that, by allowing buyers and sellers to exchange information, will inspire subscribers to investigate the site on their own. In the American Express area, for example, users can check their bills, get vacation advice, make travel reservations, and, of course, apply for a charge card.
"AmEx is a new life form," insists Leonsis, who says the area is generating tens of thousands of user-hours a week. "It's content, market research, transactional services, and community. What was once a cost center for American Express has been built into a profit center. And our members love it. So at the end of the day, both sides of the equation are really happy."
In line with the "programming" approach, areas that don't attract enough interest from users won't be long for the service. "We're going to start canceling shows the way networks cancel shows," Leonsis laughs. "Maybe Wired will be first."
Replacements may be modeled after The Hub, a new ad-supported "channel" aimed at teens and young adults. Developed in alliance with New Line Cinema, The Hub will feature regularly scheduled interactive programs like talk shows and cooking classes. Another innovation? The Greenhouse project. Just as HBO produces original material to differentiate itself from Showtime, AOL is fostering "home-grown" content by giving budding "infopreneurs" up to a half million dollars in seed money and support in developing unique online offerings. The company plans to have as many as 50 in place by next year.
On the technology front, AOL is working to incorporate CD-ROM technology into the online experience. The idea is that bandwidth-clogging graphics and other basic components will be contained on discs at home, with users getting updated information when they sign on. An AOL shopping service called 2Market already has a digital link, with more content providers to follow. And in an attempt to get a head start on Microsoft, AOL management recently announced alliances with multimedia publishers like Broderbund, Voyager, and Novell to link AOL with their CD-ROM products. Members will be able to click once from inside the respective programs and be taken straight to the companion space on AOL.
Multimedia is set to become an even bigger component of the service as AOL moves to faster pipes. The company is already offering 28.8 Kbps support through its new network, with ISDN access on the way. AOL is also participating in cable/PC trials with Viacom and Comcast, and has formed an alliance with set-top box manufacturer General Instrument to develop an interactive TV service. While these experiments are still years away from paying off, Case believes the effort to free AOL from the tyranny of the telephone line is crucial to building interactive services into a mass medium.
"Right now, most people can only use AOL when they're at home in their den," Case says. "Well, that's not what its going to take to create a mainstream phenomenon. But when you look ahead 10 years from now, probably most of our subscribers will be connecting to us several times a day, from several different locations, with several different access devices, on several different communications devices. It will become part of their life."
We'll see. Before that wonderful day arrives - if it ever does - America Online still has to prove it can deal with the changing marketplace in the here and now. Remember AOL's erstwhile partner Commodore? Ten years ago, it was the largest home PC company in the United States; today, it's the answer to a trivia question. Will AOL be able to avoid a similar fate? Can it withstand the Microsoft juggernaut? Will its strategy of co-opting the Internet work? Or will the attractions of the Web prove irresistible to users and content providers alike?
The online world is in such a state of flux that grand predictions are even more suspect than usual. But if history is any guide, sell AOL short at your own risk. Some services may turn out to be cheaper, others may have cooler technology. But it's hard to imagine anyone having a better insight into the hearts and minds of American consumers. The folks at AOL have risen to the top by demonstrating that the online business isn't just about technology; it's about understanding what people really want - an easy, affordable, mediated experience. As the market grows and the common denominator lowers, that should prove to be more true than ever.
To the naysayers who persist in believing that the world is full of intrepid adventurers just itching to climb the mountains of cyberspace on their own, Leonsis has a final story about human nature.
As he relates it, the cruise-ship business was once fragmented into hundreds of tiny little companies. Then a guy named Ted Arison came along and discovered that what excited people the most about cruises was the idea of sailing to exotic foreign lands. So Arison started Carnival Cruise Lines. For a few hundred dollars, Carnival gave passengers a nice berth and all the food they could eat, and sent them off on a journey with people like themselves.
And when they arrived at that exotic foreign land, what did they do? "Well, half of them would run to the Hard Rock Cafe," Leonsis says with glee. "A couple would buy a Swatch watch. And a couple would go eat some shrimp. And Carnival became a multibillion-dollar company."
Then he delivers the punch line: "We have the opportunity to become the Carnival Cruise Lines of this environment."
It's the path of least resistance. It's the shopping mall, the packaged tour, the fast-food joint, the all-in-one deal. It's all those contemporary mass-market phenomena that leave elitists shaking their heads in wonder. It's the desire to be comfortable, safe, and warm. It's the thing you know. It's America, Online!
AOL Acquisitions:
__May 1994
Redgate Communications Corp. of Vero Beach, FL.
Multimedia marketing company.
US$35 million.
November 1994
BookLink Technologies Inc. of Wilmington, MA.
Internet software developer, maker of InternetWorks Web browser.
$30 million.
November 1994
NaviSoft Inc. of Hillsborough, CA.
Internet publishing tools.
$5 million.
November 1994
Advanced Network & Services Inc. of Elmsford, NY.
High-speed network infrastructure and related services.
$35 million.
May 1995
WAIS Inc. (Wide Area Information Servers) of San Francisco, CA.
Internet publishing tools.
$15 million.
May 1995
Medior Inc. of San Mateo, CA.
Interactive media applications.
$30 million.
June 1995
Global Network Navigator, a subsidiary of O'Reilly & Associates Inc. of Berkeley, CA. Commercial Web site.
$11 million.__