Death of AOL
In the brief history of the Internet, the death of America Online has been predicted countless times.
After the Web's mainstream explosion in the mid-1990s, pundits said consumers would outgrow the closed, training-wheel environment of an online service like AOL and graduate to direct dial-up connections that catapulted them to the wilds of cyberspace, using portals like Yahoo for navigation.
While Web portals chased traffic in a strategy based primarily on advertising for revenue, AOL plodded along with far smaller numbers, but its customers provided steady monthly income through paid subscriptions. So when the ad market froze last year, AOL became the proverbial tortoise that beat out the hare.
"What Yahoo is going through is no different than what AOL went through four or five years ago when we had to change our business model, when Wall Street was putting pressure on us," said Barry Schuler, now the chief executive of AOL Time Warner's America Online unit. "And we figured it out; we made it work."
Today, Web rivals that banked on free services are desperately trying to figure out if they can change course and follow AOL's strategies without undermining their original businesses.
Most of the portals long ago abandoned the idea of getting into the Internet access business because it was so expensive to maintain and would severely limit the potential to attract as much traffic as possible for ad dollars. Internet service providers that sold dial-up Web access without portal features were never able to catch up to AOL's membership, which it grew largely through an unparalleled marketing juggernaut, even after the largest ISPs merged and began to make money.
"AOL was saying when no one else was onboard that it was important to marry access with a content service. They were hurt by that because they didn't have a 'pure-play' Internet company," said Andrea Williams Rice, an equity analyst with Deutsche Banc Alex Brown. "In the end it doesn't matter. They were right."
Perhaps most perplexing, Web companies know that others have tried to beat AOL at its own game--including vaunted Microsoft, with its own subscriber service--with little success. The few portals that have tried to follow AOL's model of tying Internet access to content programming, such as Excite@Home and Terra Lycos, have stumbled badly in those attempts.
At last count, AOL had 29 million subscribers who purchased US$20 billion worth of goods and services through the online service last year, according to the company. That formidable membership will now be exposed to all manner of promotions from Time Warner's global empire of magazines, cable service and entertainment studios.
To be fair, few outside the company predicted that it would become the powerhouse it is today as AOL Time Warner. In fact, the access business nearly destroyed AOL in 1997, when the company experienced massive service blackouts after changing its pricing plan from hourly charges to a flat rate--a move that drew so much traffic that it overloaded the networks.
The outages led to lawsuits by dozens of states representing angry members who complained about the poor service, giving other companies even more reason to avoid the ISP business. AOL was seen as having "this dirty, nasty access business with low margins," Rice said.
Yet those margins, which widened just days ago with a surprise rate increase, are precisely what allowed AOL to weather the economic tumult that now threatens competitors that pursued a free strategy.
As taxing as it was at the time, the outage fiasco was a blessing in disguise, company executives now say. It forced them to turn to other types of revenue to offset the increased network costs, and AOL became a media company that made money through advertising and e-commerce, as well as dial-up connections. Last quarter, advertising and commerce revenue for the AOL unit hit $721 million.
"We didn't know exactly how the flat-rate model would work out, but we did feel we had to have other revenue streams as well," Schuler said. "It ended up causing us access problems and caused us to scramble to expand capacity. We all took a blood oath that that would never happen again."
Others took vows of their own to stay out of the network business altogether.
