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How AOL rose from the ashes

How did AOL go from a digital whipping post to an Internet superpower? The answer lies in a combination of marketing hubris and an obsession with the Internet novice.

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: Puppet masters: AOLHow 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 AOL growth chart 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," High speed pipe dreams? 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