AOL's Ted Leonsis returns

The world's largest Internet service provider is turning to one of its few remaining veterans to help it execute a tough turnaround.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
Faced with a growing management void, America Online is turning to one of its few remaining veterans to help execute a tough turnaround.

America Online Vice Chairman Ted Leonsis, the abrasive executive who helped steer the company through some of its most tumultuous years in the mid-1990s, is back in the spotlight this week following the latest departure of a top-level manager at the beleaguered Internet giant.

On Tuesday, Jimmy De Castro quit after just seven months on the job as president of America Online's interactive services division. The move has effectively cemented the quiet reascension of Leonsis, an influential figure within the company who had nevertheless stepped to the sidelines in recent years.

Leonsis will assume De Castro's duties, giving him control over the company's flagship AOL service. He is expected to remain in the new role indefinitely, according to people familiar with the appointment, giving him substantial input over day-to-day operations and placing him in close contact with recently appointed AOL CEO Jonathan Miller.

Leonsis' return underscores parent company AOL Time Warner's desperate attempt to reconnect Dulles, Va.-based AOL to its roots. Now that Leonsis is calling the shots for the AOL service, the question remains whether his vision for AOL makes sense as the service searches for its identity.

"He has a legacy of experience, but a legacy of experience at a time when you could do no wrong," said Patrick Keane, an analyst at Jupiter Research. At that time AOL was "on a steady rocket-ship growth curve with subscribers being added at a herculean rate."

Leonsis said in an interview that he views his new job as a revitalization effort for AOL, which has fallen on hard times recently despite its undisputed position as the world's largest Internet service provider. The company faces collapsing ad sales and dwindling subscriber growth in addition to accounting troubles that caused it to cut $190 million from its earnings in a financial restatement affecting results for the better part of two years.

Indeed, Leonsis inherits a very different AOL from the one he helped steer to prominence half a decade ago. Last quarter, AOL gained about 200,000 new members, a drop in the bucket of its 35.3 million member base worldwide and a growth rate significantly lower than those posted during the boom years, when a million or more sign-ups was considered the benchmark.

America Online also faces pressure from its long-standing competitors: Microsoft took the wraps off a new version of its MSN service this month, while Yahoo recently unveiled a co-branded high-speed Net access plan with SBC Communications. At the same time, Internet users are demanding faster access in their homes and are warming up to their cable and phone companies for broadband, a trend that could hurt AOL by moving customers away from its higher-margin dial-up business.

Leonsis declined to discuss his plans in detail, saying the company expects to make its strategy public Dec. 3. But he gave some hints about his thinking, saying emphatically that AOL's strengths lie in its member community and its communication features such as instant messaging and e-mail.

"It's the customer, stupid; it's the product, stupid," he said.

Giving AOL its groove
Leonsis joined AOL in 1994 after the acquisition of his marketing company Redgate Communications. Energetic and brusque, he quickly carved out a role as a tireless promoter of the service, both inside and outside the company. Former executives attribute the addition of Leonsis as an early turning point in AOL's attempt to appeal to the masses.

Longtime AOL employees know Leonsis as a colorful cheerleader who once asked them to sign a wooden cutout of a Tyrannosaurus rex to stoke their competitive fires against Microsoft.

"It was Ted who put the face on AOL; it was Ted who helped AOL get its groove on," said Terrie Clifford, a marketing executive at AOL between 1994 and 1998 and currently vice president of business development at NationalGeographic.com. "Otherwise, AOL was a company of nerds."

Leonsis is also known as an early advocate for creating proprietary content for the AOL service, a strategy that has recently come back in vogue.

During his tenure as president he strongly backed efforts to turn AOL into a breeding ground for new Web content ventures. His major project in this regard, AOL Studios, spawned sites such as The Motley Fool and a precursor to iVillage.

The company took a new direction with the arrival of Robert Pittman in 1996, an event that some say began Leonsis' retreat to the sidelines.

Pittman, former chief operating officer of AOL Time Warner, shifted AOL's strategy from producing content to leasing space on its site to third parties.

With Pittman's rise, Leonsis took responsibility for a collection of scrappy Web properties that AOL had acquired, including its instant messaging services ICQ and AIM, local city Web guide DigitalCity, online radio service Spinner, and MP3 software Winamp, to name a few. While some of those properties, such as instant messaging, carry a high profile within the company, none contributes significantly to the bottom line.

It was also during this period that Leonsis extended his influence outside AOL by purchasing a controlling stake in the Washington Capitals hockey team and a minority stake in the Washington Wizards basketball team. Leonsis even lured a retired Michael Jordan into a management position with the Wizards. Jordan now plays for the team.

Leonsis began to reassert his presence in Dulles when AOL's corporate problems claimed many of the company's top-ranking executives, including former division CEO Barry Schuler, Pittman, and head of business development David Colburn.

Some people close to the company attributed Leonsis' survival in part to a diminished role that kept him out of the firing line.

"He took a satellite position at the right time," said one former employee, speaking on condition of anonymity.