How America Online became a superpower

With a 55 percent stake in the new AOL Time Warner, compared with Time Warner's 45 percent, AOL will be in the driver's seat--a stark departure from what most industry watchers expected.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
It wasn't that long ago that media giants like Time Warner, along with the Net's early adopters, analysts and others, were writing off America Online as an industry force.

Saddled with lawsuits over dial-up connections and widely ridiculed for its strategy of inundating the public with disks to get new users to sign up, AOL was the beleaguered playground wimp in an arena of media titans.

Today, AOL got the You've got Time Warner ultimate last laugh with its multibillion-dollar acquisition of Time Warner, one of the most established media giants in the world.

As remarkable as it may seem, this has become a familiar theme to America Online, which has had a long history of catapulting itself to the top of the heap after being left for all but dead. Despite setback after setback, it has risen to become the largest dial-up ISP and nearly synonymous with the Web for much of the general public.

Time Warner, on the other hand, has yet to fully deliver on its latest Web strategy, after finally abandoning its much-criticized Pathfinder site. And its new strategy--offering hub sites aimed at vertical areas of interest such as entertainment and finance--is not based on a financially proven model.

"In the past we always thought that Internet companies needed traditional assets to succeed, and it's becoming more evident that it's the traditional media companies that need the help because they can't figure it out," said Charlene Li, an analyst at Forrester Research.

With a 55 percent stake in the new company compared to Time Warner's 45 percent, AOL will be in the driver's seat--a stark departure from what most industry watchers expected.

"About 18 Is Time Warner next in merger mania? months ago, the feeling was that some of the media companies would buy Internet companies, but what happened is that the valuations got so reversed that it is really the opposite that is likely," said Phil Leigh, an analyst at investment bank Raymond James.

Over its short history, AOL has hitched its cart to the consumer wagon, betting it all that making its online offering palatable to the most mainstream of audiences would bring it success where others failed.

Its campaign to push sign-on disks to users was the beginning of a consumer-focused blitz that has aimed to make the Web more like television and less like high technology for users.

America Online "didn't make the brand stand for high technology like CompuServe did," Bruce Kasrel, an analyst with Forrester Research, said in an earlier interview. "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."

Creating an Internet leader

Jan. 2000 Announces plan to merge with Time Warner in the largest acquisition deal worldwide.
Dec. 1999 Membership reaches 20 million.
June 1999 Signs pact with DirecTV to develop interactive TV services. Acquires Spinner.com, Winamp and Shoutcast.
March 1999 Partners with SBC Communications, other Baby Bells to provide digital subscriber line (DSL) access.
Dec. 1998 Membership reaches 15 million.
Nov. 1998 Announces plan to acquire Netscape Communications and signs strategic partnership with Sun Microsystems.
June 1998 Announces plan to acquire Mirabilis and ICQ.
May 1998 Announces plan to acquire NetChannel.
Nov. 1997 Membership reaches 10 million.
Sept. 1997 Announces plan to acquire CompuServe Online Services.
March 1996 Announces Net alliances or partnerships with Apple Computer, AT&T, Microsoft, Netscape and Sun Microsystems.
Feb. 1996 Membership reaches 5 million.
Oct. 1995 Launch of GNN, AOL's direct Internet service.
Aug. 1994 Acquires Redgate Communications, a multimedia publishing company. Membership reaches 1 million.
Jan. 1993 Windows version of AOL launches.
March 1992 AOL goes public on the Nasdaq Stock Market for $11.50 per share.
Oct. 1991 Quantum changes name to America Online (AOL).
Feb. 1991 DOS version of America Online launches.
Oct. 1989 Quantum offers "America Online" for Macintosh and Apple II.
Nov. 1985 Quantum's first online service, "Q-Link," launches for Commodore Business Machines.
May 1985 Company incorporates under the name Quantum Computer Services.
Source: America Online
Sticking with that strategy has paid off for AOL, pushing up its membership rolls ever faster in recent months. Last month, the company said it surpassed the 20 million member mark, after reaching 19 million in October. The content and technology AOL has acquired or developed--including Net radio firm Spinner for music, interactive movie information company MovieFone, and instant messaging with ICQ and AOL Instant Messenger--have contributed to analysts and others deeming AOL the Wal-Mart of the Web.

But where AOL has largely failed has been in its efforts to create original, compelling content brands of its own. Efforts to create news and entertainment sites, for example, largely have gone by the wayside.

Enter Time Warner, which boasts established brands such as Time, CNN, Warner Bros., Sports Illustrated, People and HBO.

David Simons, managing director of Digital Video Investments, was quick to point out that although AOL is the buyer in today's deal, Time Warner will not be merely swallowed up by the online giant.

"Time Warner is not going to be a subsidiary of AOL," Simons said. "It's not a case of AOL taking control of Time Warner--it's creating a new company.

"(AOL chairman and chief executive Steve) Case is chairman of the board (of the new company), but he really can't tell (Time Warner chairman and chief executive Gerald) Levin what to do," Simons added. "Only the whole of the board can."

In fact, the deal appears to be more of a meeting of the minds than a true takeover. AOL is in a more powerful position financially with a market cap approaching $160 billion, compared with Time Warner's roughly $115 billion--thanks at least in part to the cachet of AOL being a "dot com."

"You're much better positioning yourself as an Internet company than a traditional company now," Forrester's Li said. "For traditional media companies, their revenues are not as interesting and as dynamic as AOL. You publish Time magazine and you keep publishing Time magazine. How much more can you grow it?"

Still, even with all of AOL's success in the online services market, it clearly has seen Time Warner and others--such as Excite@Home--as a threat as widespread broadband access to the Net approaches.

In a recent filing with the Securities and Exchange Commission, AOL said: "Some of our present competitors and potential future competitors may have greater financial, technical, marketing or personnel resources than we do. In addition, as a result of acquisitions, certain competitors are able to offer both Internet access and other services, such as cable television or telephone service, and such consolidation may continue. The competitive environment could have a variety of adverse effects on us."

AOL named Time Warner and others as threats to the advertising and commerce portions of its business and Excite@Home and Road Runner as threats to the subscription part of its business.