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Clash of the cyber titans

Under Barry Schuler's tutelage, AOL has given Bill Gates fits for years. But with the rivalry from Microsoft greater than ever, so are the stakes.

Barry Schuler has some big shoes to fill.

As his former bosses Steve Case and Bob Pittman ascended into the corporate boardrooms of AOL Time Warner, Schuler was handed the job of chief executive at America Online with a mandate to maintain the unit's market dominance and continue its strong revenue growth. No small order, but AOL Time Warner has set aggressive financial targets for the year and expects AOL to power the company toward meeting these expectations.

However, the weakening economy is an equal-opportunity culprit. The effects have spread to AOL Time Warner, which recently reported revenue that failed to meet Wall Street's estimates. AOL's subscriber revenue also fell below some analysts' estimates, causing some to wonder whether the company's growth streak is nearing an end.

Schuler defended the subscriber revenue shortfall as an accounting issue rather than as a reflection of the business.

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  AOL says interoperable IM "difficult"
Barry Schuler, CEO, AOL
Besides the spotlight shining from Rockefeller Center, Schuler must confront a more organized, and always aggressive, Microsoft. AOL Time Warner also faces ongoing scrutiny from federal regulators in the aftermath of its protracted merger-review process. Regulators are keeping a close eye on the company in areas such as cable Internet services and instant messaging for signs of market-share abuse.

It's up to Schuler to navigate through these minefields while maintaining AOL's prominence as "the Internet service for dummies"--a formula that has worked, given the unit's 30 million subscribers.

A self-admitted techie, Schuler joined AOL in 1995 when his multimedia start-up, Medior, was acquired by the company. Before the merger with Time Warner, he served as AOL's president of interactive services, heading the technical end of the company.

In an interview with CNET, Schuler sounded off on Microsoft, reiterated the company's stance on instant messaging, and mused about the cultural differences between AOL and Time Warner.

Q: Who are your competitors? Is Microsoft the big competitor now? Yahoo? Other big media companies?
A: AOL Time Warner is a unique company. If you looked around and tried to name another company that is a direct competitor to AOL Time Warner, you really can't. It's not any different from five years ago, when (Microsoft) declared they were going to come into the online market and become the leader. But also remember AOL Time Warner is a collection of companies. When you start to think about how we work together to leverage assets, then you start to understand what a strong position we're in.

Microsoft is certainly out there. If you look at them from a market-share point of view, vis-a-vis AOL's business, we've got 30 million, they've got 4 (million) to 5 (million), whatever they claim their numbers are. They're kind of in the pack of smaller ISPs that are out there. They clearly have designs to grow and be more in AOL's league--they're not yet. But they're a company we take very seriously.

At the same time, there's been a lot of stuff written about how the negotiations broke down over presence on the Windows XP desktop. In the aftermath, it seemed like there were a lot of legal threats. Are you watching the XP release very carefully?
Sure, absolutely. Let's face it--they have a monopoly operating system. Anybody that has a business that's dependent on applications that runs on the operating system has to keep a close eye on what they're doing. We always have. It's not any different from five years ago, when they declared they were going to come into the online market and become the leader. They are an extremely successful, powerful company. They are a great competitor. I have enormous respect for them, and I wouldn't be doing my job if we weren't keeping a close eye on them.

What about antitrust concerns? There was an issue about antitrust being brought up during the negotiation sessions. Is that something AOL wants to be active in?
Well, look: The discussions we had were very much blown out of proportion. It came into being like the Paris peace talks, covered by the press like a play-by-play. I think we were trying to do a very simple deal with them, maybe a precursor to something else. In the end, we couldn't agree on the exchange of value. We believe we will be partners and competitors with Microsoft. It's a model we feel very comfortable with. And so we're going keep talking.

At the same time, there are real issues. They're out of the last round of the legal process. The court upheld the fact that they have a monopoly and they practiced monopoly maintenance behavior. That is serious. And because they are a company who has great influence over the platform that many businesses run on, the process that goes on from here is very important. Microsoft has to understand what's going on, examine everything they're doing with XP, and really bring their behavior in line with what the courts have called out as issues.

Now that you've parted ways, is there an incentive to use Microsoft's Internet Explorer browser? Can you use the Netscape browser?
We have announced that we are continuing to work on Gecko, that we had planned to integrate it into CompuServe. CompuServe becomes a great place for us to test. We think that Gecko is very efficient; it's fast. We're working on the reliability. Software bugs cost us a lot of money from calls to our cost center. To the extent that we can make Gecko-Netscape a more reliable product than IE, it would save us money and we would use it (in the AOL service).

Microsoft has said that AOL is not a technology company, that you're not focused on technology or developing it. Would you agree with that characterization?
Absolutely not. Let's make it clear: Are we a company that develops technology for other companies to use? No, we're not in the business of developing software tools and creating operating systems. But here's what we do, and we do it better than anyone in the world: We develop network applications that are server-based that run at very high scale at near-dial tone quality 7-by-24. In other words, if you think about AOL, it's a collection of applications. Microsoft has to understand what's going on, examine everything they're doing with XP, and really bring their behavior in line with what the courts have called out as issues. It's a mail application, it's an instant messenger application, it's authentication--a whole collection of applications that are seamlessly delivered over the pipe to a consumer.

When you buy AOL, you don't have to go into the store and buy 10 different packages and install them on your machine. You don't have to go into the store at all. You download it. Well, guess what? That's the future of the world. That's the future of the world of delivering computing applications.

By the way, that was also Microsoft's big revelation that they woke up to a year and a half ago when they announced .Net. They're basically saying the future of the computer world when there's broadband and always-on connectivity is not about individual operating systems and PCs and shrink-wrapped software. It's around the model that looks like AOL. And that's what they're going out and building.

Will AOL only be on devices that don't use Microsoft?
We're very neutral when it comes to operating systems. If Microsoft has an operating system available for set-top boxes that we could build to, we'd go build AOLTV for it. They are introducing some platforms for wireless stuff. If they're open and we can build on it, we will. If you look at Pocket PC, we've got AOL on it. We absolutely will support Microsoft to the extent they get technology out there that they will allow us to use and they build some customer base.

On the subject of applications, one of the most high-profile applications that you have is instant messaging. One thing Microsoft has started to do with XP is develop a more corporate type of messaging service, where people build applications on top of Windows Messenger. It seems AOL has maintained its level of functionality for many years. What's your thoughts on the virtues of creating applications on top of IM and turning IM into a different beast?
We're in the consumer business. And people--especially those who focused on enterprise software--told me for years, "Your mail sucks; it doesn't have this and it doesn't have that." I said to them, and will say it today, "Well, how come we deliver twice as many communications a day than the U.S. post office?"

The fact of the matter is, we could build our mail into anything. We have the capability to write great software like anybody else. We could build instant messaging into anything, but when we talk to our audience, they're very clear about what they want.

We have experimented with features on AOL IM. We have tested over the years and have had operational over the years the ability to add videos, the ability to transmit videos over real time, the ability to do voice. And in the end, it's not something consumers are interested in. It's not to say that there aren't applications in the enterprise world and other places that would make sense. It's just not the business we're in. It also happens to be a business that Microsoft is very good at, and if Microsoft is interested in pursuing messaging-based applications in the enterprise market, that's great.

Is maintaining your lead in instant-messaging market share an important thing?
Yeah, I mean, to us it's something that is an integral part of what we do. It is a feature, not a business in and of itself. It's something we're very proud of.

The FCC was pushing the issue of when you guys were going to offer an interoperable IM system. It's been almost a year now. How long do people have to wait until something interoperable comes out of the AOL side?
Interestingly enough, if you go back to the record of what I said last year, everything I said about it has come true. You saw a lot of people pounding their chests when we were under regulatory review. You had IMUnified saying, "We'll have it working"; they didn't deliver. The IETF (Internet Engineering Task Force) had a process going along trying to create standards where people can write to create interoperability, and that has been grinding away with no conclusion.

On digital downloads: What you're really seeing is...if you take the whole music area and make it easy and convenient, and you charge (consumers) reasonable fees, there's some demand there to make it happen. You have to ask yourself why it has been so difficult. The answer is that it's hard. It's a very complex problem because of the real-time nature of instant messaging to make it work and make sure it works in scale. Now, we made a commitment last year that we would be in a position to test an interoperability solution by next summer, and we are. We're going to make an announcement shortly about a test with a partner, and actually we've made a lot of progress. We have been following the IETF progress very closely, and as a part of the test we'll be integrating some standards that have been proposed, and we'll see if they stand the test of scale.

There are some complicated issues. The world has changed since last year. Microsoft has announced they are bundling their own IM products directly into the operating system. That practice is something that is obviously being questioned form a legal and regulatory point of view considering their monopoly position. How that impacts the future of interoperability has to be sorted out.

The partner that you're testing with, is it a technology partner or another company involved with instant messaging?
It's another company that's involved with instant messaging.

Some analysts after your earnings report said subscriber revenue was less than expected. What can continue to fuel AOL's growth at this point?
A number of factors. Let's be clear that some of the dissection of our results are analysts that are still trying to figure what's going on, and they don't have the picture yet. It was a very strong quarter, and all of AOL's metrics are extremely strong.

That phenomenon of subscriber revenue is actually a function of the merger. What I mean by that is, we are now doing a lot of things for a lot of divisions--for example, promoting movies. And when we're doing that, we're not charging money to the other divisions. I'm not collecting money from the publishing divisions for selling magazine subscribers. But it's contributing to the company overall. So it depresses our revenues per subscriber a little bit. But we'll get that rectified through company accounting.

Our growth story is going to look like this: There's still plenty of growth in bringing new people on. If you look at U.S. households, there are still tens of millions of households that are not connected. We'll be focusing on continuing to do that. Same thing internationally, which is really booming for us. We now have 6 million members internationally, and it's very fast growing.

At the same time, you will start to see some new phenomena, because up to this point it's about get people online, get them to spend time online, get them to spend money on things, and monetize time spent online though ads. What you're going to start to see added to that is the idea of taking these highly adopted homes where multiple people want to get online, and make them multiple-use homes. Get broadband in there, get a home network in there, have a family account where multiple people in the homes can be online at the same time over the network, start to introduce other convenience applications such as music subscription services, video-on-demand.

AOL Time Warner is the largest copyright holder in the world. It seems like there is a difference between how the digital world and the traditional world views copyrights. On one hand, you have people who come up with technologies that push limits on copyright protection, and at the same time you have traditional businesses that are trying to hold on to that. How do you balance innovation vs. holding on to your legacy?
Well, I think that goes to the essence of the merger. There are some very straightforward issues. There's a great difference between innovating and making things more convenient for consumers and enabling consumers to steal. Those are black-and-white issues. You saw a lot of that centered around Napster, and what you saw was an industry--rightfully so--getting extremely nervous about what happens if this new medium and technology comes along and people can steal our product.

However, in that fear and paralysis, It's easy to miss the really important point: Consumers have said, "Hey if you make it easy for me to get music online, I like doing it." What you're really seeing is a leading edge of a desire on consumers that if you take the whole music area and make it easy and convenient, and you charge them reasonable fees, there's some demand there to make it happen.