THE STATE OF AOL: What would describe as the most dominant internet
company of all time? Maybe Google, Facebook or Amazon? Well, in the modern age, that’s probably
true, but zooming out, you could argue that AOL was the most dominant internet company of
all time. Way back in 1999, they boasted a market cap of $200 billion when the internet was in its
infancy and dollars were actually worth something. They did everything from email and online news to
chat and connecting to the internet itself. And AOL wasn’t just a zombie company that was held
up by the dotcom bubble either. They had massive users and market share to back up their sky high
valuation. In fact, at the peak, over 35 million people were using AOL to connect to the internet.
For perspective, only 248 million users were using the internet in total at the time. So,
AOL controlled over 10% of the entire internet and they were expanding into every service you
think of. But, their time at the top didn’t last forever. Very soon, they would start bleeding
market share to younger internet companies like MySpace, Friendster, Facebook, Google and so on.
And pretty soon, all of their fundamentals would begin a harsh decline. By 2008, for example,
their revenue was consistently falling by over 25% every single year. At that rate, you’re entire
business is pretty much gone in 4 years and that’s exactly what happened. By the early 2010s, AOL was
a shell of their former selves who was simply cashing in on their former glory. Eventually,
in 2015, Verizon would go onto by the entirety of AOL for just $4.4 billion or 98% lower than
their peak valuation. And things have only gotten even worse since then. In 2021, a private equity
firm named Apollo would buy out the entirety of Verizon Media for $5 billion which included Yahoo,
TechCrunch, Aol, Engadget and RYOT. So, it’s safe to say that AOL has officially lost 99% of
their valuation and that’s not even accounting for inflation. So, what in the world happened to AOL?
AHEAD OF THEIR TIME: Taking a look back, the story
of AOL takes us all the way back to 1983 when the internet was basically just a concept. As such,
AOL didn’t quite start off as an internet company but they were always flirting with the idea. You
see, they actually started off as a video game company called Control Video Corporation or CVC,
but this wasn’t actually a video game company. CVC offered a service called GameLine for the
Atari 2600 which allowed users to download games on demand. Users were able to hook
up a modem to their phone line, after which they just had to pay $1 for every game they wanted to
rent. CVC was basically trying to introduce cloud gaming way back in ‘83. Big companies like Sony,
Microsoft, and Google are struggling to do this in 2023, so unsurprisingly,
the venture wasn’t all that successful back in 1983, but this simply gives you glimpse as to
how forward thinking AOL initially was. Anyway, by 1985, CVC would reach the brink of bankruptcy and
a couple of investors would buy the company for pennies on the dollar and startup a new company
called Quantum Computer Services which was once again way ahead of times. At first glance, they
were just an online services company that allowed people to get access to things like the news and
stock prices from their computer. However, it’s how they went about providing this access that
was ingenious. As you would guess, the internet was extremely slow back in the day. In fact,
the best you could hope for was just 2400 bits per second. As such, making the most of the little
data that could be passed through this connection was essential and this is where Quantum excelled.
While much of the competition was passing through fully rendered graphics to the user’s computer,
Quantum would only send the bits and pieces needed to render these graphics, and it was up to the
user’s computer to put together the visual. This minor change, which is a no brainer today, set
Quantum leagues ahead of the competition. Users didn’t quite know why but online services offered
by Quantum were way faster and convenient to use despite having the same slow internet. As such,
many were more than happy to pay $10/month to get access to an online encylopedia, news, stock
quotes, 15,000 public domain Commodre programs, the Comp U store, and American Airlines’ travel
booking site. And that was just what you got with the basic plan. For an additional 8 cents per
minute, you could get acces to chat rooms, email, online games, classified ads, online classes,
and events. While this was a phenomenal service for the time, the internet market simply wasn’t
all that big. The entire internet itself only had an estimated total of 500,000 users. So, it’s not
like Quantum could really grow all that big, but it wasn’t the size of CVC or Quantum that make
them a notable part of AOL’s history, but rather, it was their innovative spirit. It turns out that
AOL was much more willing to push the boundaries and try new things when the company was constantly
fighting to survive largely because they had no other choice. When those were the options,
AOL had an easy time picking the former, but once they actually achieved scale and success,
that mindset would be thrown out the window which brings us into the creation of AOL proper.
IN LINE WITH THEIR TIME: Moving into the 1990s, the
internet would see massive influx of users largely thanks to web browsers which made accessing and
navigating the internet far easier for the average person. This in turn led to an explosion in online
services and games with whom Quantum continued to compete with, but they also saw a far larger
opportunity. Instead of trying to dig for gold on the internet like they had been doing since 83,
why not just sell the shovels for the internet? Aka, get into the internet service provider game
and that’s exactly what they would do. They would rebrand the company as AOL or America Online and
introduce their famous AOL disks in 1993. These are often described as being the internet on
a disk, but that’s not exactly what these disks did. Rather, you still needed a modem to actually
connect to the internet, but the software on the disk simply made the process of connecting to the
internet using the modem far easier, especially for people who had never done it before. Also,
the disks usually came with a set number of free internet hours, usually somewhere between 70
and a 100 hours. So, these disks basically became the perfect starter kit for people who wanted to
try out the internet. And did I mention that the disks were free? AOL basically sent millions of
these disks to people’s homes hoping that they would give it a shot and become addicted which is
exactly what happened. A whopping 10% of people who received these disks would give it a shot,
which is insane for a cold mailing strategy. Eventually, AOL would switch from floppy disks
to CDs and these guys basically single handedly popularized CDs. In fact,
50% of all the CDs produced worldwide were from AOL, and they were onboarding a new user every
6 seconds. And this trend was simply thrown into overdrive when AOL switched from a pay per hour
model to a flat monthly fee of $20. I do want to note that this wasn’t exactly a profitable move,
as the company was burning money, but it did make AOL the ubiquitous internet company. And
by the mid 1990s, AOL would begin cashing in on this ubiquity across the board. In 1996,
they would purchase a search engine called Excite which they would eventually brand as
AOL search. They would also purchase one of the largest browsers of the time, Netscape, for $4.2
billion. They of course also had their own instant messenger, email, news outlet, video platform,
and yellow pages just like every other internet company. And to their credit, a lot of these
services were actually super successful too. Their email service for example was the world’s largest
in 1997 with 9 million users. But, there was one key difference between AOL’s original products
like CVC and Quantum and these products. These products were nothing special. They weren’t ahead
of their time, they didn’t offer anything unique, and there was really nothing notable about. The
only reason that they were so popular was because AOL as a whole was so popular. It’s like the same
that happened with Internet Explorer. Internet Explorer was never popular because it was good.
It was popular because Windows was so popular. At least, AOL’s products were still keeping up with
the times throughout the late 90s as it wasn’t long until they would fall behind the times.
BEHIND THE TIMES: Likely the single biggest event
that changed the trajectory of AOL was the turn of the century which perfectly coincided with the
biggest deal in internet history. A merger between AOL and Time Warner in a deal worth $350 billion.
Accounting for inflation, that’s the same as a $623 billion merger today. On paper, this deal
looked like a genius idea as it was combining the world’s largest media congloermate with the
world’s largest internet provider. And if executed correctly, this could’ve been an excellent deal
that turned the company into a trillion dollar giant. However, that’s not exactly how things
played out. You see, AOL had just played an entire decade on easy mode. Everything they
touched turned to gold, so they were overconfident as ever. And as for Time Warner? Well, Time Warner
is basically as entrenched and slow moving as a company gets. Combine this with the irrational
investor confidence during the dotcom bubble, and the new company was naturally inclined to think
that they had already won the internet. So, they would sit back and relax as their biggest threat
continued to grow: broadband internet. Broadband internet was already a thing in the 1990s,
but it wasn’t all that popular because it was quite expensive compared to the dial up internet
that you could get from AOL. With that being said though, Broadband did offer much better internet
quality. People simply didn’t care for that extra quality in 90s but they did in the 2000s.
For a company like AOL and Time Warner, making the pivot from dial up to broadband would’ve
been a piece of cake, but instead they would let competitors like AT&T and Comcast eat their lunch.
Combine this with the dotcom burst and in 2002, the new company would post a loss of wait for
it $98.7 billion. To this day, this is the worst annual loss in corporate history ever of all time
period. By this point, AOL was naturally starting to get nervous. Fortunately, they still had their
massive slew of internet products, the messengers, emails, and news outlets right? Well, it turns
out that these products had no differentiating advantage and a little startup named Google had
been rapidly chipping away at their market share for years at that point. Within a blink of an eye,
you all of a sudden no longer needed AOL to access the internet or use the internet. Worse, people
started associating AOL with the slow and old Time Warner, and they far preferred to use services
from young startups with slogans like “Don’t Be Evil”. By this point, it was basically all
but over, and all that was left was the painful decline. In 2009, Time Warner would spin off AOL
into it’s own company. And since then, AOL has mainly stayed afloat by selling run of the mill
products like anti virus to their dwindling user base and a running few successful acquisitions
which primarily consists of the media publications TechCrunch and Engadget. Ironically, the brands
of these subsidiaries are far more relevant today than AOL itself. It just goes to show
that just because you’re ahead of your time at one point doesn’t mean that you’ll always stay ahead
of your time. And that is what happened to AOL: the company that threw away everything. Another
company that had everything and then threw it all away is Xerox. Check out this video to leran more.