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America Online was a company that helped shape the internet as we know it today.
It became a giant of the Dotcom world and was even a part of the biggest corporate
merger in history. But, just as it was great, it was flawed.
America Online went from being the biggest player in the market to an underachieving
integration. How? Today, you’ve got mail, and it’s about America Online.
In 1983, Control Video Corporation (CVC) was
born, the brainchild of William Von Meister who, out all things, was a Count.
CVC only had one product: GameLine, and it was visionary.
An online game rental service for the Atari 2600.
By the way, if you want to check out Atari’s crazy story, click on the link below.
GameLine allowed users to temporarily download games and keep track of high scores.
This was online gaming. In 1983! Perhaps the idea was ahead of its time, because
CVC didn’t really take off. But Von Meister did hire a key player in AOL’s future:
Steve Case, who joined as a marketing consultant.
CVC went bust a year later. But, in 1985, with Case in the mix, Quantum Computer
Services rose from CVC’s ashes.
This company created Q-Link, for the Commodore 64 and 128 computers. The software
was described as an “useful, affordable, easy to access and entertaining” source
for news, messaging, libraries and games.
In 1988, Quantum created PC-Link for…PC’s and AppleLink
for Apple. But the relationship with Apple fell through just one year later,
so Quantum renamed AppleLink to America Online.
Unlike competitor Compuserve, which sounded
really techy, America Online was inviting, geared towards those who weren’t
tech-savvy.
These programs weren’t bad at all: messaging, file transfer, even Massive Online
games, and play-by-mail games. Which were a thing back then.
This, mind you, was before the internet, and users were scarce. Experts estimate about
500 000 in the earliest online years. So, with such a small market, Quantum’s
idea was promising: for a modest fee, users had access to an array of services, even custom
color graphics, and sound. And it worked.
By 1990, the internet was on the verge of erupting and Quantum was keeping up.
Building off of the success in the 80s, Case renamed Quantum into America Online in
1991 and customer base grew on a yearly basis. By 1993, America Online had about
200 thousand subscribers.
Plus, it had created its own email address and a Windows version. But most
importantly, you could now access the internet. Here’s where we must delve into a couple
of details. First, there’s a thing called Usenet, and
to understand what it is, let’s see Usenet’s own
definition:
Usenet was first used, to great success, in universities and research groups. And
classes began in September, so veteran users expected to train new users within a
month, then they either learned the rules or left.
Then there’s Jan Brandt. In 1993, she was hired as VP of Marketing, and Steve Case
told her one thing: grow the subscriber base.
You see, at the time, AOL sent complimentary trial disks to people who asked for them.
So, Brandt said: why don’t we give trial disks to EVERYBODY? Well, not everybody, but
close. Her first plan was to invest $250 thousand
in sending disks through the mail. And this worked at about 10% uptake, in some places
reaching 18%. Which was really good. So, she went all out but, now, with CDs and
not just with mail. No. She stuck them in every catalog, airplane magazine, and cereal
box available. At some point, HALF of the CDs produced in the world had an America
Online logo. The cost? $300 million dollars.
Crazy, yes. But it worked. America Online had a new subscriber every
SIX seconds. And, those subscribers had an average life of 25 months, with about $350
profit per user evey after paying for the discs. Also, they went from 200 thousand to 25 million, a decade later.
Now, let’s go back to Usenet because A LOT of people had access to it.
So, in September of 1993, it wasn’t just university students and researchers who began
using it. But also, Joe down the street, who had never used forums.
So many people logged in, Usenet crashed. There was no way of controlling etiquette,
people flooded forums with questions and the quality of discussions plummeted. It
was called the September that never ended.
And this was how America Online would grow; imperfect.
Robert Pittman is a key name in America Online’s
growth. He became CEO in 1996 and stuck content deals with big brands like
the Smithsonian Museum, National Geographic, Discovery Networks.
He then went on the offensive, purchasing products like search engines (which would
eventually, become America Online Search), WebCrawler in 1995, and eWorld in 1996.
America Online now had news, sports, games, and a lot of subscribers. It reached
upwards of 25 million subscribers by 1998. But it was the Netscape deal, in 1999, that
would set them apart.
Netscape was, during the late 90s, one of them, if not the, most used internet navigator
in the world. It wasn’t cheap, though. The
deal cost them $4.2BN, but now, America Online now had great software and guaranteed
presence in almost every computer. And yes, there were some mistakes.
In December 1996, the company changed from an hourly fee to a monthly fee, which
meant a permanent connection. Kind of. Because so many people logged in, that the
servers collapsed. Ironically, many subscribers were unable to
use the internet due to oversaturation, and they
stopped using it altogether. Those CDs? Some even ended up as frisbees,
and others as collectibles! So, don’t throw them away.
Such was the crisis of oversaturation that Case himself launched an ad to calm down
users. But America Online was still hungry for more.
So hungry, it shot itself in the foot.
The worst merger in corporate history. That’s what experts call the merger between
America Online and TimeWarner.
America Online was the big dotcom player and internet companies were booming. So,
investors confidently looked for more big bucks, in other markets.
Then there’s Time Warner, a massive media company that frustratedly tried to be a part
of this booming world but failed. Their strongpoint: presence in a lot of households.
Households and internet: a seemingly perfect match made in heaven.
So, you would think that this deal happened for $4BN or $5BN tops...
Well, this deal was for no less than $165 BN.
But it failed miserably. Both companies couldn’t find common ground,
their cultures clashed and, just months after the merger, the world changed. Bad.
The years leading up to 2000 were full of
speculation around internet companies. From 1995 to early 2000, NASDAQ rose about 400%,
thanks in large part to dotcom companies.
Stocks would increase 1000% in value or more, people quit their jobs to venture into
full-day trading, and investors were dishing out big bucks, no questions asked. Dotcoms
even bid for Super Bowl ads, something unheard of at the time.
But many of those companies weren’t making profit. In fact, they bled money, and were
fully aware of it. They opted to grow rather than look for profit and, grow they did.
At the peak, some stocks opened at 400% the initial value, Qualcomm increased
2619%, and stock market reports were more like movies. It’s just that money is finite,
and people knew this: some warnings go as far back as 1996. But nobody listened.
The unsustainable dotcom world collapsed. By November 2000, most internet companies
had lost about 80% of their stock value. Damage estimates were about $1.7 TRILLION
lost.
Right after America Online had invested $165 BN in the merger. Advertising vanished,
its stock plummeted from $56 to $14, and in 2002, it had to write-off $99 BN, double
what people expected. This was the worst write-off in corporate history, and losses
would add up to $200 BN.
America Online, always breaking records!
In short: America Online was too slow.
It focused on dial-up internet while the world shifted to broadband.
And America Online did try to venture into it, with no success. Perhaps they were too
confident. After all, in 2000, 50% of households in America had internet, but only 3%
had broadband.
But there were other options, like Yahoo and Explorer. And broadband meant
permanent connection. So, if it was slow to react, then who reacted quickly? All those
users! Before the merger, America Online had more
than 30 million subscribers and by 2007, that number was 10.1 million.
And times were hectic. Case left as Chairman, then in 2002, Pittman left as CEO. He
was replaced by Jonathan Miller. In turn,
he was replaced by Tim Armstrong in 2009. Each CEO brought his strategy to try and save
an already sinking ship, and the company went through several changes.
In 2006 it became AOL and the focus was now online advertising. Even Google
participated, buying 5% of AOL’s share for $1BN in hopes of helping in the transition
to broadband.
In desperation, they even made AOL mail and AIM, their star products, free.
So, just eight years after the biggest merger in history, in 2008, Time Warner divorced
from AOL.
AOL’s value plummeted to about $5.5 BN and was now an independent company. But,
at least, it had a clear target: content. And Armstrong showed no signs of slowing down.
But his tenure was chaotic. In 2009, AOL bought Bebo, a social network, for $850
million dollars.
That same year, it purchased Patch, a news site, to help gain traction in content
regarding business, news, and media. But, in 2010, Armstrong sold Bebo (allegedly
for just $10 million). Then, in 2011, AOL bought the Huffington Post in 2011.
They ventured into filmmaking because, why not? And, in 2012, created a documentary
series focused on successful women in male-dominated industries.
Then they sold over 800 patents for $1.1 bn to Microsoft, out of all places.
AND they still had, at that point, dial-up subscribers. About 2 million of them.
By Q3 of 2014, AOL had $271 million
in revenue.
Patch, the news site, lost them money, so Armstrong
sold part of it.
Armstrong had managed to keep AOL afloat by buying other companies, but AOL
was no longer on top of the food chain.
In 2015, Verizon dished out $4.4 BN for AOL. The reason why? Just like AOL in the past,
Verizon wanted to be the one-stop source for all things.
After the purchase, AOL went full into digital advertising, marketing and audience
management, and in 2017 it was merged again. Verizon bought Yahoo’s core business
and merged the two former giants into one division called Oath.
But Oath would have its own rocky times. In 2018, Verizon wrote-off $4.6 BN of Oath’s
value.
Finally, Armstrong had had enough. He left as CEO and now, AOL lingers as the
division of a division. Is it relevant? Probably not. But it used to be.
In fact, it was so relevant, I’m sure the Nigerian prince's daughter, the one with
a lot of money, used an AOL CD to send those emails.
That’s how relevant AOL was. We publish new company failure stories every
week on Thursdays. To stay tuned on those, hit that Subscribe button. See you next week.