AOL Is Dead

Posted on January 14, 2003

You’ve probably heard by now that Steve Case is leaving AOL/Time Warner. Naturally AOLTW shareholders are cheering, as they’re tired of watching their stock deflate, and they pin the blame on Case and his management of the merger.

This is 100% wrong. Seeing Steve Case leave AOL should be a sad moment for anybody who cares about the Internet.

It’s been fashionable for a long time for Net-savvy people to dismiss AOL as a backwards haven of grandmas and kiddies, who pollute the Net with their cluelessness and the world with their ubiquitous AOL CDs. This kind of elitism, frankly, burns me up. It’s incredibly shortsighted and shows a clear misunderstanding of how the Net, and AOL, have developed.

AOL started out as a private network without any connection to the Internet. At the time, the world of online services was completely dominated by one company: CompuServe. CompuServe was the eminence grise of the online world; its interface was a “green screen”, completely devoid of graphics, that would look just as much at home on a VT100 terminal as on a modern PC. But it had gotten there first, and had been smart enough to forge alliances with companies like Sabre to provide services that appealed to its audience of businessmen.

(My first online experience took place on CompuServe, in 1985, dialing in over a 300 baud modem. It completely blew my mind! The experience of having access to a huge information service at my fingertips was incredible.)

So here’s little AOL, trying to break into a market dominated by this staid monolith. How could they hope to succeed? Steve Case came up with a cunning battle plan. Instead of playing on CompuServe’s turf, he literally changed the rules of the game, by leaving behind the green-screen interface and instead providing a rich, graphical interface to his service. Unlike his competitors, he had the insight to see that PCs had become so graphically powerful that green screens were hopelessly outdated, and he designed his service to make the most of the PCs that were just starting to be available to nearly anybody. Additionally, he had the other key insight that the way to compete with CompuServe’s powerful services was not to try to match them, but rather to emphasize something different altogether — community. The AOL environment was completely built around bringing people together. These two features combined gave AOL the weapons it needed to take on CompuServe. (I should know; after 7 years of using CompuServe, I tried AOL for the first time in 1992, and saw from the ground floor how revolutionary Case’s service was.)

Did it work? Let’s put it this way: today AOL owns CompuServe. And do you know anybody who uses it?

As times changed, Case & company showed an amazing ability to reinvent their service to fit the zeitgeist. When the Internet took off in 1994, AOL moved faster than anybody expected to interoperate with this new network, by providing access first to e-mail, then to newsgroups, then to the Web. When the standard pricing for Internet access became established as a flat $20/month, AOL dropped its per-minute charges like a hot potato. And in the process, they blazed trails with technology such as instant messaging (AIM was the first product to make IM a tool for people other than geeks) and browsers (by backing the Mozilla Project even as development of its revolutionary Gecko engine dragged on for four years).

And then there was the crowning achievement — the merger with Time Warner. At the time, the move shocked the world; at the peak of the dot-com boom, why would AOL waste time buying an old media company like TW? The only person I saw who understood Case’s plan at the time was Robert X. Cringely. Cringely wrote that the merger was really Case’s way of getting off the dot-com train; Case knew, argued Cringely, that the bubble was doomed to burst, and before he did he wanted to convert his insanely overvalued stock into some real assets (read: Time Warner) before the market woke up and realized that AOL wasn’t worth nearly what it was trading at. “If that was to happen to AOL,” wrote Cringely, “then having the diversification of owning CNN and HBO and all those magazines and cable properties would look very, very smart.”

Nobody was paying attention at the time, but Cringely nailed it. NAILED IT. If you were an AOL stockholder before the merger, before you bewail the deflation in Time Warner stock since the bubble burst, ask yourself this: what would AOL be worth today had the merger not occured? In other words, what would AOL be worth if it was still just a dialup Internet service? Probably not much.

The merger was Case’s biggest gamble ever — a way to try and protect his company from the train wreck he could see looming ahead. In the end, it didn’t work; AOL and Time Warner were just too different to fit together comfortably. And of course, when it didn’t work, the Time Warner folks (who should only be angry at themselves for being so swept up in the Internet hype that they practically gave their company away) howled for Case’s head.

Now that they’ve got it, what lies ahead for AOL? Probably the same fate that befell CompuServe — AOL will become just a brand, just a name that TW keeps around because it has better consumer recognition than “Time Warner Internet” would. And given TW’s insanely stupid Internet decisionmaking in the past, it seems likely that AOL will drift into mediocrity and, eventually, irrelevance, as its technically savvy customers switch to broadband (AOL has a broadband service, but I’ve used it and, trust me, it sucks) and the rest of its base gets peeled away by services like MSN. There’s no evidence anywhere to suggest that TW has any plans to use AOL as a platform to innovate in any meaningful way. Which, in the end, is the saddest legacy of all; for all the scorn it’s suffered from the Internet cognoscenti, AOL has helped an entire generation discover the beauty of the global network, and the reason it was able to was because for fifteen years Steve Case saw the future more clearly than almost anyone else. Here’s hoping that he holds his head up high as he leaves the company he built behind.