The Rise And Fall (And Rise?) Of AOL

AOL, which recently abandoned its 'pay to play' model, is now trying to succeed as a free service in a very crowded marketplace. Can it succeed? We look at

October 4, 2006

17 Min Read
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AOL -- the company that was once at the forefront of the Internet revolution -- is now at a crossroads. Will the company that was among the first to popularize online chat be able to reinvent itself in order to click with the savvier user of today? Or will it fade away, written off as a company that couldn't keep up with the ever-changing world of technology?

Until recently, AOL was best known as an ISP for those who knew little or nothing about the Internet. Many of its users were attracted to it because of its reputation as a family-friendly starting ground. On the other side of the tracks, more experienced users were often critical of the service, pointing to its "walled garden" approach, the software's tendency to override other applications, and the way AOL made it difficult for its users to quit the service.

But on August 2, 2006, the company surprised everyone when it announced that it would be providing its services free of charge. According to the company, it was just a part of its goal of putting AOL "back on a growth path." And on October 4, 2006, AOL introduced the beta of its new OpenRide software, which offers AOL adherents a new interface with which to check their e-mail, surf the Web, IM their buddies, and check out AOL's media offerings (music, video, etc.).

It's a complicated history: A company that was once ahead of its time is now struggling to keep up with competition that was born years after AOL began hooking up its first users. And its gleaming image, once held up as an example of a company that knew how to deliver a desirable, quality product to families nationwide, is now tarnished due to poor customer service. Now, having eliminated its fees and introduced a group of new services, AOL is trying hard to catch up.

Begin At The Beginning

To understand AOL's fall, it's important to understand how it rose to such tremendous heights. (For a blow-by-blow account of AOL's history, check out our AOL Pop-Up Timeline.)

AOL would not have succeeded without the Commodore 64 or the Apple II. AOL started in 1983 as an online gaming company called Control Video Corp. (CVC), which was founded by William (Bill) Von Meister.

The Rise And Fall Of AOL

•  The Beginning•  AOL Is Born•  Does AOL Get It?•  Will Work For Free

AOL Pop-Up Timeline

One year later, the company was in dire financial straits. An investor in CVC, Frank Caufield, brought in Jim Kimsey as a manufacturing consultant and Steve Case came on also, initially as a part-time consultant. Case, Kimsey, and engineer Marc Seriff convinced Commodore Business Machines, maker of the popular Commodore 64, to research the viability of providing an online communications service for its customers in 1984. Until that point, CVC was only providing one online service: Gameline, developed for Atari. When Commodore accepted the deal, CVC licensed software from another online service called PlayNet, and their online service, dubbed Q-Link, was off and running with e-mail, chat, file-sharing, games, and other features.

But while Commodore's management had the foresight to embrace online communications, and to invest in CVC, the computer maker was struggling financially. So CVC, which dropped von Meister and was renamed Quantum Computer Services in 1985, started to look for other partners to expand -- and secure -- its business. Quantum forged an alliance with Apple, helping that company bring AppleLink Personal Edition (ALPE), an online service offering support and community for Apple users, to market.

Then, in 1988, Quantum debuted PC-Link in a joint venture with Tandy Corp. (now Radio Shack), a service for use with IBM-compatible machines (Q-Link was solely for Commodore computers). PC-Link offered news and reference services, and had two levels of service: a basic news and reference service, and one which offered more advanced computer hardware and software forums.

America Online Is Born
In 1989, Quantum enabled AppleLink and PC-Link users to talk together online via a service dubbed "America Online." Although the AppleLink and PC-Link services were still run separately, users could send e-mail from one service to the other. Later that year, the AppleLink and PC-Link monikers were completely dropped; the former AppleLink and PC-Link services were now called America Online.

The name change for the entire company would come two years later, in 1991. It was also around this time that the average PC user was finally able to join America Online using a graphic interface called GeoWorks overlaid over the DOS operating system. The company wouldn't move to Windows until 1993.

AOL soon found its niche: As a safe place for beginners on the Internet, especially for children, through a walled garden (restrictive) approach to the Internet. AOL's association with user-centric Apple also underscored AOL's commitment to make its own service user-friendly.

And some of AOL's early initiatives were groundbreaking. For example, in its days as Quantum, it partnered with LucasFilm to produce the online game Habitat, one of the first attempts to build a large-scale commercial multiuser virtual environment, and its offspring Club Caribe. In 1996, AOL debuted AOL Instant Messenger (AIM), which helped bring instant messaging to the masses.

However, this same approach soon made it the target of the tech-savvy, who objected to its restrictive approach to the Web, and derided the inexperience of its user base. "AOL was considered Internet training wheels," says branding consultant Rob Frankel. "It offered a closed system on the Web. It had mainframes that cached the Web and offered people appropriate pages. AOL thought it could keep people captive."

The Rise And Fall Of AOL

•  The Beginning•  AOL Is Born•  Does AOL Get It?•  Will Work For Free

AOL Pop-Up Timeline

If AOL executives did think that, it soon became clear they were mistaken. By the end of the 1990's, even non-technical users were becoming comfortable exploring the Web and discovering that other ISPs would give them unlimited access to the "information superhighway." But while some users left AOL, more joined, encouraged by AOL's simple interface and the thousands of floppies (and later CDs) with which it flooded mailboxes.

A Fateful Merger
In January, 2000, after years of steadily increasing subscribers, AOL announced that it planned to buy Time Warner in a move that was supposed to position AOL as a media powerhouse. The deal was finally approved a year later.

The new company was called AOL Time Warner, and the deal was touted as creating the world's first fully integrated media and communications company. The purchase was conducted in an all-stock deal and was valued at $350 billion. As a result, AOL gained access to CNN, Warner Brothers., and Sports Illustrated, highly valued Time Warner properties. Steve Case, the chairman and chief executive of AOL, became chairman of the board of the new company, while Time Warner's Gerald Levin took the reins as AOL Time Warner's CEO. The company had more than 100 million subscribers and 80,000 employees. But steering such a large ship soon became a challenge.

Does AOL Get It?
In a 2003 report, the Pew Internet & American Life Project wrote that broadband Internet usage in the United States grew from 6% in June 2000 to more than 30% in 2003. AOL Time Warner was obviously paying attention -- in March, 2004, after a deal with Comcast failed to materialize, AOL inked an agreement with Covad Communications to offer its members a service called Broadband Connect. However, Broadband Connect was a high-speed DSL connection without any accompanying content or applications -- AOL was still charging members for services other ISPs offered free, including AOL screen names, e-mail accounts and client software.

There are other ways in which AOL Time Warner seems not to "get it." Industry watchers acknowledge that the vast amounts of video and recordings of Time Warner have been woefully underutilized by AOL. Laura Betterly, CEO of InTouch Marketing Group, notes that AOL could have been a leader in the pay-for-video download space but was not. "AOL had huge market share early on, but strategically did not change with the times."

Recent news reports suggest AOL is making moves to better showcase its wares. For example, in September, 2006, AOL launched an initiative that opens its video search platform to third-party developers and content owners.

Even with this, though, the Time Warner/AOL merger's promise of transforming the Internet has largely gone unfulfilled. No less than co-founder Steve Case, in December, 2005, admitted that he wanted to "undo" the merger. Case stayed with the company as CEO for a couple of years after the merger, but resigned in 2003, a year in which AOL Time Warner was $26 million in the red. He left the board of directors in 2005.

The Caretaker Syndrome

AOL's apparent loss of direction is symptomatic of what Frankel calls the caretaker syndrome. "The first generation makes or creates the product. That person understands the brand, loves it, and grows it. Eventually it becomes too big and it's handed off to the second generation," Frankel explains. "The second generation just spends the money the product generates. They are [managing] without the brand's vision. Finally, the third generation loses the company. They are doing everything just to preserve quarterly performance."

By 2006, it was obvious that AOL's old business model was no longer working. At its peak in 2002, AOL had 34 million members and was worth $200 billion. Today, it's worth one-tenth of that, and its membership rolls are shrinking faster than you can say "Yahoo!" In fact, in the second quarter of 2006, the company reported it had 17.7 million members, nearly one million fewer than in the first quarter of 2006.

The Rise And Fall Of AOL

•  The Beginning

•  AOL Is Born•  Does AOL Get It?•  Will Work For Free

AOL Pop-Up Timeline

As a result, on August 2, 2006, AOL took a radical step: It announced that it would no longer charge its members for e-mail, storage, discussions, and security features. In a published statement, AOL chairman and chief executive officer Jonathan Miller said: "Providing [our members] with their familiar AOL software and e-mail for free, over any broadband connection, will be critical to our future success. For members who've left us over the past two years, we've kept your e-mail address. When this effort is fully operational in early September, you'll be able to come home again -- for free.... The AOL Network has over 100 million unique visitors per month, and we'll work hard to engage Internet users with new products that will be available for free on the Web."

Free At Last
AOL seems ready and willing to make a monumental shift in its approach. In a further effort to become more attractive to the entire range of Internet users, the company has opened up access to its APIs.

One way of doing that is through the alliance formed earlier this year with, which runs online programming competitions. "AOL seems to realize that the first building block is to get a good relationship with the development community," says TopCoder CTO Mike Lydon. "You can then leverage that community, having it create features for the less technically savvy. For example, the technically savvy can create more easy-to-use features. So it's targeting the tech-savvy to ultimately target the less technically-savvy."

An AOL spokesman agrees. "The entire focus of our company has shifted to provide a range of services, to include an all-inclusive software client to very granular 'long-tail' experiences for users who want to have a more discrete experience," says Andrew Weinstein. It's important to AOL's viability, he notes, to continue to promote its simple approach and not alienate its traditional customers. By providing open APIs for products such as AIM and Mapquest, AOL hopes it can attract developers who will take those offerings even farther, making them even easier to use for AOL's core audience.

"Ease of use is in our DNA," Weinstein says. "AOL applications are not designed for technologists, but technologists designed them We are focused on building great products, making them available to everyone and making tools available to developers. When you do that, word gets out."

As Lydon notes, it's a process that is going to take a while to gain traction. Further, the commitment has to be genuine, he warns, or else the backlash in the community could be fierce. But if AOL lives up to its commitment to be a true partner with the developers, Lydon believes that it will be "very powerful to get buzz going, to be virally in that community."

Will Work For Free

So what are AOL's chances? "AOL was known to offer a kind of 'Internet Lite'" notes Betterly. "But is that even wanted now? There's no more so-called 'walled garden,' but who will turn to AOL for content when there are so many other well-established brands to choose from? What compelling reasons must AOL give potential customers for switching?"

AOL contends that there is plenty worth coming over for: video services, music, and -- perhaps central to its existence -- communities. For example, Weinstein points to AIM Pages, a new social networking site in which users design and personalize their own pages, as the foundation for what AOL terms a "next-generation community offering."

Crucial to AOL's success are those 100 million unique visitors that Miller referred to in his statement. Advertisers will only be interested in AOL if there is healthy traffic flowing in and out. And that traffic will only be maintained if they are attracted by AOL's offerings.

The question facing AOL right now is: Can it get its brand right? Does it know what to do, and, just as importantly, does it know how to do it? Some believe it does. "Just imagine the power of the AOL brand once it gets every employee focused on the one big goal of building the world's biggest and most engaged audience based on brand utilitarianism," says Robb Hecht, adjunct marketing professor at Baruch College and owner of the blog Media 2.0, where he analyzes business branding issues. "AOL owns and operates [instant messaging service] ICQ. It owns and operates Mapquest, Netscape, Moviefone, Weblogs, Cityguide, and And, now it has other non-AOL branded media properties such as In2TV, TMZ, and Engadget that are all hits. If AOL gets its brand right, AOL could re-establish itself as the 'go-to' social online media property it was originally destined to be."

"AOL is, in fact, re-focusing on community via its new AIM Pages and blogging platforms," Hecht explains. "In this way, AOL will truly re-enter the social networking business, a category the company actually invented."

The Rise And Fall Of AOL

•  The Beginning•  AOL Is Born•  Does AOL Get It?

•  Will Work For Free

AOL Pop-Up Timeline

But Frankel is among the experts who doubt the company can pull it all together. "AOL has no message. It could reinvent itself, but it won't," he says, noting that one big step toward correcting AOL's course would be for it to develop a strong brand strategy. "A good brand strategy is getting people to see you as the solution to their problems. You start to figure out what people want. Then you over-deliver so much that they can't live without you. But AOL has the worst marketing and advertising. Remember, it's not about what you want to sell, it's what they want to buy." In other words, if customers are not compelled to get their free e-mail through AOL, they won't.

In fact, according to Frankel, the 'free' movement within AOL is probably not enough to turn things around. "It smacks of a desperation move," Frankel says. "I'm guessing that they think 'If Yahoo can be totally ad supported, we can too.' AOL is just following the market, not leading it."

A better tactic would be for AOL to figure out what people want, determine what they can't get from competitors, and then deliver it, all the while exceeding expectations, says Frankel. But for any company, much less a behemoth, that's a tough row to hoe.

Accentuate The Positive

One important item to put on AOL's "to-do" list, notes InTouch's Betterly, is to rid itself of its current reputation of being difficult to deal with. "AOL is losing members, and losing the public relations battle," she says. By focusing on what AOL has done well in the past -- serving family needs -- Betterly believes the company can substantially squash its current negative image.

One instance of that is AOL Parental Controls, a free service, which covers Web site screening, report cards for parents, online timer limiting time/amount of access, and pre-approved e-mail/IM lists. In addition, the company is ramping up the KOL Channel for kids and an area called RED for teens.

"Ironically, although you'd think AOL should dump its family mentality in light of its competitors like Yahoo, the key to AOL future branding success vs. Yahoo could be to actually capitalize on its family friendliness alongside targeting the tech-savvy community currently owned by Apple," says Hecht. "AOL's core message should remain true to being family-friendly as perhaps 'the old standby' online service and the originator of online social networking, but the company messaging should certainly refocus the tech-savvy [user on the idea that] that AOL is not a 'walled-garden' or a 'gated community,' but is, rather, a gateway to the new utilitarian Internet."

Will AOL make it? Focusing on its core strengths of community and ease of use, using its video and music capabilities, and then getting the word out to users who realize they can't live without you are enormous tasks. Still, time will tell whether AOL has the stamina to get back on top, or if it will simply run out of gas.

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