Newsreal: The Banana Peel Syndrome

The critic who exposed America Online's ill-fated telemarketing scheme explores why the nation's biggest online service keeps making such PR gaffes.

Published July 29, 1997 7:00PM (EDT)

on July 1, America Online quietly rewrote its Terms of Services, giving subscribers 30 days notice of certain changes, along with a warning that continued use of AOL "constitutes acceptance of all such changes." Buried among the changes were plans to "make available" the phone numbers of their 8 million subscribers to telemarketers.

I stumbled across it by accident July 16, and mentioned it in an AOL newsletter I send out to more than 12,000 e-mail subscribers. Last Tuesday -- nine days before the changes were to go into effect -- Bloomberg picked up the story, followed by CNET, the Wall Street Journal and CNN. Two days later, according to the Wall Street Journal, New York Attorney General Dennis Vacco, who has been something of a thorn in AOL's side, contacted the Virginia-based company. Thursday afternoon, reportedly minutes before Vacco took to the airwaves on CNBC, and with a firestorm of criticism raging, AOL withdrew the telemarketing scheme and has since spent considerable time attending to damage control.

This is hardly the first time. A journalist friend kidded that AOL doesn't just shoot itself in the foot -- it blasts away at every toe. Last November, AOL thought $20 a month for unlimited access for all its members was irresistible, but Vacco, who heads the consumer protection committee for the National Association of Attorneys General, thought it should still be the customers who decide. In January, he also pointed out that many AOL members "are getting no access whatsoever." One day before Vacco was to file a lawsuit on the matter, and with bad publicity rising, AOL "heard the footsteps" and amended the plan.

AOL members have suffered through numerous infuriating service problems. Many subscribers still remember the 10 days in December when AOL blocked any Web page from its browser that was using Apache's Web server. E-mail brownouts are a recurring event. Last August, just days after an AOL executive assured reporters that it was immune to nationwide outages, AOL made headlines when the entire service went down for 19 hours. Last month, after major delivery problems were noted, we were told that AOL's e-mail system was "more reliable than ever." Test messages I sent five days later still took 12 hours to arrive -- on four consecutive days. In tests I conducted up to July 17, the mail rarely arrived in less than eight hours. Mailing list subscribers reported delays of several days. The service is also plagued by unreported mini-outages affecting subsets of subscribers or parts of the service.

Yet, as AOL's latest marketing campaign insists, "We're ready for you," and to prove it, consumers are being barraged with a new avalanche of television ads and software CD-Rom and floppy disk mailings. Life goes on and everything's fine.

But is it? AOL may be a masterpiece of marketing, but after nearly a decade of deficit-financed growth, it needs to morph into profitability, and soon. Last September it abandoned its dubious accounting practice that had marketing and promotion expenses treated as assets. And those expenses are huge. Burying the nation in floppy disks -- 3.5 AOL disks for every U.S. household, according to one estimate, -- has cost AOL over $500 million dollars, or $200 per subscriber in one quarter's tally. Writing off $385 million of accumulated expenses, AOL gambled on getting subscriber and revenue growth by matching the Internet's standard all-you-can-eat pricing. Besides leaving them strapped for capacity, it has left them even further strapped for cash.

To compensate, AOL is now looking to cultivate "alternate revenue streams," like selling subscriber lists to telemarketers. At least one recent advertising deal on AOL, with Tel-Save, included provisions for a cash advance. AOL users now find their mailboxes and chat rooms include mini-billboards. Signing onto the service triggers pop-up ads, which are on by default. (At the little-publicized "Marketing Preferences" keyword, deactivating them is choice No. 15 -- below "If you own a CD-ROM drive, enter 'X' here." Last week it was so clogged with users trying to opt-out of the telemarketing phone calls, the Washington Post reported some subscribers couldn't even access it.)

CEO Steve Case has said all along that his plan was for AOL to corner a significant chunk of the online world's users, even if it involved some loss-leader economics, and then use them as leverage for money-making schemes. So, subscribers should expect more unwelcome surprises as AOL seeks to reward its investors' patience. AOL should also know, if it doesn't already, that it is being carefully watched. Earlier this month, Vacco raised concerns about how AOL's all-you-can-eat pricing gels with last week's new $2-an-hour rates for AOL's game areas.

By David Cassel

David Cassel is an Oakland, Calif.-based freelance writer covering the Internet and popular culture.

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