Saving AOL

The online giant's woes are legion. Will new software and a bet on broadband come to the rescue?

By Farhad Manjoo

Published October 15, 2002 7:29PM (EDT)

In the mid-1990s, around the time America Online was last routinely described as a business without a future, folks at the Usenet newsgroup were preening themselves for their apparent foresight. For some time they'd been declaring that AOL was bad news: that it offered a watered-down version of the Internet, that the company's members were morons and numbskulls and, worse, that the firm cared little for the free expression that was the hallmark of the infant World Wide Web. Finally, in 1995 and 1996, important people -- the media and some regulators -- seemed to be agreeing, and overflowed with anti-AOL glee.

Today, however, as AOL faces what may be its roughest period ever, with its ad revenue shrinking and subscription growth sluggish, is strangely quiet. There is the odd "AOL sucks!" post, or some witless, personal barb aimed at Steve Case, AOL's founder, but there's no passion to it. "To be honest," wrote one poster recently, "I can't see why the group wouldn't be overflowing ... Maybe it's just common sense nowadays -- everyone knows AOL sucks."

It can't be a good sign for America Online that even its most ardent detractors don't care enough about the company to count the myriad ways in which it may suck. AOL, in 2002, is both the world's largest ISP as well as its most beleaguered. Its merger with Time Warner -- which was initiated in early 2000, at the height of the dot-com party, but completed in 2001, when all the guests were leaving -- is seen as a failure on Wall Street. The Securities and Exchange Commission is investigating AOL's "aggressive" accounting practices. Since the merger, the new company's stock price has fallen by more than 70 percent. In response, a series of management changes and a high-profile "restructuring" were undertaken during the summer, and the online service was reduced to just a small unit within the entertainment behemoth it once consumed. Steve Case is now the only former AOL exec with a senior position at AOL Time Warner, and there is talk of dropping both him and the letters A-O-L from the company.

On Oct. 15 in New York, America Online will launch a new version of its connectivity software, which executives promise will address many of the problems plaguing it. Although AOL has released new software each fall since 1998, AOL 8.0, the new version, is hailed as more than a small refinement. It is, instead, the "epicenter" of AOL's strategy to reinvigorate itself and "ignite a new round of innovation and creativity in the industry as a whole," AOL's CEO, Jon Miller, said in a speech recently.

At a time of crisis, AOL is banking on a strategy that takes both a step back to the glory days and a leap forward into the high-bandwidth future. The new software is intended, executives say, to re-energize the sense of community that once tied AOL users together but that was lost somewhere in the dot-com frenzy of the late '90s. Simultaneously, the company is hoping that broadband users will need the same kind of handholding that its masses of dial-up devotees once thrived on.

Neither approach is a sure thing. Few observers are convinced that the new software will save AOL. In an odd twist of online history, experts are saying today the same thing about AOL that people in had come to believe in the '90s: that the company is an anachronism, offering a closed-off, proprietary-content "online service" in the age of the World Wide Web.

"Even if the Internet bubble had continued to swell, AOL's days would have been numbered," James Surowiecki writes in the October issue of Wired. "The reason is simple: It was never really an Internet company. AOL was based on the idea that people needed to live in a halfway house while they became accustomed to the Net." But, the thinking goes, people are now accustomed to the Internet, especially in the United States, AOL's biggest market, and they no longer need a halfway house. If folks can get a better, faster, cheaper online experience by ditching AOL, they'll do it in a heartbeat.

Such arguments have haunted America Online for years, but they've become more important in the nascent age of broadband. The vast majority of AOL's 35 million subscribers dial up to connect; AOL's high-speed DSL service has just half a million customers, about 4 percent of the total broadband market. Analysts blame AOL's poor broadband showing on the fact that the service is a bit more expensive than competitors' systems, and on what's called a "mature market," by which they mean that people interested in DSL are too sophisticated for AOL.

But the thing that people seem to be forgetting about AOL is how it became popular in the first place -- by connecting people. AOL's early dominance was no fluke. In an age when getting online was difficult, AOL may have attracted dial-up customers by giving them a nearly foolproof product, but it kept those customers by offering much more than ease of use. Some observers dismissed AOL as a mere "walled garden," but to many AOL subscribers, the garden offered a bounty that quickly addicted people -- other people. AOL's killer apps were discussion forums, chat and instant messaging, services that were thrilling, early users say, because they let you connect to others in a way that seemed truly new.

At some point during its growth spurt, the critics say, AOL lost interest in improving those key areas of the system and instead focused on creative ways to make money that didn't always benefit users. The company now says that its era of benign neglect is over; it once again cares deeply about its members. The new software improves some of AOL's community services, and it even offers perks to people with high-speed connections. There's still no sign that AOL has hit on a way to make a fast connection an interesting community application -- but that's no reason to count it out.

More than any other broadband provider, AOL is touting its interest in making the fast Internet the easy, friendly, proprietary, content-rich Internet. Whether it can pull off such a system and make money is unclear, but its plans aren't crazy. The firm is betting that broadband users are not very different from the dial-up users who first made AOL big -- that however sophisticated they may become, AOL members will still like a simple interface and a colorful, cheery online place where everybody knows their name.

Despite the splashiness of AOL 8.0's launch -- it will be unveiled at Lincoln Center's Avery Fisher Hall, at a "star-studded" bash hosted by Dana Carvey and featuring Alanis Morissette -- the software does not look, to an outsider, like anything other than your standard AOL. AOL's trademark cartoonish look-and-feel remains the same, and the service's various sections and subsections will be familiar to most users. But John Kaufeld, the author of "AOL for Dummies," says that he's been using 8.0 for several months, and "it's the first software that I've seen in probably four years that I'm excited about."

AOL 8.0 allows users to customize several aspects of the service, such as the colors of the desktop, or to choose one of six versions of a "Welcome Screen" they'd like to be greeted by when they sign on. To experienced computer users, that may seem like trivial stuff, but Kaufeld says that to AOL users, those changes will be very big news. "You could argue, well, dang, it's not that impressive -- there was one Welcome Screen and now there are six," Kaufeld says. "But culturally, that's freakin' huge. AOL tends to operate under the Mercedes-Benz approach: 'We have figured out the best way to present information to you. Why would you want to change it?' With 8.0, they're saying, 'Maybe you would enjoy having some choice.'"

Of all the changes in 8.0, Kaufeld particularly likes AOL's improvements to e-mail. AOL has long been criticized for being spammy. Maybe an AOL address signals a certain lack of sophistication that appeals to bulk e-mailers, or maybe the sheer number of AOL members makes them a good target market; in any case, AOLers are often flooded with unsolicited e-mail. To reduce it, "the mail client now looks at your address book to see if you know the person mailing you, and it displays a different icon if you know the person," Kaufeld says. "When you send an e-mail, it automatically adds that person to your known-person list, and they've added a sorting tool to quickly show you e-mail from only people you know."

Several new features in AOL 8.0 are designed to improve what Jeff Kimball, AOL's vice president of product marketing, calls the "community aspects" of AOL. One utility quickly finds others who share your interests to chat with, and another allows people who are talking to each other to listen to the same song at the same time. "I'm not sending you a file that you listen to later," Kimball says, describing the service. "I'm getting you right now, while we talk. I know you like the Stones, and you're in my life, and as we listen to the song I say, 'Remember the time we went to the concert three years ago?'"

AOL has made much of its renewed focus on features meant to improve the user experience rather than the bottom line. AOL's CEO often mentions that the hallways in company's Dulles, Va., headquarters are plastered with signs that say "Members rule!" Such reminders are a good idea, because many who follow AOL, both inside and outside the company, agree that for a while, members did not enjoy such exalted status.

Depending on whom you speak to, you'll hear either that AOL lost its way very early in the Internet age -- around 1995, when the company first began experiencing exponential growth rates -- or late in the game, right before the dot-com bust. AOL says it happened more recently. Ted Leonsis, the vice chairman, candidly told BusinessWeek that AOL's "last two product releases -- 6.0 and 7.0 -- were primarily driven by how we can create inventory to run ads and how we can bring [magazine] subscriptions to our partners at [Time Warner]."

But AOL veterans say that money corrupted the company earlier. In his book "AOL by George!" George Thornally, who ran AOL's Mac forum when the company had fewer than a hundred thousand users, writes of how the company was slowly infiltrated by business school grads who didn't know how to run an online service.

In a stream-of-consciousness narrative that at times degenerates into a meandering ramble, Thornally paints early AOL as the kind of friendly, high-minded place that few people associate with the company today. In his remembrance, AOL was a place where people argued weighty issues, where the most personal of problems were discussed without much interference from AOL execs, and where the discussion forums reigned supreme.

"We made America Online," Thornally says of his forums, "and they didn't bother us. The analogy is the actors and the front office in Hollywood. The front office runs the business, but the actors make a studio. People come to see the actors. And that's how we were in the forums on AOL."

But in the mid-'90s, when Thornally's contract was up and he went to renegotiate, the bottom-line-conscious management refused to re-sign him. AOL seemed to be forgetting its community.

"They really lost touch with it," Kaufeld says. "People were doing screwy things that turned into more of a focus on, How can we sell our customers' 'eyeballs'? Everything was sponsored. Borders brings you this, Pep Boys brings you that. At some point all of the discussion boards started getting moved off to one side. They got shoved into an area organizationally where it made no sense. They changed it so that if you were in the autos channel, you get all kinds of branded, sponsored content, and the autos forum would have been moved off into a whole different area, sort of the Siberia of the online world. When they did that they killed a lot of the community side, because -- I can just see some MBA grad saying this -- 'Community doesn't really pay.'"

Still, subscribers stuck with AOL, and more people and then more people signed on. In the late '90s, AOL's growth rate was extraordinary. "There's this hallway at their headquarters where they have the milestones marked on the wall," says Gary Arlen, the president of Arlen Communications, an interactive media research firm in Bethesda, Md. "It's amazing -- it takes like six months to go from 10 to 11 million, but six weeks to go from 21 to 22 million. At one point in the late '90s, AOL was adding a million people a month."

The age of fast growth is now over. Arlen says that about 60 percent of American households have Internet access, and most researchers believe that the number will hover at that point for some time. Unlike TV, which has a penetration of more than 95 percent, Internet access doesn't seem to be a must-have for everyone. A certain percentage of the population can't afford it, and another chunk has tried it but not liked it.

"Everybody who wants to be online is online," Arlen says, and that's not good for AOL. "AOL used to be a point of entry to many people online, and there are now relatively few newbies." Still, during the last year, AOL's growth rate hasn't been terrible. The company has added a million new users in the last nine months. Microsoft's MSN service, which has benefited from prime placement in Windows and what Arlen calls "very heavy marketing," is adding a million users every six months -- but at 8.7 million subscribers, it is far smaller than AOL. EarthLink, which has around 4 million members, is growing as slowly as AOL is, but according to the company, it has managed to alter "the mix" of its subscriber base, switching many of its dial-up users to high-speed service. (Microsoft, which is releasing version 8.0 of its MSN software on Oct. 24, declined to comment on its online service.)

Wonderful as the advent of the high-speed Internet might be for users, broadband is not generally considered to be a great thing for Internet service providers that make most of their money from dial-up customers. The main reason is economic: Profits in the dial-up business are good, while the profits in broadband are paltry. To provide a user with a broadband connection, an ISP like AOL or EarthLink must essentially rent space from a phone company or a cable company at rates of between $30 to $35 per user per month, says Dave Burstein, editor of the newsletter DSL Prime. An ISP that offers access at $45 a month, as AOL does, is making as little as $10 per month on a broadband customer, as opposed to more than $20 on a dial-up user. (Burstein says that the wholesale rates charged by telephone and cable companies are "totally out of line with cost" and that some regulation to remedy the situation might be in order.)

The unfavorable economics of broadband are expected to deal a severe blow to AOL; Merrill Lynch has estimated that the migration of users from dial-up to broadband may reduce AOL's cash flow from a projected $850 million in 2003 to as little as $235 million in 2005. (This is the worst-case scenario.) But, analysts say, if AOL doesn't offer its users a compelling reason to switch to AOL's own broadband plan, they may go somewhere else.

AOL is thus often described as being in a kind of ISP no-man's land, stuck with millions of dial-up users who might leave at a whim for broadband service elsewhere, or who might go with AOL's broadband and automatically become lower-margin customers. The ideal for AOL would be for every one of its customers to keep dialing up, indefinitely -- but to its credit, the company realizes that's not a plausible scenario. However slowly, broadband is coming, Burstein says; ISPs would be wise to heed that trend.

AOL's broadband "strategy" is anything but clear; it has offered no far-sighted strategic vision for broadband, and it has not said how it plans to deal with the lower subscription revenue from high-speed connections. The one thing AOL has been clear about is that there's no such thing as a "mature" subscriber, that people interested in broadband are not any less interested in an easy service.

"I get this question a lot," Kimball, the marketing vice president, says of the theory that people can become too sophisticated for AOL. "This is how I respond: I start off with my daughter who is 7. Will she come to me when she's 12 and say, 'I've grown up steeped in technology, so what I really need you to do is go build me a way to read my mail that is really complicated'? We think that simplicity or ease of use doesn't map to experience."

Kaufeld, the author of "AOL for Dummies," says something similar. "My wife is someone who's written for several computer books and she's not a tech slouch, but she doesn't care," he says. "She does everything through AOL because she says it's just easier, and because her friends are on AOL." Kaufeld adds that every so often, he gets an e-mail from someone saying they're leaving AOL. "But then I get another e-mail saying, 'I'm back. I couldn't stay away.'"

When you think about it, the idea that people would eventually feel hemmed in by AOL's proprietary interface and content has always been somewhat fanciful, the wishful thinking of access-only ISPs and the AOL-haters on AOL is certainly ideal for novice users, but after you've used it for some time, made friends there, and learned the ins and outs of cyberculture, are you suddenly going to leave the system because you're too smart? Maybe, but that doesn't seem likely. And according to the numbers, there's no real evidence suggesting that AOL's subscriber base is shrinking.

But if AOL's prospective broadband users have no immediate reason to leave AOL, is there an immediate reason for them to stay? That seems to be the one question AOL is struggling hardest to answer.

Perhaps with the recognition that the company's greatest asset is the exclusive, proprietary content it provides, the company is taking its cue from TV and offering scheduled content in AOL 8.0 -- programming offered at specific times on specific days. "Not only do I need to be online because that's where my friends are and because I've got to check my e-mail," says AOL's Kimball, "but also because it's Tuesday night, when there'll be new artists online, and Thursday is movie review night. We're creating a model where I've got to be online Saturday morning, I've got to be there on Sunday night. I really think we're creating this pattern through the week where you feel like there's value in all of the time online."

Many of these programs, the company says, will be enhanced for high-speed users, with video and audio tailored just for AOL members. The company also says that some of its "community" features will benefit from high-speed connections -- two DSL-equipped AOL members chatting with each other might simultaneously watch the same video, for example.

Is this the kind of thing that broadband users want? It may be, the experts say, but there's no guarantee. Burstein, of DSL Prime, says that nowhere in the world has broadband adoption been spurred by exclusive content. "It sounds good but I ain't seen any proof it's going to work," he says. "The idea is, there's so much on the Internet already, why would you need that content?" Especially, he adds, if AOL charges more for its service than other ISPs, since the one thing that high-speed customers do seem to respond to is price.

But is it really the case that the Internet is brimming with free multimedia content? Perhaps in the days of Napster that was the case, and maybe people who know where to look can still easily find what they want.

But what about everyone else? What about the people who have not yet seen the light of broadband, who don't know how to find a video codec, who can't figure out how to install a peer-to-peer file-sharing system while avoiding the scourge of parasite software? In other words, what about AOL's natural customers? Even if they'll now be going at full speed, maybe they'll still want their Internet to come with training wheels.

Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

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