Road-kill on the information superhighway
AOL's closed-network instincts tempered by market demands

They're road-kill. That was this columnist's brilliant assessment of America Online Inc.'s chances for survival following the early 1996 release of the Netscape 2.0 browser, the first that allowed the public to easily surf the Internet.

Although it had 5 million users, at the time AOL was locked in a three-way battle for control of what then called the information superhighway. Its main competitors were two online services backed by big dollars from major U.S. corporations: CompuServe, (H&R Block Inc.) and Prodigy, (Sears, Roebuck and Co. and IBM Corp.).

Unlike "closed" services offered by the three main competitors, that billed users exorbitant hourly fees, the release of Netscape 2.0 allowed home users to bypass the giants, and obtain unlimited Web access with smaller independent service providers for a fixed monthly fee.

As a result of the challenge posed by the openness of the Internet to AOL's more closed system, the company's share price came under increasing pressure from the investment community, and its already high "churn rate" (the rate at which subscribers abandon a service), began to skyrocket.

AOL's simple, easy-to-use service, began more and more to be derided as the junk food of the Internet, by analysts and competitors, both forgetting how much Americans junk food.

As my colleague Andy Riga noted in his recent articles on AOL Canada, the company did not emerge as a major contender in the Canadian market until last July. At that time it announced a strategic alliance with the Royal Bank of Canada which included the bank paying $60 million for a 20 per cent equity stake in the service provider.

AOL president Steve Case reacted to the Netscape challenge by taking three key decisions. The first was to open up the company's internal network to allow users easier access to the Internet. Next members were given an unlimited usage option, for a fixed monthly fee. Finally the company's BootLink browser was scrapped and a deal was inked with Microsoft to license Internet Explorer.

The actions served to open AOL's users to non-AOL content on the Web, and to provide them with greater flexibility. Coupled with the company's aggressive consumer-products approach to direct marketing, they vaulted AOL ahead of its competitors to become the world's leading ISP with 23 million members, including about 40 per cent of the U.S. market. AOL eventually bought out CompuServe and left Prodigy behind as a bit-player in the market.

AOL's move to open up to the Net is important for both advertisers and consumers alike to note, in the wake of its proposed merger with Time Warner Inc.. The deal has many people questioning whether it is going to lead to the formation of a series of integrated media conglomerates, steering subscriber traffic to exclusive content such as news, music and video.

These concerns are legitimate, considering AOL's favorable bias toward closed systems, which is rooted first major Internet contract to build and operate an online network for Apple Computer Inc. in the late eighties. Apple's tendency both toward closed architecture, and easy to use interfaces rubbed off on its supplier.

As early as 1991, when AOL had only a handful of subscribers, Case told a Wall Street Journal reporter that the company would be the biggest online service in the world and, later, would become a multimedia empire.

The AOL-Time Warner merger announcements had reverberations throughout the business world and are provoking a spate of mergers of all kinds as evidenced in Canada by the Rogers Communications Inc. - Le Groupe Vidéotron Ltée merger and BCE Inc.'s offer to acquire CTV Inc. and Teleglobe Inc.

Many of mergers are in response to fears of an AOL-Time Warner keiretsu closing off market choices to both advertisers and consumers. But there is a good body of evidence that those fears are unfounded.

Although in the past, AOL preferred exclusive deals with content providers, the merger with Time-Warner gives it far less incentive to keep its content exclusive to AOL subscribers and more incentive to seek the widest possible audience through its Web distribution.

AOL sites are the most visited Web properties with a weekly unique audience (individuals visiting a site or viewing a banner ad) of more than 25 million, and the company has been leveraging this traffic to boost advertising sales, the fastest growing portion of its revenues.

In fact AOL is now the biggest ad platform on the Web, although it is difficult to calculate by how much, since the company groups E-commerce and ad revenues.

When Time Inc. and Warner Bros. merged more than a decade ago, "people assumed that 80 per cent of the deals done with Time Warner would be done through cross-media selling," said Rich Hamilton, CEO of Zenith Media Services, to Advertising Age magazine earlier this month.

Cross-media selling implies bundling attractive with less attractive content and selling the package at a discounted price. This restricts choice because advertisers have to buy bigger packages and support inferior content. "That did not happen and that won't happen here," said Hamilton.

Another factor mitigating against AOL doing too much tweaking to keep its network closed is its fickle customer base, and the high churn rate discussed above. If AOL customers perceive that they are being steered to sub-standard content the company will lose subscribers.

It would be naive to deny that AOL will continue to do all it can to keep its subscribers within its services. But in the past, the company has also kept a good ear on what the market is saying.

One of the good things about being an armchair quarterback is that when wrong, as this columnist was in his assessment of AOL, we may grumble a bit, but in the end it just amounts to a big "oops," and then we get on with our lives.

But many of AOL's competitors, who did not listen as closely to the market, wellthey're road-kill.

 

Chart: AOL sites are the most visited Web properties with a weekly unique audience (individuals visiting a site or viewing a banner ad) of more than 25 million.

Courtesy of Advertising Age, Neilsen/NetRatings

 

Diekmeyer can be reached at peter @peterdiekmeyer.com


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  © 1998 Peter Diekmeyer Communications Inc.