Digerati - Chapter 18

Digerati - Chapter 18

Ted Leonsis [10.1.96]

Chapter 18


Ted Leonsis

THE GADFLY (John C. Dvorak): One of the most high-energy guys in the business. Always attracted good-looking women. Tells a good joke, maybe that's the key.

Ted Leonsis is president of the America Online Services Company.

"Several people suggested that I meet Ted Leonsis a few years ago, but I didn't know too much about him or his company, Redgate," says Steve Case. "I had breakfast with him in Boston in October of 1993. By the end of breakfast I offered to buy his company, which focused on new media marketing, database management, interactive shopping, and private networks. It was quite clear to me, even in a couple of hours, that he had insights into this medium which would be terribly valuable to us. He was able to absorb a lot of ideas and inputs and perspectives and see the future."

At the time, AOL had 1 million members. Now it has 6 million members, is the first billion-dollar franchise in the online business, and has a market cap of $6 billion. Much of that growth came from Ted's vision and his ability to turn AOL into a media company, instead of a utility. That's probably why Steve paid him $40 million for Redgate.

"AOL saw Redgate," Ted says, "as being first and foremost a broadband and midband kind of programming company, with a lot of relationships with content companies. AOL looked at our intellectual capital. We had about a hundred people that "got it," and at the time AOL had four hundred people. It was a big acquisition. Redgate was generating $20 million; AOL was generating $100 million in revenue per year. Now we're looking at a combined billion-dollar business. That was just two years ago, so the velocity has been terrific. We've had to execute well. There's no manifest destiny for any company in this market, America Online included. If you don't block and tackle, if you don't deliver the product and service well, at an affordable price, you're going to get your butt kicked."

Steve and Ted seem to get along very well and to complement each other's talents. "Steve's Bill Paley, and I'm Brandon Tartikoff," Ted says referring to the founder of CBS and the former programming chief of NBC. From Steve you get an intelligent statesmanlike style; from Ted you get high energy and imaginative ideas flying at you, and by you, like missiles. Ted Leonsis is "The Marketer."

I'm not at all surprised by his great success. In the late '70s, he coined the phrase "new media." I later sold a series of book-disk packages for his List Magazine to Warner Books, one of the megadeals of the software gold rush of 1984. It was, to my knowledge, the first time anybody packaged a CD-ROM in a book.

I ran into him in February 1996 at Richard Saul Wurman's TED conference in Monterey. It had been at least ten years since I had seen him. Ted sat down in the front row next to David Bunnell and me and muttered over and over, "We're the survivors. We're the survivors." Funny, I never thought about myself that way.

For the next half hour, while some New York advertising guy wearing all black showed the audience TV commercials, Ted and I carried on a muted conversation, catching up with each other, hatching new schemes. "Time for you to do your own book," I said to him, realizing that Ted had always been one of the most entertaining figures I've ever met. For example, at TED, he told the following story: For a vacation and an adventure, he invited a group of friends to join him on a trip to Italy. He had chartered a jet to fly the party to the coast, where an exquisite yacht would be waiting to take them on a weeklong cruise in the Mediterranean. "It's costing me a quarter of a million dollars. And you know what?" he said. "If I offered my friends the option of skipping the trip and taking their portion of the cost in cash, I would have wound up in Italy by myself."

As the speaker concluded his remarks, Ted whispered to me, "OK, I've got a book I want to write. How much can you get me for Everything Bill Gates Ever Said Is Wrong?" "For you, Ted," I replied automatically, "anything less than seven figures in an insult. But, perhaps it's not a good idea to burn business relationships. You never know who you're going to need some day." Undeterred, he began to rattle off chapter titles for next year's big best-seller.

The audience applauded, and the speaker received the ritualistic bear hug from Richard (Ricky) Wurman. Ted was the next speaker. As he rose, he leaned down and, with a toughness that is not apparent in his friendly demeanor, growled "I'm the only one in the industry who isn't afraid of him. Watch. Listen." I watched, and listened. At the conclusion of his forty-five-minute oration, Ted got his hug and left the stage having convinced the large audience of industry heavyweights (for at least a minute) that Microsoft's future in the interactive media world might be equivalent to that of a 20-watt FM radio station in central Greenland.

We made plans to talk further during the conference, but he disappeared. I called his room and found that he had checked out of the hotel early. Clearly, something was up.

Several days later I phoned him at his office in Virginia. "What about the book?" I said. "Gotta clear it with legal," he replied lamely, and hung up.

Then came the wild week in which AOL announced a series of deals with AT&T and Netscape and finally a major strategic relationship with Microsoft. I wondered how all this related to his biting talk at TED only weeks before.

"We won," he said when he resurfaced. "It's all over. We're the Number One online service."

"Right on, Ted. You're the greatest, I replied. "What about your book?"

What book?"

THE MARKETER (Ted Leonsis): In terms of marketing, would you rather be loved or needed? That's a question I ask all the time. Utilities are needed but they're not loved. So are cable companies and phone companies. If you're a brand that's loved, you don't even have to know who your customers are. Coke doesn't know who its customers are, but it has the most important shelf space‹a position in a consumer's mind. We want to be a brand that's loved, and that's where word of mouth becomes very positive. We can send out a billion disks, but if members don't love us and tell their friends and relatives about us, we won't win.

AOL is in the entertainment and communications industry just as Ted Turner is in the news/entertainment/information business, and not the cable business. The Internet is not a market. It's a set of technological and business models that smart entrepreneurs will adapt to their businesses.

I was leading the charge at AOL against Microsoft when it was introducing MSN. I was thrilled when Microsoft originally named its service The Microsoft Network. We're called America Online. It's not our network. It's our members' network. The Microsoft Network is Bill Gates's network. That's like calling MTV the Sumner Redstone Viacom Channel. When was the last time you saw a kid walking down the street wearing a Sumner Redstone T-shirt? Branding becomes important. Since I've been here, Prodigy and CompuServe were going to put us out of business. Microsoft was going to put us out of business. Now the RBOCs (regional Bell operating companies) are going to put us out of business. We aren't threatened because we think that the consumer will always migrate to a simple, affordable, high-value proposition. If they root for you, if they want your brand to succeed, you can win.

The concept of "content" is so poorly defined. One, there's the myth that content is king. How can content be king when there are 253,000 free Web sites? If it were king, people would place a high value on it and demand their shekels from the taxpayers. What's happened is that content is not what drives a business. It's the story. It's the emotion. It's the way that the information is packaged and programmed. If you look at how newspapers started, how magazines played a role, and how television broadcast networks emerged, they were essentially picking and choosing the content that they wanted. What does a programmer do? He cancels shows. He finds talent and he packages it up. Nobody's doing that on the Web right now, whether or not people want to consume information and consume content in new ways remains to be seen. 

My son, who's seven, is already living in a nonlinear digital environment. He spends more time on the computer and with videogames than he does with television, so he'll be trained to want to live in the more granular, interactive, on-demand world.

The concept that publishers are content providers who can repurpose existing content like a Hollywood studio is ludicrous, especially when you look at what Hollywood does. Studios open their movies in theaters, and then package them up and sell them to HBO and Blockbuster and the networks. Magazine publishers and newspaper publishers looked at the Internet as being an ancillary revenue stream. They would repackage their content and make it available in CD-ROM, then put it on the Web or America Online. That's proven not to work, because this medium demands more. Content is not the end-product. Content is the activator of the conversation and the community.

Esther Dyson jokingly says that I am the world's biggest bartender and essentially I pour the same beer as everybody else, but when people came into the bar I use content to activate the conversation, and my job is to provide context and navigation. That's where the value will accrue. The two big hits in cable, MTV and HBO, essentially take other people's content and transmit it over someone else's pipe, but they package the materials using their own brands and market those brands as a destination. No one is doing that yet on the Web. We're seeing the first glimmers of that with some of the search engines and some of the packagers. Certainly AOL will continue to try and do that.

The Web is a lonely, cold, ice-gray place. Going from site to site is like going from empty restaurant to empty restaurant. First we have to build a sense of community, so that when you're in a site you know who else is in that site with you. Not only will you go into that site and come back for the camaraderie, but you will stay longer in that site than in other sites. One of the big issues that advertisers and transactors face is that people go in and out of sites. They're browsing. This is bad for a business model. What we have is an anti-market. Browsers are free, Web sites are free, and access is, for the most part, provided by corporations. No money is changing hands, yet everybody holds on to the myth that advertising will follow. Advertising will follow when there are brands and a site can show that people spend time there, that there's repeat activity, and that it has become a community. 60 Minutes has a viewership; people spend the hour with 60 Minutes. People spend thirty minutes with Friends or Seinfeld. That's not happening on the Web today.

What we are going to have in the near future is an infrastructure that enables chat and enables the avatars and the people-to-people aspect of the Web. Whereas today the aspect is people-to-content, the big win will come when you have people-to-content-to-people. Once you have that you'll get some accountability, and then you can start to overlay advertising. The big hit will come in the transaction area.

The Web is a daytime phenomenon. People get their high-speed access to the Web through TCP/IP networks at their companies, which are paying for access. The Netscape homepage, for example, peaks at about four o'clock. On the other hand, AOL is a prime-time medium. Most of our usage occurs from seven to eleven in the evening, and is at 14.4-kps rate or less, so we have to optimize for this narrowband world. That consumers are coming to the Internet is a myth, at least in the evening. Fewer than a million people, at max 1.25 million people, are paying for direct-dial Internet access from their homes. Netcom is the big Internet service provider, with 300,000 to 400,000 members. We have added that number of subscribers to AOL in a month. That's because we are programming an environment.

Our strategy at AOL is to become a lifestyle brand. We want to have the permission to be a media company not unlike Disney‹to be on TV, to do books and magazines, to sell T-shirts and other branded products in malls, and to show that we represent something regardless of the transition medium. When DBS [digital broadcast satellite] came out, no one said to Ted Turner, CNN is at risk. There's a new distribution method. He said "that's great! I'll get millions more people that can't get cable who are subscribing to DBS." The companies that understand marketing and brands and how to weave together areas of interest and communities of interest will win in the long term.

We call the online world "new media" but at some point this won't be new media. It will be the media. When you look at the transitions in media history, it wasn't the newspaper barons who created and pioneered radio, and it wasn't the radio moguls who made TV, and it wasn't the TV execs who made cable. Each generation had its own set of entrepreneurs. People in the mainstream are looking at the Net or at online services as being a niche business, but if we were a cable company, we would be third largest behind Time Warner and TCI. The most amazing statistic to me is that between the hours of ten and eleven at night, we're getting three hundred fifty to four hundred thousand people to log in. The Larry King Show on CNN reaches about five to six hundred thousand. MTV gets six to seven hundred thousand. In eighteen months we'll surpass Larry King's and MTV's ratings.

If someone had said ten years ago that in the aggregate more people would be watching a cable channel than the three broadcast networks, you would have said that was impossible. But that's what happened. Today 55 percent of all homes watch one of a hundred cable channels, and 45 percent watch ABC, NBC, and CBS. It is not out of line to say that in three years, in the aggregate, more people will be on computer, interacting over the Net, than will be watching a cable channel. The tide has shifted.

Two things haven't caught up with this. One is that, for the most part, none of us are providing acceptable levels of service or creativity. Bandwidth has had a lot to do with that, but only in the last two years have companies like AOL become the hip place to work. Look at industries that had their golden age. In the '60s, advertising and Madison Avenue were in their golden era. In the '70s the great young minds were going to Hollywood. In the '80s you went to one of two places, cable or high technology. The new interactive services business of the '90s, combines advertising, entertainment, and programming like cable technology in a new way. Kids who used to want to work at Microsoft now want to program an online service or Web site or work on their own as entrepreneurs. It's just a matter of time until the talent, ideas, and the capital start flowing in. In ten years we'll look back at this ASCII world we've been living in, and AOL and MSN, and perhaps some of the new entrants, will look more and more like CBS or ABC.

For the foreseeable future we're locked in the current business model. AT&T has announced its world Net product with a lot of hoopla. It's in two hundred cities. We're in five hundred cities. The main complaint we get from our members, the reason they cancel, is that they can't get a local access-number. The phone companies and cable companies have yet to deliver on the promise to make bandwidth ubiquitous. What we've seen in our business is that every time you provide higher speed transmission rates, people stay longer because they have a more pleasant experience. My bet is that the general bandwidth is going to become ubiquitously slower rather than faster. I'm almost offended when I see people building Web sites with lots of audio, video, and graphics, because they are testing their sites in their TCP/IP environment with high-speed connections such as T1 lines or, at minimum, ISDN, whereas the average home user connects at 14.4 or 28.8. Try connecting even at 28.8 and see how unpleasant the experience can sometimes be.

I spend most of my time dumbing things down. That's one note of caution for this entire industry. Television and Hollywood have the perspective that the whole world is thirty-one years old, ethnic, single, and lives in Manhattan. The programming sensibility of television is very New York. We've developed the same kind of prejudices on the Web. We have a Cambridge/Berkeley/Silicon Valley outlook. That's not what makes things mainstream. Vanilla ice cream is mainstream. McDonald's is mainstream. You can't be clubby and cliquey and inward. I read Wired, but I'm in the industry. I love Wired, but I don't believe that it is an inclusive publication. In fact, it's an exclusive publication. That's what a lot of people do on the Web. Rather than make it for everyman and everywoman, they overcomplicate it. What we've learned at AOL is the simpler, the easier, the better.

I'm "The Marketer" because I don't care about what anyone in the industry says. I care only about what our members and consumers say. As a marketer you have to provide service and value to consumers. Then you have to lead them from one place to another so they continuously buy your services. In our business, when we become inbred, we drink our own bathwater. We're a business in an industry that has the luxury of having intelligence in the network, where you can talk to and communicate to consumers all the time. I have learned that if you package things, and if you build a brand, you can overcome any kind of technology and make the transitions from generation to generation of technology. People could consider us a marketing and programming company. I don't think anyone, if you mentioned AOL, would say that we don't have enough members, or we don't have enough buzz, or we're not mailing out enough disks, or we don't have our ads all over the place. I'm extremely conscious that this is a brand business.

For example, I went shopping with my wife in a mall. We bought Coke from the grocery store. We went next door to a Blockbuster, which was doing a promotion with Coca-Cola. We bought suntan lotion at a CVS pharmacy, where there was a big cooler of Coke. Then we went next door and I bought a slice of pizza and got a Coke. As we walked back to the car, it stuck with me that Coke was everywhere. That's what we're doing with AOL. It's on Windows 95. It's included with every modem. It's shrink-wrapped with every computer and in magazine about the Web. AOL will become an impulse buy, a product providing the service that you need access to, where trial is important. I believe we are the first company, the only company, committed to making the brand and the trial ubiquitous to all consumers.

Our main competition is the weather. Our usage goes through the roof when we have big snowstorms. When spring arrives, we see some dips in usage. A second area of competition is leisure-time activities. There's a battle waged every night in the home. You finish dinner, then what do you do? Do you talk with your husband, wife, boyfriend, girlfriend, kids? Do you watch television, read a magazine, or go online? Some people do all at once.

What strikes me most is our usage pattern. Thursday night is the highest TV viewership, and it's our worst night. We're competing with Jerry Seinfeld, so I'm much more concerned about Seinfeld than I am about Bill Gates. No one's going to turn on the network to listen to Bill Gates, but 20 million people have a date every Thursday night from nine to nine-thirty with Jerry Seinfeld. We're not that good yet. We will be. If we look at that kind of compelling programming as our competition, we can become a new media. If we look at CompuServe and other online services as the competition, we'll be setting the bar far too low.

THE LOVER (Dave Winer): AOL is in a major struggle to keep up with its growth. If you want to understand where AOL is at and why they get a bad rap, you have to understand that.

THE WEBMASTER (Kip Parent): A lot of people talking about the Internet don't know what they're talking about or say the same type of stuff. Leonsis is an interesting guy to see. He has vision, and he's able to communicate it. If I'm going to listen to a speaker, he's the kind of speaker I want to hear.

THE SEARCHER (Brewster Kahle): Ted is a marketing extravaganza. He is good at spinning a tale that is amazing, fun, and based on real numbers. Credited with inventing the term new media, Ted seems to thrive on pushing technology into the mainstream. 

THE CATALYST (Linda Stone): I've always thought of Ted more as "The Seller." He could sell anything to almost anyone. How can a person be the mayor of Vero Beach, Florida, the CEO of Redgate, and the president of American Online? Ted is the consummate relater. He made me a little nervous when I first met him because he's so smooth, and there's something about someone that smooth that makes you wonder what's really going on.

THE PRAGMATIST (Stewart Alsop): 90 percent bullshit, 10 percent brilliant.

THE IMPRESARIO (Richard Saul Wurman): He seems at first like the electronic car dealer to the world and says things I don't really want to hear but are correct.

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Excerpted from Digerati: Encounters with the Cyber Elite by John Brockman (HardWired Books, 1996) . Copyright © 1996 by John Brockman. All rights reserved.