Chapter 7

THE STATESMAN

Steve Case


THE COMPETITOR (Scott McNealy):
AOL has the big challenge we all have: it's right in the middle of the vortex of the change. One of the things it has been able to do is adapt and deal with the new and different competitive threats and regulatory environments and technology changes driving the business. This is one business where you want to spend very little time in internal strategizing and a ton of time with your head outside the window, or on an airplane, flying around, trying to figure out what's really going on. Technology in AOL's space is moving way faster than it does in the hardware space or the operating system space or the product space. Steve Case has done a good job of keeping his head in an environment that is swirling like crazy.

Steve Case
is the founder and CEO of America Online.



Steve Case has been at it a long time, which means he's tried more things and failed at more things. I met him in my office in 1985. He had just started Quantum, an online service and wanted to see if we could do some business together. He was an earnest, bright, engaging twenty-six year old man, but I was not keen on the business prospects. First, I didn't see a way to make money. Second, the idea of sitting in front of a computer screen and "communicating" left me cold. I told him so, perhaps too brusquely. Twelve years later, his company, renamed America Online, is the dominant online service in the United States, with more subscribers than the combined readership of the country's five largest newspapers. Part of my charm is that I am always wrong.

The convergence of different ideas, technologies, and cultures is driving the new online medium. Companies like Microsoft have a software-centric perspective. Companies like AT&T are communications-centric. Companies like Time Warner are media-centric. One of Steve's strengths is that he's not an expert in any one area but knows enough about each to be dangerous. He also knows more about how these perspectives intersect than anyone else. His goal is to position AOL at the center of that convergence, with an eye more toward what consumers want and how they want it than toward what software might allow, what communications might enable, or what content might be possible.

Steve Case is "The Statesman." He excels in building strategic relationships, partnerships, and alliances. In the space of two weeks in February 1996, he dazzled the business world by announcing major deals with Netscape, Microsoft, Sun, and AT&T, companies viewed as AOL's major competitors. The day-to-day drama of the unfolding events was more compelling than any novel I have read in years. He could probably retire on the sale of the movie rights to his story.

Steve explains this significant turnaround by saying that these deals are "a recognition that this business is mostly about consumers and mostly about building audiences. If you have millions of people using your service, you have some credibility and momentum that is of terrific benefit to many companies, whether they are technology providers or content providers. People want to reach the widest possible audience, and AOL is that audience. A lot of companies want to work with us‹as opposed to competing with us."

Steve envisions an engaging interactive experience that cuts across not only the diverse categories of entertainment, information, transactions, communication, and education, but also cuts across various technologies, access devices, and communications networks. "Lots of technologies are stirred together to create an interesting base-level platform," he says, "and then lots of interactive experiences are placed on top of that, mostly through entrepreneurial efforts. There's a thirst to participate in this industry. It's very similar to what I felt in the early '80s, when personal computer software emerged as an entrepreneurial opportunity, a magnet for creative minds. The same thing is happening in this interactive space."

Steve plans to take all the parts and assemble them in a way that can excite the imaginations of tens of millions of people on a global basis. He has little use for people who view the industry through the prism of the past, wishing and hoping that their own perspective and business model will prevail. In Steve's new world, the wants and needs of consumers will prevail.

THE STATESMAN (Steve Case): The concept of interactive services on the Internet is starting to move to the mainstream. Millions of people are connected, and more are joining every year. It will be as important as the telephone or television some day, but we are still very early in its development. Only 11 percent of households in the United States subscribe to online services. The question is, How do you reach that mass market? Things that AOL is focused on, such as ease of use, useful services, fun, affordability, and creating an engaging experience, are what it's all about. There's too much focus on technology in the industry, an obsession with bandwidth and the latest browsers. What's much more important is creating a magical interactive experience, for which the technology is certainly an enabler. Human creativity is really going to drive us.

AOL went public in 1992. We had 187,000 subscribers, and a market value of $70 million dollars. Four years later, we have nearly 6 million subscribers, and a market value of nearly $7 billion. The value has gone up a hundredfold in four years, which shows the power and possibilities of this new medium. AOL's circulation is larger than the combined circulation of The New York Times, USA Today, The Wall Street Journal, The Washington Post, and the Los Angeles Times, the top five newspapers in the United States. Consumers are voting to participate in interactive services, and the majority, we're pleased to say, are voting to join AOL.

There are probably many reasons for this, but fundamentally our company has been about people who believe in the possibilities of this medium. They eat, drink, and sleep it. They are not just on a career path. They are building an industry. Look at other companies, Netscape, for example, which came out of nowhere in the last couple of years. Why? The quality of the people. The credibility that Jim Clark provided, the technical insight that Mark Andreessen provided, and the management leadership that Jim Barksdale provided have taken Netscape from nothing to a major leader in this market‹overnight. That's the power of people. In such an important new industry, it's gratifying to see that the key criterion is the people. It's true in most industries, but I think it's particularly true in something that is so new evolving and is so rapidly.

AOL has always been open-minded about partnering with companies. One of the things we've done better than most in the last ten years is establish a tapestry of alliances with many companies from many different industries. In the case of some of the core Internet technologies around the Web, we realized that although we could continue to build these ourselves, the pace of innovation was accelerating, and several companies, including Microsoft, Netscape, and Sun, were pouring in significant resources. It made sense for us to partner with one or more of these companies, as opposed to competing with or trying to replicate what they were doing. We ended up establishing alliances with all of them, because we wanted to have access to all the technologies and also to have some influence over the evolution of those technologies. We decided to work primarily with Microsoft for the built-in browser for AOL, and primarily with Netscape for the built-in browser for GNN (Global Network Navigator), while offering our consumers their preferred choice.

The Microsoft alliance was the one that surprised people the most, because we have been fairly public critics of The Microsoft Network's business strategy, particularly bundling it with Windows 95. We had to take a step back and understand their technology strategy and their willingness to pursue new business models, including bundling us with Windows. The more we looked at the situation, a partnership with Microsoft to provide a wider consumer base with access to AOL through Windows 95 struck us as the right business decision. Competing with companies at one level while you partnering with them at another level is an increasingly typical strategy, though it requires subtlety and finesse.

We are partnering with the Microsoft group responsible for Internet technologies, and we have no responsibility for The Microsoft Network or for content. Our day-to-day interaction is primarily with a group that views us as an important partner. The people in the group are bending over backward to try to meet our needs, because they believe that AOL embracing their technology substantially increases the momentum for Internet Explorer in this Web market. We're just another customer. Obviously, when all the dust settles, it is one company, and Bill Gates is in charge of that company. Part of his job is to balance the different factions and constituencies and do what's best for the industry and what's best for the stockholders. At Microsoft there's a real pragmatism that might not have existed before; it is concerned with recognizing the new realities of the market and what's happening with the Internet.

There is an almost mindless debate about the Internet versus online services, the Web versus AOL, as if there's some inherent tension between them. Over time people will realize that AOL is the leading on-ramp to the Internet. We provide full Internet access and a whole lot more, not just content but also context and community. In this world of virtually infinite choices and no barriers to entry to create content, the battlefield will be context and community, and the ability to build large audiences and commerce and revenue streams, to the overall growth. The perception that content is king is naïve. Content will be king if it's got an audience, and in order to get an audience, you need distribution muscle, which means plugging into services like AOL to make sure that your brand gets out there. There's a sense that if you create a Web site, tens of millions of people will knock on your door, because tens of millions of people have access to the Web. But nobody would be so naïve to think that if you started a new business tomorrow and had the phone company install a phone line, a hundred million people would call you the next day.

There are terrific benefits and wonderful opportunities that accrue to this medium as it moves mainstream. The way we'll get information, communicate with others, buy products, and learn new things will fundamentally change and improve. Some negatives also come with that growth. There is a tendency to have knee-jerk reactions to issues without fully understanding the dynamics. In new industries and new technologies with subtleties that aren't really appreciated, this tendency is particularly dangerous.

The debate over the Communications Decency Act is a perfect case study. A well-meaning legislator inserted this act into the 1996 Telecommunications Bill. The CDA is based on keeping pornography away from children, on making access to pornography difficult for children. If you're a typical politician in an election year, it's particularly easy to vote in favor of protecting the children. That's essentially what happened. A lot of companies, including AOL, immediately filed suit to challenge the CDA. The intent of the bill is fine, but the way it deals with the issue is seriously problematic.

Legislators have not understood what distinguishes this medium from newspapers and television networks. It's more interactive. It's more participatory. It's more like having a conversation in a restaurant than like having stuff flying off printing presses. The interaction and fluidity of conversation are what make these services so interesting. The soul of this medium is people talking to each other. To try to regulate and censor that is problematic, and to try to do that given the global nature of the Internet is naïve. The community standards boards in the United States would probably not agree with the community standards boards in China or Singapore.

We advocate fairly vigorously that you can't put your head in the sand and say, Well, it's a new medium, and since there is freedom of expression, anything goes, then wind up with a seedy Times Square that everybody is scared to wander into. The right answer is to use technology to address the problem by creating tools, like those enabling parental control, so members can customize the service to meet their own particular needs. That's what we're trying to do at AOL. The global aspect makes our business more complicated, because you need to be sensitive to global customs and local laws while remaining focused on trying to build a medium on a global scale. My sense is that there will be some more bumps in the road, but when the dust settles, say five years from now, we'll have in place a reasonable public policy structure that balances the different interests, that recognizes the uniqueness of the medium while also recognizing the legitimate concerns some people have about its potential negative aspects. As long as the approach is disciplined, deliberate, and balanced, we'll be OK.

The penetration of online services in 1996 is not deep enough to have a societal impact, but it will be in four years, when politicians start realizing the number of people who are connected to these services and the influence they have, the way information is discussed and disseminated, and the way polls are taken and so forth. Politicians will say, We'd better make the Internet our friend if we want to get reelected. The pivotal decision point in the presidential election of 2000 may be what happens on interactive services, just as the pivotal point in 1960 was the television debates between Kennedy and Nixon. That was the birth of television as an influential part of society. The same thing will happen in the next presidential election.

Another aspect of interactive online services that we are sorting out has to do with privacy. We have what we call terms of service, which articulate our rules of the road. There are federal statutes that force all email to be private. The situation gets a little more complicated when you get into things like junk mail, which is not necessarily a privacy issue per se, but is a keep-these-people-from-bothering-me issue. That's going to be a tough one. To block people from sending email to other people is a form of censorship. Yet there is a significant nuisance factor if people get a lot of unwarranted, unwanted, irrelevant junk mail when they sign onto a service like AOL. But one of the natures of this medium is communication. If people want to know who you are and you're posting information publicly, they will know who you are, and if they then want to annoy you, they have the ability to annoy you.

We do think you should not be able to use this communications medium to break the laws of the land. The levels of cooperation required by court orders issued to Federal Express or to the U.S. Postal Service, and viewed by society as appropriate, will also be deemed appropriate for the online medium.

The wall you have to climb before you get our cooperation is pretty high. One requirement is a subpoena from a court with a specific information request that is reasonable. Because email is private, we will not know if somebody is using email to send information or pictures that are illegal until it is brought to our attention. If an individual receives information or files that are suspected to be illegal and voluntarily brings them to our attention, and if in our judgment they are illegal‹child pornography, for example‹then we would turn the material over. Often what isn't appropriate is less clear.

AOL has seen significant growth over the last couple of years because we have struck a chord with mainstream America in the kinds of service desired. For example, AOL works pretty well on 14.4-kpbs modems. To handle new areas, we download the graphics to you once and then store them on your hard drive. This may be a little annoying the first time you go in, but the next time you go in, the graphics pop up instantly. The Web doesn't work that way. Every time you go to any area, all the graphics are retransmitted, which makes the Web a terribly unsatisfying experience for people with 14.4-kpbs modems, who make up two-thirds of the consumers today. A growing number of consumers have 28.8-kpbs modems, but even at 28.8, the Web is only marginally satisfying, because it was originally designed for people who had direct connections‹high-speed Ethernet connections on college campuses, and almost unlimited bandwidth. That's Marc Andreessen's original target market, but that's not the way the real world works when you're trying to reach consumers. There's a lot of tension between what technology enables versus what consumers want. Part of what they want is an experience that's satisfying given the hardware and networks they have in place today. This has also been the source of the perception that there's a tension between a service like AOL and the Web. However, AOL emerged quite quickly to provide an easy, useful, fun way to get into and around the Web, as well as to offer a whole sea of content and context and community not available on the Web. It's a more satisfying experience, and it's ten bucks a month. You stick in a disk and click on a few things, and you're up and running.

What's the disconnect? It is the presumption by people in the industry that the mass consumer audience is like them. In the industry we all have high-speed PCs, and most of us have high-speed connections. We are tolerant of complexity, so downloading the latest Netscape alpha browser and installing programs such as Shockwave and Java applets is fun. But all this is out of step with what most consumers want. They're curious about the world of interactive services. They've read a little bit, or their friends use a service, and they want to try it, but they're a little nervous. They want to make sure there's a brand they can trust, a brand that'll make the experience easy and useful and fun and affordable. For millions of people, that brand has been AOL. We hope it will continue to be.

There are lots of reasons why more people aren't using online services, and we're trying to do a better job of addressing each of them. One is that it's too hard. We're trying to make it easier. Another is that people don't think that being online has sufficient value. We're trying to create a more engaging interactive experience with more original content, improved context, navigation, and personalization, so AOL becomes your AOL, not our AOL. By building a sense of community, we can help people feel like members of the service, like participants. At this stage in the industry, and particularly in AOL, we're able to reach out to entrepreneurs and encourage them to join us in the creation of the content technology that can take this to the next step. Our AOL Greenhouse program is an example. We've funded several dozen entrepreneurs and, more importantly, have provided distribution to help build their brands.

In the past year, we've built new brands, like Motley Fool, a community of interest area on AOL that focuses on personal investments. Motley Fool, run by Tom and Dave Gardner, two brothers in their twenties, is a raging hit and one of AOL's most popular areas. We have not been able to create a new brand by leveraging the audience reach of AOL in concert with creativity of bright young entrepreneurs. We made a deal with Simon & Schuster for a Motley Fool book that has now been published and is selling quite well, and we'll probably negotiate now for a TV show and other media forms. In a couple of years, the whole development of new media has turned upside down, because up until quite recently, online services were the last stop on the media value chain, and people said, Well let's repurpose our media a little bit, we'll get a few incremental dollars by licensing our content to one of these guys like AOL, we'll throw it up there and they'll send us checks every once in a while. Suddenly the new media ideas are being nested in the online world, like Motley Fool, which will lead to spinoffs such as books, movies, and TV shows. Almost all the major media brands created in the next decade will be initially nested on services like AOL and then taken more broadly to the Web, and then taken more broadly outside of the interactive world to more traditional forms of media and distribution.


THE PRAGMATIST (Stewart Alsop): "The Statesman?" He's a street fighter. He loves to win. He's floating on cloud nine because he got Bill Gates to do a deal with him.

THE MARKETER (Ted Leonsis): I think Steve is a historical figure and I'm not saying that because he's my boss. He will go down as the William Paley of this business. Paley didn't invent television, Sarnoff did, but Paley was the one who figured out how to build a business model and bring it to the masses and then kept up the quality of programming in the golden days of television. That's what Steve's role here is, to be the voice of the member. Steve focuses on what works for consumers and how people will extract value.

THE CATALYST (Linda Stone): The spirit of AOL reflects Steve Case in many ways. To look at the service is to look at Steve. Wish I'd get flowers as often as I get AOL disks in the mail.


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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.