The expression on his face was contrite; his response to many questions was to look uncomfortably into the camera, occasionally smiling sheepishly. The man who recently made an appearance on prime time television in the United States had little in common with the superstar he once was.
Steve Case -- AOL founder, Internet pioneer and former billionaire -- said he preferred to talk about the future, about his charitable activities and about his plans to save the American healthcare system. But then he did say something to reveal his true state of mind. "I'm disappointed and frustrated," he said. When asked whether he regretted what he had done, Case responded: "Yes, I'm sorry I did it."
Case was talking about the fate of his brainchild AOL, and the consequences of the merger he facilitated in 2000 with Time Warner Inc., celebrated at the time as the "deal of the century." The newcomer had acquired a well-established conglomerate, which included CNN, Time, and Warner Brothers, for $106 billion. It was an unprecedented deal that was considered a world record at the time.
By 2002, the newly combined company set another record when it reported the biggest annual loss in corporate history.
Six years after the disaster of a merger, America Online is now confronted with the remnants of its now-antiquated business model. Its current executives are responding to the crisis by taking the company in a radically new direction, away from its outdated subscription model and toward a free portal funded entirely by advertising. The move represents a complete break from AOL's previous strategy. It is likely also the company's last chance at maintaining a seat at the table of Internet giants.
Defending their territory
Other Web veterans are also changing with the times. Google, Ebay, MSN and Yahoo are all vying for the rapidly growing online spending of both advertisers and consumers -- and for dominance on the Web. And all of them are trying to defend their territory against the rapidly increasing number of small companies and newcomers vying for attention, clicks and advertising revenues.
The result has been a rapid increase in competition and multimillion-dollar takeovers not seen since the heyday of the New Economy. Last week alone, Google signed a $900 million deal with MySpace and Viacom's MTV unit acquired Atom Entertainment, an online provider of video clips, for $200 million. The rapid expansion of broadband connections has made completely new business models possible. Companies that once offered little more than e-mail and search engine capabilities are now transforming themselves into entertainment machines with a global reach. Young entrepreneurs like Chris DeWolfe and Tom Anderson, the founders of MySpace, have suddenly become global players, while once-derided "old media" barons like Rupert Murdoch have repositioned themselves through billions of dollars worth of Internet acquisitions. The Case generation has been shaken to its core. And a question many had believed was already answered is relevant once again: Who are the winners in the battle over the Internet of the future?
Just in the US, almost $12 billion was spent in online advertising spending last year. And corporate consulting firm PriceWaterhouseCoopers euphorically predicts that spending on Internet advertising will continue to rise -- to $52 billion worldwide four years from now. The race for a share of these new advertising dollars has clearly already begun. After all, no one wants to allow Google, with its 40 percent market share and 78 percent growth in the second quarter of 2006, to dominate the industry forever.
America Online's story shows the peaks and the valleys that the Internet has to offer. The company, with its official mailing address at 22000 AOL Way, Dulles, Virginia, became the icon of the Internet in the 1990s. It was the first major Internet service provider to enable its subscribers to log on through an easy-to-use graphic user interface. This meant that millions of people worldwide experienced their first online adventure courtesy of AOL. The company made Internet easy, as Boris Becker pointed out as AOL advertising icon: "Even for non-techies like me." And millions joined Meg Ryan in hoping for those magical words, "You've Got Mail."
From fairy tale to fizzle
The value of the company grew even faster than the number of its subscribers. By 1999, AOL's share price had increased by 6,000 percent, its market value was as high as $164 billion and the self-confidence of AOL's executives seemed limitless. "We are a company full of superstars," employees at AOL headquarters liked to say.
In early 2001, when the company acquired media giant Time Warner, the wondrous fairy tale seemed complete. Major shareholder and CNN founder Ted Turner admitted that to him the deal felt like the first time he'd had sex, 42 years earlier. AOL CEO Case predicted that the newly merged company would soon surpass General Electric as the world's largest company.
But Case's dream fizzled a short time later -- the collapse of the New Economy and a financial scandal turned the fairytale into a horror story. "Everything went wrong," an executive at AOL headquarters now admits, an assessment which retains validity today. In late July, AOL inadvertently disclosed hundreds of thousands of sets of user data. Furthermore, subscriptions have plunged since cable and telecommunications providers began offering Internet connections at significant lower prices.
The search for the recipe for future success is on -- and not just at AOL. Ebay's business in its major markets, the United States and Germany, has cooled off considerably, causing the online auction service's stock price to drop by more than 30 percent in the last two years. Major acquisitions in the areas of Internet telephony (Skype) and payment systems (Paypal) have yet to provide the hoped-for boost to Ebay's bottom line.
Part II: Buying Milk on Amazon
Amazon CEO Jeff Bezos, another hero of the first Internet generation, is also searching for other sources of revenue. Today his company, launched as a virtual bookstore, even sells milk -- much to the derision of the online community, which has written hundreds of sarcastic milk "reviews" recently and is amusing itself over what's happened to Amazon's purchasing tools, useful for ordering books but less so when it comes to buying groceries. A user interested in buying milk on Amazon's site is informed that those who bought milk also bought tomatoes and grapes.
Even Google could run into problems in the long term, despite its phenomenal track record. The Silicon Valley giant earns its money almost exclusively through the Internet search business or, to be more precise, through the inconspicuous text ads that appear on consumers' computer monitors and correspond to their search results.
But the Internet is rapidly changing and is becoming a diverse source of entertainment, filled with videos, music and games, online meeting places and "user generated content." Animated, colorful advertising is increasingly in demand in the shrill world of the "Web 2.0" era. In this respect, Yahoo, Microsoft MSN and perhaps even AOL could ultimately be better positioned than Google. Eric Schmidt, the CEO of Google, is trying to spread the risk by constantly offering new services. Though routinely celebrated by the Internet elite, Google's inventions have made little impact on ordinary users. Its trip planner and map program (Google Maps) is in third place behind AOL and Yahoo, its e-mail function, Gmail, is in fourth place, and Google Talk, a chat service, was a major flop. Only 44,000 people used Google Talk in June, while AOL's comparable service, AIM (AOL Instant Messenger), attracted more than 41 million users. Google Finance is in 40th place among the finance sites on the Web. Its online meeting place, "orkut," has only managed to acquire about 280,000 regular users in the United States after two years. By comparison, market leader MySpace has 52 million users in the United States alone.
Logging on at AOL, searching at Google or Yahoo, bidding at Ebay and buying at Amazon -- this straightforward online worldview of the past no longer works now that all major portals offer everything on the same site. This has prompted the major players to form alliances when they are unable to develop features and services on their own. Yahoo has just formed an alliance with Ebay and with Microsoft's MSN, while Google last week clinched what was probably the most sought-after deal of the day. For $900 million, the company acquired the rights to run MySpace's advertising and search business for the next three and a half years -- a triumph for Rupert Murdoch, who was ridiculed when he acquired the social networking and entertainment forum for $580 million last year, a price that was considered vastly inflated at the time.
Cutting jobs in Europe
And AOL? In December, Google acquired 5 percent of the company for $1 billion. AOL's fortunes have improved considerably since then, with advertising revenues jumping by 26 percent in the first quarter of this year and 40 percent in the second. But revenues from its subscription business still make up the lion's share of AOL's sales and profits.
This makes the Time Warner executives' gamble all the more risky. It is by no means certain that future advertising revenues will offset the loss of AOL's subscription business, which remains highly profitable. Of course, the other alternative would have been to milk the old America Online for as long as possible, and then shutter the business.
The hard realities facing the US parent company are currently being portrayed as party games at AOL's German subsidiary. Colorful invitations to a "Social Networking Day" hang on doors at AOL's Hamburg headquarters, doors leading to conference rooms with harmless-sounding names like "World Peace." The invitations mention "fun" and a "summer party."
But the real purpose of the "Social Networking Day" in Hamburg on Tuesday will be to generate ideas for the future of AOL in Germany, which will by no means be as rosy for the German subsidiary's 1,500 employees as the cheery invitations might suggest. Indeed, the company plans to cut 5,000 jobs worldwide, including 3,000 in Europe.
In Germany, AOL plans to sell off its Internet access business and instead develop its free online portal, AOL.de. In doing so, AOL is bowing out of the race for DSL customers, a business in which the one-time trendsetter was already struggling in Germany. AOL relied on slow modem connections for far too long, while market leader T-Online promoted new, faster technology. Charles Fränkl, the head of AOL Germany, says the company owes its woes to "unattractive underlying regulatory conditions." "(Deutsche) Telekom was always given preference," he says, "and the competition was only allowed to join the fray once it had become firmly established." But for industry insiders, these are nothing but excuses with which Fränkl hopes to gloss over his predecessors' mistakes.
With AOL now selling its German Internet access division, its remaining 2.5 million German customers, including about 1.1 million who use DSL, will be forced to switch to one of AOL's previous competitors. A number of different providers have voiced interest.
AOL Germany also plans to concentrate on marketing its portal and on advertising in the future. "Otherwise we would have had to invest a lot more money in marketing the Internet access business," says Fränkl. "At 40 percent net sales growth in the portal division, it didn't take us long to reach a decision."
Upsurge in advertising revenues
AOL hopes to develop a partnership with the purchaser of its Internet access business, an arrangement Fränkl calls "co-branding" and "joint scope marketing." Free access to e-mail, social networks and expanded services in the Web 2.0 era are also expected to produce an upsurge in advertising revenues in Germany.
"It won't be easy," says Fränkl, "MySpace is already there, and 15-year-olds aren't interested in AOL. We know that. But we do have a real opportunity to get involved when it comes to established values like ease of use and security."
What will happen to his 1,300 employees in the subscriber business is currently up in the air and will depend on the buyer. "We have more than 2.5 million customers. We cannot simply cut off their service," says Fränkl. Jobs in the portal area, which employs a staff of about 200 at the company's Hamburg headquarters, are also in jeopardy. "We will bring the German portal business closer to the United States," he says.
Fränkl himself, who has only headed AOL Germany since late last year, hasn't moved his family from his home in Düsseldorf to Hamburg. He says he prefers to take a wait-and-see approach.
Translated from the German by Christopher Sultan