by Kara Swisher
Things seemed to reach a particularly frenzied peak at a live charity auction held in July 1999, which pretty much the entire Internet pantheon attended. The purpose of the event was to raise money for a nonprofit outfit called Schools Online and it was held by the pool at the posh Ritz-Carlton seaside resort at Laguna Niguel, California, during Industry Standard magazine’s first big Internet conference. In very short order, the Industry Standard had become the business bible of the Web, selling a record number of ad pages and making barrels of money doing it.
At that particular moment, the Internet was going gangbusters and its leaders handed over more than $350,000 in a few short hours for what was referred to as “unique items of unclear value.” That was an understatement: $17,000 for dinner with homemaking guru Martha Stewart; $4,000 for $2,400 worth of toys from online retailer eToys; $89,000 for an executive search; and even $22,000 to sup with AOL’s top three deal makers, Myer Berlow, David Colburn, and Miles Gilburne. And there was more. Sunil Paul, founder of a company that helps deflect unsolicited email, paid $53,000 for the singular privilege of pushing eBay CEO Meg Whitman and three other Internet leaders into the pool. Cybercash founder Dan Lynch bid $10,000 to buy the sexy dress—a size 4 Herve Leger—that another entrepreneur had worn in a controversial software ad.
Perhaps most jaw dropping of all to me, Lynch also forked over $12,000 for a navy-and-silver tie belonging to superstar venture capitalist John Doerr. I was sitting at the table with Doerr and his family while a bidding melee broke out. His eight-year-old daughter got excited and wanted to bid, too. Doerr let her raise a hand to the $1,000 mark, but stopped the little girl when it got higher and quietly told her: “To pay that much for a tie is a little crazy.” Later at the conference, I ran into that entrepreneur’s wife who had chastised me for writing too much about the profligacy of the era—and she started in on me again. Not about the money, okay, got it.
Of course, the Industry Standard would go out of business within two years of this party, due to the Web economy’s implosion, a potent symbol of how quickly Internet time took place. Yet it was all about the money back then, but in much more insidious ways than just a tie that costs double the salary I got in my first job. Not surprisingly, the number of companies actually ready to go public—that is, that were fully “baked”—dropped precipitously by late 1999. The reasons were many, including the need to beat competitors out the door, the need for additional funding from a nearly free money market, and the need for public currency to undertake mergers and acquisitions. The VCs were deftly offloading the risk they usually carried for many years to willing public investors, who seemed eager to take a risk immediately. And the bankers seemed interested only in the flood of fees that came to them.
Now, I am not naïve about this. I did not expect much more from the moneymen, who knew the getting was good, so they got. I will never forget when a banker told me that he was thinking of taking a company public that was “prerevenue.” I suggested that he just cut to the chase and start mugging the average investor right on the street. He was still laughing at my joke when I hung up.
But even those individual investors—those folks who turned out to be the last suckers in line—did not care at the time. They were going along for the very profitable ride, caught up in a day-trading frenzy that was hard to explain and impossible to stop as stocks soared. That was helped a lot, I must admit, by the media’s incessant cheerleading, as it trotted out one magazine cover after the next celebrating the boom and did fawning interviews with Internet CEOs on the sets of cable stations like CNBC. And even those journalists who were more circumspect also failed by not consistently pointing out that the revenues and profits were terribly out of sync with the valuations.
Many tried, of course. In one instance in 1998, one of the Journal’s reporters, George Anders, wrote a devastating front-page piece about a medical-practice Web site for doctors called Healtheon, which was backed by such Valley luminaries as Netscape cofounder Jim Clark and the venture firm Kleiner, Perkins, Caufield & Byers. Despite Healtheon being keyed up for an IPO in the fall, Anders correctly reported that doctors in pilot programs found that its complex products were unusable and that its losses were massive. In other words, Healtheon was still a very unproven startup, and possibly a dud.
Healtheon delayed its offering, because of the article and also a temporary deterioration of market conditions. But it was soon out the IPO door again, grabbing tens of millions of dollars by February of 1999. In fact, its share price quadrupled immediately and reached as high as $125 a share that golden year. When Anders emailed Healtheon venture investor Brook Byers about another time soon after the story ran, the reply he got was typical. “George, why did you run the Healtheon story at the beginning of their road show?” wrote Byers. He was irked that Anders had actually dared to raise questions about critical business issues in the middle of this nonstop party and had—if only temporarily—slowed down the fun.
That kind of experience proliferated everywhere on the Internet landscape. It was clear to all that investors didn’t seem to care, at least for the moment, about niggling details like earnings, viability, and costs. Thus, company promoters prevailed quite naturally over company builders. The mantra was clear: Think of market share and not revenues, spend more money to get more scale, and don’t worry about the past since the future was so much easier to sell. Indeed, anyone who was reticent did lose, by not participating in the constantly upward trajectory of stocks.
David Rocker knew that all too well as a frustrated short seller of stocks—that is, an investor who bet on stock price downturns rather than upticks. I had met the increasingly apoplectic Rocker years earlier, in 1996, as he unsuccessfully battled AOL by harping on its shoddy accounting practices. He had later attempted the same thing with a range of Internet stocks, and kept losing—despite the fact that he was entirely correct about the precarious state of their finances. “It was a mass hysteria and, honestly, if you tried to be a cautious voice, it was not productive, because your caution was drowned out by the cheers,” Rocker reflected in 2003. “The thing is, if you got looser and looser in behavior, the more you were rewarded for it.” Rocker recalled that he found himself frequently shrugging his shoulders during the Internet fever years, as if to say, “Why fight it?”
At the time, it was nearly impossible to fight it, even though there were moments of absolute clarity to be found in the smallest details. I will never forget, for example, walking out of yet another dot-com party with Jim Barksdale at the height of the mania. The well-known and genial former head of Netscape, Barksdale was by then, like a lot of others, dabbling in the venture capital business. One of his investments was a small online shopping service called Respond.com, and now he had to attend the obligatory party in San Francisco’s trendy South of Market neighborhood to celebrate a new round of funding. Packed full of young people whooping it up on free food and exotic drinks in expensively decorated rooms pulsing with loud music, the party was a pretty normal scene for the time. There was a rumor floating around that the party invitations alone had cost the company $30,000.
In another typically extravagant gesture, everyone in the huge crowd was handed a bottle of expensive champagne on the way out. Neither of us took one, but Barksdale, a courtly Southerner who didn’t go to many of these parties, was a bit amazed and perplexed by the offer. “Is this normal?” he asked me. In truth, after all I had seen, I expected an even better bottle to be offered.
“Your venture capital money at work,” I replied, as we watched thousands of dollars sail out the door to points unknown.
From Ponzi to Powermonger
Actually, for all the decadent spending that made headlines, the real money garnered from both venture investments and public offerings was flowing to one place: Directly into the coffers of America Online. With the biggest audience in cyberspace, AOL was in the catbird’s seat to attract the venture funds of Web sites looking to boost their business. More important, an affilia
tion with AOL had a more lucrative impact than just garnering new customers. A deal with AOL soon became a key factor in creating a supercharged IPO. I may not have known it at the time, but all along AOL was feeding the fires of the Internet frenzy to strengthen itself for their next transformation. It is critical to focus on AOL’s machinations in this time, because it is key to understanding how they ended up on top in the merger with Time Warner. Without the boom, AOL would never have been able to exert its burgeoning power so deftly.
That power wasn’t much in evidence after AOL’s terrible performance in 1996 and into 1997. The company had faced myriad problems: The day-long service outage; the disastrous shift to flat-rate pricing that attracted such consumer ire and regulatory scrutiny; management turmoil; accounting questions; and a stock free fall caused by its churning membership. Worst of all, there was a growing belief in investor circles that AOL’s business might be a lot closer to a Ponzi scheme than anything else.
But under the new leadership of Bob Pittman, the company slowly began a turnaround, helped in large part by that first improbable $100 million check from Tel-Save. Later, both Tel-Save and AOL would be scrutinized for how the deal was accounted for. But when the then-obscure long-distance discounter made its bold move to tap into AOL’s eight million customers in February of 1997, it was a watershed moment for AOL and the online industry. It also marked the first appearance of the “halo effect” on Web stocks that would become commonplace after any AOL deal. On the announcement of its AOL deal alone, Tel-Save’s shares leaped from $13 to $19. And its stock price would rise to $30 a share within a year, until the onerous cost of the AOL deal would take its toll on the business.
But the Tel-Save coup started to recharge AOL stock and put Pittman in firm control of the business. Top executives, who had once worshipped at the altar of Steve Case, now transferred their loyalty to the charismatic Southerner. On the surface, Pittman could be extremely amiable—one AOL executive described dealing with him as being “sucked into the charm zone”—and also compelling. His deft presentation at a Goldman Sachs investment conference in February of 1997—a variation on the typical Pittman folksy Southern speech that always included the phrase “my momma”—actually made bored investors sit up and listen.
But despite his reputation for affability, Pittman was a hands-on manager who left little room for error. Throughout his career, he had become well known as a bit of a control freak with his focus constantly fixed on meeting the quarterly numbers. This kind of management was a welcome change at AOL, which had a history of behaving like a chaotic startup, where meetings were without agendas and executive decision-making seemed to include almost everyone in endless free-for-alls. Under Pittman, though the bureaucracy did manage to grow even further, it became a command and control organization with a management system called the Matrix in place. Simply put, it meant all power tended to reside at the dead center in a structure where functions of multiple divisions flowed together. Or as one executive said to me, “AOL is a place where five thousand people can say no, but only one person can say yes.”
That would be Pittman, who made sure he had total purview over his minions and received little interference from those above him. In practice he struck a kind of hands-off deal with Case, with whom he had little in common. Pittman disliked Case’s nagging emails and never-ending agonizing about AOL’s business, as well as his poor communications skills, and he tried to limit Case’s access to operational executives. The shy and awkward Case was in turn put off by Pittman’s glib manner, as well as by his distaste for the kind of endless email debate about almost every move, which Case found so exhilarating.
The fact that neither man particularly liked the other initially created a tense situation at the company and gave rise to warring public relations camps. Even more unsettling was the fact that many Steve Case loyalists didn’t trust Pittman’s ultimate motives, especially since he had positioned himself in the press as the company’s savior. Did that mean Pittman was going to try to take over the company? Or was he there to sell it out from under Case, as the Wall Street rumor mill buzzed?
Even Pittman’s office décor came under scrutiny. A typical stroll down the corridors at AOL’s staid Dulles headquarters revealed the extent to which Case’s low-key, khaki-pants style had permeated the place. Employees were dressed in casual clothes, offices were decorated with goofy toys such as Magic 8-Balls and gumball machines, and the whole place had the feel of a smart-boy college fraternity. Then there was Pittman’s office, which many AOL employees would sneak past to get a look at when he wasn’t around.
It was a hipster’s vision, with a white shag rug, bulbous lamps, and designer furniture—and a bowl filled with perfect green apples. The first time I came to Pittman’s office for an interview, I plopped myself down on the creamy soft leather couch to wait for him and grabbed one of those apples. As I raised it to my mouth and bit a big chunk out of it, one of Pittman’s assistants gave me a horrified look. It turns out, the apples were for show—an apparently vital design touch from Pittman’s decorator that I’d sullied.
Yet Case looked past their differences, knowing that Pittman was precisely the man he needed for the time—much in the same way he had pulled in Leonsis years earlier to transform AOL into a consumer company. The pair soon settled into a working relationship in which Pittman concentrated on the short-term quarterly issues and Case was free to think about the bigger picture. While Case still retained the title of CEO, it was Pittman who was in charge of all operations—a position that was made formal in early 1998 when he was named AOL’s president.
The team Pittman assembled was soon dubbed the “hunter-gatherers” of AOL. It was their mission to leverage the vast audience the company had managed to corral and finally make some real money off of them. The core was made up of an unusual band of misfits, who often operated like a highly dysfunctional, though strangely cooperative, family.
It included ad sales head Myer Berlow, with his bomb-throwing demeanor. He played the good cop to bad-cop deal maker David Colburn, who sported Miami Vice stubble, a patter of Don Rickles–style insults, and cowboy boots, despite a dullish suburban upbringing. Marketing chief Jan Brandt continued her zealous quest to bring in subscribers, even going as far as ordering up a conference table made of concrete and crushed AOL disks. Gadget-obsessed Barry Schuler ran the service itself. And closest to Pittman was a trio of longtime advisers who had worked with him consistently for years, including pinch-hitting manager Mayo Stuntz, researcher Marshall Cohen and, perhaps most important, Kenny Lerer, the well-known New York public relations guru and strategist.
Case played the more strategic role. He and his most loyal lieutenants—Ken Novack and Miles Gilburne—were the designated “visionaries” at AOL. They thought about the big moves and key trends that were taking shape in the industry at large, and were charged with seeking out alliances. Novack, an affable-seeming Boston-based lawyer, had been around AOL almost since the beginning and played the role of Case’s alter ego. Dubbed AOL’s consigliere, he was also the one charged with doing much of the actual work in getting big initiatives completed. The bearded and cerebral Gilburne, who came to AOL in 1995 after a successful career as a lawyer, entrepreneur, and venture capitalist in Silicon Valley, was the one tasked with thinking up the big ideas, and mapping AOL’s many strategic options. Gilburne, who affected a professorial image, relished complexity and bragged about doing deals that were so confusing only he understood their inner workings.
Case, Novack, and Gilburne were the trio who spearheaded the purchase of CompuServe in the fall of 1997 in a three-way transaction with WorldCom and H&R Block. They also took charge of the even more complex acquisition of Netscape a year later. The Pittman forces often derided their world of white-board thinking and endless and frequently perplexing ideas about AOL’s next chess move and characterized the trio as the “eggheads.” These eggheads, of course, would be responsible for the momentum that carried AOL to the Time Warner
deal.
Serving both teams was new chief financial officer Michael Kelly, a burly former telecom executive who specialized in banging heads in order to bring order to the three-alarm fire that had long been AOL’s business. Kelly, whose brash demeanor would later wreak havoc within AOL Time Warner, was thought to be just what the AOL business needed to finally garner much-needed credibility on Wall Street after years of growing worry about the quality of the company’s accounting. Already, in its short history, AOL had attracted huge notice for writing down its marketing expenses in 1996 and was being watched by many regulators for its aggressive accounting treatments. Given how new the industry was, AOL was able to claim that it was making pioneering accounting decisions and should not be held to the same traditional standards. It was an argument it would try to make later when the online unit accounting was once again called into question after the Time Warner deal.
But accounting debates were shoved into the background, as the online industry began to rapidly change in 1997. Rather than focusing solely on the service and growing the customer base (which had long been AOL’s mission), Pittman set out to strengthen two even more critical parts of AOL: Its brand name and its ad base. Pittman, who had been in charge of several well-known brands such as MTV and Century 21, felt that AOL needed to be as well known as Coca-Cola, with a simple message of purpose. He quickly junked trendier ad campaigns and settled on one somewhat hokey idea for the service: “So easy to use, no wonder it’s #1.”