There Must Be a Pony in Here Somewhere

by Kara Swisher

  And yet, this was not so. While I hate to agree with a come-on for a stock-selling firm, I must invoke Dick Parsons here: It is time for AOL Time Warner to get over it. Because no matter the employees’ feelings about AOL, the future of the company—and of many others like it—will be deeply impacted by the changes technology will continue to bring. Two important and intertwined truths lie at the heart of finding out where the digital world is going. The first truth: The tidal wave of technological change continues to advance. And the second truth: Tough times are often the best times in which to lay foundations for the next phase of digitization.

  And so, now that the hype and agonizing have almost worked its way through the system—an uncomfortable journey that has always been part of major technological leaps—it’s time to take measure of the landscape. Why? Because post-boom, post-bust, the moment has arrived to figure out what this flood of digital innovations will do to AOL Time Warner in the decades ahead.

  I know it’s easy to sneer at this kind of dreamy hopefulness. Not having lost my savings, my job, or my belief in some company I’d spent my life building, I probably have no right to urge a company like AOL Time Warner forward. But, even surveying the carnage of the merger, I firmly believe that all things will be touched and transformed and improved by what the next digital era will bring, especially for huge media companies like AOL Time Warner. And while you can’t go back and repair all the stumbles and missteps that have been made along the way, there really is no other way but to press on. Everyone may be limping now, but things are moving forward nonetheless, especially since young people, the next generation of media consumers, are.

  One need only recall an on-target prediction made by Marshall McLuhan in his 1960s landmark book, The Medium Is the Massage, which applies even more today. “Innumerable confusions and a profound feeling of despair invariably emerge in periods of great technological and cultural transition,” he wrote, although he was referring to very different technologies than interactive ones. “Our ‘Age of Anxiety’ is, in great part, the result of trying to do today’s job with yesterday’s tools—with yesterday’s concepts. Youth instinctively understands the present environment—the electric drama.”

  Dreaming new dreams was what AOL Time Warner’s other Ted—Ted Leonsis—was trying to do when I last visited him at his office in Dulles, Virginia, in the spring of 2003. Now the head of AOL’s flagship online service, Leonsis was sassy and defiant, as usual, trying to figure a way out of the mess. As usual too, he had a million ideas—some of them good, others not so good, but all of them interesting.

  He joked about the sorry state of the AOL division and about his wife, who had, he related, told him it was time to “get off the stage.” She’d made him write up a list of friends who had retired and were enjoying life. But rolling and twirling his chair across his small office (quite nimbly, in spite of his girth), he tried to approximate with his meaty hands what it was like now trying to turn the rudder on the business. And, as was his style, he randomly dispensed a series of sound-bite insights about the disaster, even as he spewed ideas about the digital future.

  “We are a division of a group of a corporation, and I am a middle manager working to get my gold watch,” he joked.

  And also, “We have clarity now, but no hero.”

  And also, describing a recent meeting with Sports Illustrated magazine over the cost of licensing exclusive content for AOL users, he told me, “Now they are shaking us down like the Mafia, which they used to accuse us of being . . . it’s all in the eye of the beholder.”

  Leonsis made me laugh, even though there didn’t seem to be a whole lot that was funny at AOL, which Time Warner was still treating like a leper. Despite Parsons’s admonitions in late 2002, internal bashing was still going on, although many insisted it was not. By now, this was just bad business, as another longtime and well-respected AOL product executive, David Gang, pointed out in a 2003 interview with me. Fretting about the anger he still felt from the Time Warner side, he asked, “Do they really want to say, ‘I killed you, but in the process I cut off my arm and lost my eye’?”

  Leonsis had his own prescription for that particular attitude. “The Time Warner anger is just noise . . . and we have to remove the rear view mirror to move ahead,” he told me. “The only way to reclaim the moral high ground is to make AOL great again.”

  Oh, is that all? Because by then, I was beginning to feel that it might just be too late for AOL, which seems to have paid for its many sins by becoming irrelevant. I felt sorry to think this way, after all the time I’d spent believing in the company’s prospects while others had made fun of it. Now, almost 10 years later, had I finally reached the point where I thought it was curtains for AOL? Things certainly look bad for the company that made history by casting itself as the lead character in a digital Perils of Pauline. This time, it finally seemed that AOL, strapped to the railroad track, might not be rescued in time.

  The first problem was time itself. Internally, AOL had only 18 months from the fall of 2002 to turn things around—meaning that things had to start looking good by the end of 2003. “Parsons told me, ‘Deliver what you say and I am your greatest fan,’ ” AOL CEO Jon Miller recounted. “If not, who knows?” Indeed, to Wall Street and reporters, Parsons seemed to be drawing a line in the sand, making a promise that he would be able to fix AOL’s problems pretty fast.

  There had been some precedent already for Wall Street to accept such a story. By May of 2003, Yahoo’s Terry Semel was being praised on the cover of Business Week for reinvigorating the troubled online company, for example. Wall Street was impressed, too, as Yahoo was showing strong progress in both online ad sales and expansion of paid premium services, a feat that had given a $20 billion valuation to Yahoo. With AOL’s many more assets and stronger brand, and despite its higher costs, surely AOL’s executives could at least keep up.

  But there was also a devastating morale problem at AOL, stoked by cost cuts, layoffs, press attacks, and that persistent feeling that AOL was now—as David Gang had quipped to me—the “ugly stepchild” of Time Warner. The formerly vibrant culture had badly degenerated with all the changes that whipped through on a daily basis.

  Cost cuts would doubtless remain a fact of life, but Jon Miller told me he was desperately trying to turn around the dysfunctional situation at AOL by turning its employees into “buyers and sellers”—meaning everyone would better understand his or her role. By formalizing job descriptions and making responsibilities clearer, he hoped to limit the endless email debates that cluttered up employees’ workdays. Yet he didn’t pretend that things would change overnight. “My message: It ain’t perfect here and it ain’t gonna be,” Miller said he told employees. “Let’s just go to work.”

  Miller had recently spent some time visiting the company’s other divisions, and he related an anecdote he’d told them to try to help move the relationships forward. “Have you ever had your car towed in New York?” he said he’d ask executives in other divisions. “When your car gets towed, there’s a sign at the place where you go to pick it up that says, ‘The person behind this window did not tow your car. If you cooperate with them, you will get your car back quicker.’ ”

  But the question I’m sure many of them were thinking was: Would Miller be returning the car intact, or would it be the wreck that everyone was expecting?

  The Inevitable Future

  That, of course, depends on a lot of things that have to do with the past. Because if it is any guide, the Internet will be an even bigger deal in the future than it was when it first burst onto the scene.

  The history of technological evolution is proof of that: Innovations first cause a frenzy, and then flame out and are sometimes widely discounted before they ultimately reveal their true power. I’m always reminded of this truth with a quote, from an 1876 Western Union internal memo, that I keep pasted to the side of my computer screen. “The ‘telephone’ has too many shortcomings to be seriously considered as a means
of communication,” some doubtlessly intelligent Western Union executive wrote then. “The device is of no value to us.”

  I keep that quote with a bunch of others I’ve saved that deliver the same message. Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977: “There is no reason anyone would want a computer in their home.” Thomas Watson, chairman of IBM Corporation, 1943: “I think there is a world market for maybe five computers.” And, of course, Bill Gates, chairman and co-founder of Microsoft Corporation: “640K ought to be enough for anybody.”

  Bill Gates certainly wouldn’t have been celebrating the 20th anniversary of the personal computer in 2001 as the richest man on the planet if that particular prediction had come true. The PC most definitely underwent a vicious shakeout after its introduction. And the same thing happened to the Internet, which celebrated the 10th anniversary of the famed Mosaic browser in 2003. As the first commercial Internet decade comes to an end, the froth has finally worked itself out of the system, with 5,000 companies having gone bust since the high point in 1999. Now, with the anger at the popping dot-com bubble (writer Mike Kinsley astutely noted that “no one minded the bubble itself”) as the result, it makes it a good time to take stock.

  First, and please don’t scream, I believe that the Internet is still under-hyped. Venture capitalist John Doerr first made that startling remark in 1995 and was forced to apologize for it in the bust. He shouldn’t have—unless he was referring simply to the stock market and then there should be I’m-sorrys into eternity. But the medium remains the fastest-growing in history, becoming widespread quicker than telephones, radio, and televisions. And it still has yet to penetrate the global market as significantly as it will. With the twin prospects of even more new features and improvements in ease of use still ahead, the interactive space is obviously in the very early stages of the game.

  And the growth will only continue, as the Internet quickly becomes akin to electricity in homes and businesses. A recent Pew Internet and American Life Project survey reported that more than 60 percent of respondents said they used the Internet routinely, and that two-thirds had been using the Web for several years. Studies like this have become commonplace, and all have the same theme: Internet usage is no longer special, but a regular part of daily life. Like electricity, the telephone, or the television, the Internet is on its way to becoming invisible—you only notice it when it’s not there.

  Now, a decade into it, the interactive arena has matured. It has achieved growth on an unprecedented scale, and has changed the way we work and play. It is also now a pillar of our economy, rather than a quirky little sector consisting of a few small companies. Yet, I wish sometimes that I could go back to those very first days when I started covering the Internet. When the money didn’t matter. When the whiff of ideas was fresh. When words like “multiple revenue streams” and “network effect” didn’t exist. When there were no Jeff Bezoses and their goofy grins gazing out from national magazine covers.

  I realize, of course, that this kind of the-past-was-pure sighing makes me sound like a bit of a dope. But I am a bit of a dope when it comes to watching what kind of mutations have developed around the Internet. It’s a place that still amazes me, with its ability to resist the pressures that have made most forms of media a kind of dead zone of ever-diminishing expectations and little dynamic growth. Today, most traditional newspapers, magazines, networks, and radio are sadly predictable and severely boring.

  Not the Internet. As online pundit and columnist Scott Rosenberg pointed out about the Web in a spot-on piece in the Salon online magazine: “It just sits there, center stage, after the curtain has dropped behind it, thumbing its nose at the booing crowd: The Internet itself hasn’t gone away. Hundreds of millions of people around the world continue to bend it to their own ends, in chaotic, unstable and unpredictable ways. As a generator of instant wealth, the Net may now be a big bust; as a generator of instant ideas, it keeps thrumming along.”

  But, even though it is clear that the Internet market will continue to grow, what does that mean for AOL? AOL—and here I’m talking solely about the online service—certainly faces numerous problems as it attempts to go forward. As everybody knows by now, it suffers from rapidly declining subscriber growth, weakened ad revenues, a need to switch to broadband for its dial-up subscribers, a loss of experience at top-level positions, the shadow of government investigations and shareholder lawsuits, and a loss of confidence from the investment community.

  With all that, will AOL, as powerful as it has been, even manage to make it to the next phase of the Internet? Or was the first part of the Internet ramp AOL’s one great moment to shine? Will it now sputter out, having outlived its usefulness? And, will Time Warner’s anger, even as it cools, allow AOL to thrive?

  That is perhaps the most critical question, especially since speculating any longer on what could have been or wishing that the merger had never come to pass seems pointless now, even though the inclination to do so seems entirely justified. But such recriminations may end up hindering forward progress that everyone at both AOL and Time Warner wants to make now. Former AOL executive Richard Hanlon wrote me an eloquent and sad email right after Steve Case resigned that illustrated the cost of such regrets.

  “What worries me is that the story is about so much more than failure and punishment. Steve’s resignation absolutely brings that home to me. To the extent that it is greeted with gloating, it seems to dismiss the fact that an enormous amount of work was done to produce something other than failure, and to discount the larger fact that a vast amount remains to be done,” he wrote. “I fear that the bitterness at much of Time Warner may blind them all to this. If so, this will be a lot more than the only war that began with the declaration of a truce: The departure of Steve Case and many at AOL will guarantee their adversaries the greatest Pyrrhic victory in business history.”

  How to Fix AOL in 13 Easy Steps

  One thing is certain: At this moment, in terms of subscriber growth, ad revenues, momentum and innovation, as well as reputation, AOL is in decline. Stuck in what seems to be an unpredictable and slow growth cycle, it’s skittering along while executives search for ways to reinvigorate it. One competitor recently likened it to a “jalopy.”

  But to begin, let’s not act as if all hell is breaking loose—AOL is still a very reliable cash machine for the larger company, spewing out $1.5 billion in cash flow annually. This is a major plus for AOL as it moves forward. While it’s a dangerously declining number—down from $2.3 billion in 2001—it allows AOL some flexibility in its choices going forward. Still, the online unit is valued negatively, while smaller competitors garner multibillion-dollar valuations.

  The question then—which is being asked over and over again at AOL Time Warner—is this: How do you get full value of the assets? Three main scenarios have taken root among those both inside and outside the company:

  1.

  Milk it by cutting costs and employees, limiting new investments in technology or offerings, and continuing to make money on its dwindling dial-up user base.

  2.

  Leverage its massive member base and brand name into more promising businesses, spending on software and other improvements, and take the risk that it might not pay off.

  3.

  Sell it off, in parts or whole, to companies better able to take advantage of the assets and more open-minded to the possibilities.

  This may be simplifying it, but I think the answer to repairing AOL resides in a weird combination of all three, especially as you list the various facets of the online company that are key to its success or, alternatively, its failure. Here’s a list of current problems and their possible solutions.

  Problem: Lack of Passion

  Passion was a longtime strength in AOL’s early history—the problem was that it turned too much into lust for a high stock price. Yet the necessity of renewed passion cannot be underscored if AOL is going to reassert itself. While AOL—located
on the East Coast rather than in the red hot center of Silicon Valley—has never been a font of techie energy, or talent, it always had an employee base that was missionary in its goals. That energy is clearly still present at fast-growing Internet companies like eBay, Amazon, and Google, and it’s an important part of their ability to attract and keep top employees.

  Even longtime companies like Microsoft still have that hard-charging feeling, as exemplified by the fact that the world’s richest man, company co-founder Bill Gates, comes to work daily and says he still sees his mission as unfinished. Although they must move out of start-up mode as they mature, very few tech companies can operate on autopilot or become complacent if they want to stay competitive. But with poor morale and a mood of being cut to pieces rather than on the cutting edge, AOL’s energy seems sapped.

  Solution: This is a tough one, since you can’t just order people to get passionate about their jobs. Given the constant belittling of AOL in the press and from the other divisions of AOL Time Warner that is only now waning, I think it’ll be pretty hard for management to find a way to excite employees. The departure of Steve Case, an icon at the company, probably didn’t help, but the continued presence of cheerleaders like Ted Leonsis is a good thing. I suspect the only thing that will return passion to this company is a measure of success. But one thing is certain—it’s important to keep as many of the more experienced people working at AOL as possible, especially the cheerleaders.