Burn Rate

by Michael Wolff

  The thirty-something Steve Case, AOL’s chairman, was an unlikely mogul and an even more unlikely visionary. He continued to look like the P&G product manager he once was—an affable, nondescript, chinos and button-down guy with a layer of baby fat. His brother, Dan Case, who runs Hambrecht & Quist, one of the leading West Coast investment banks, is the handsome brother, much more the BMOC. “He struck me as very shy, almost embarrassed in an adolescent way,” described a technology reporter who saw Steve at a White House correspondents’ dinner in Washington shortly after AOL was forced to disclose that he had left his wife for Jean Villanueva, AOL’s longtime PR director.

  Case’s role in the company began to change after the board rebuffed the Allen takeover bid. Case became Chairman Steve, and one of his most important functions became recruiting the talent to run this company that had somehow stepped to the forefront of technology and media.

  AOL, with its stock rising, was able to acquire a California-based multimedia promotions company called Redgate—not so much for the company itself as for its chief executive, Ted Leonsis.

  Case became the administrator—the suit—and Leonsis became the visionary. (Leonsis, it was said, put the first CD-ROM in a book; Leonsis, it was also said, in spite of a host of other pretenders to this claim, coined the phrase “new media.”)

  Case receded and Leonsis stepped to the forefront of AOL.

  In the Leonsis era, from late ’94 to late ’96, AOL went from $104 million in revenues to over the billion-dollar mark. Leonsis became AOL. He could talk the talk, he could sell the vision thing. He was creative, motivational, combative. He was everywhere—before the technology industry, the New York media business, the Hollywood entertainment community, Wall Street analysts, the VCs—insisting, furiously insisting, that AOL was what he wanted it to be, rather than what it was.

  People believed him, a fat man, an ugly man, sweating like crazy. You couldn’t help thinking that what he was saying had to be true, that otherwise he’d never have the guts to stand up there and say it and huff and puff like that.

  AOL was an online service, no different from every other online service that would go out of business during the next few years. What Leonsis said AOL was, was media; in fact, what he said it was was something near to, or next to, or at one with TV. It didn’t matter that AOL didn’t have the technology or the audience to remotely compare itself to TV. Leonsis said it was so.

  This is what he said: On Thursday nights, between 9:00 and 9:30 EST and between 9:00 and 9:30 PST, AOL’s usage goes markedly and reliably down. Why? Because AOL’s audience turns on Seinfeld. Ergo, AOL has the same audience and is providing the same function as television. Double ergo, AOL’s competition is TV, and not just TV but the most sought-after of TV—Seinfeld.

  AOL wasn’t Prodigy (yuk) or CompuServe (ho hum), it was mass media entertainment.

  Wall Street believed him. The media community believed him (in fact, there became a competition among mass media brands to go online through AOL). And the AOL organization believed him.

  The Internet became, by late 1995, an irritant in Leonsis’s plans. He fought it, too. Defensively. The Internet wasn’t for AOL users. The Internet was a jungle, a fetid swamp, a stormy sea, whereas AOL was a safe harbor, a nice neighborhood, a controlled environment, a planned community. He tried to articulate the difference between an online service and the Internet. And failed. But unlike his counterparts at CompuServe and Prodigy, he gave up trying to fight the Internet; he let the Internet, or really the myth of the Net, become a new engine of AOL’s growth.

  AOL recast itself as America’s gateway to the Internet, which was fairly audacious considering that you couldn’t get to the Internet from AOL. But no matter. In a highly interesting bit of semantics and dialectical legerdemain, AOL even began to present itself as the Internet. “I’m on the Internet,” a good portion of modem-empowered America would say, though in fact they had never made it outside the confines of AOL.

  Leonsis, while very good on the big picture, and superb on the vision, was not so good on the details. He had a getting-stuff-done problem.

  “That’s hypergrowth,” AOL execs took to saying.

  “Hypergrowth” was a good cover. It was almost okay not to get things done if you were soon going to have to do it differently, anyway. In fact, if everything was going to change, which you knew it would, it made sense to commit to as little as possible. Hence, the average contract turnaround time at AOL began to run at about nine months.

  Eventually though, even pedaling as fast as you can, shit catches up with you.

  The backlash was evident at AOL’s fabled partners conferences. Its information suppliers were not vendors but “partners,” and they were invited twice a year to discuss problems and ideas and issues of mutual interest at a resort with a good course (Ted was among the most ardent of golfers). By mid-’96 the mood was getting uglier. It was clearer and clearer that AOL, which the information providers believed had built its business on the backs of other people’s brands, was distancing itself from those brands. AOL was busy building its own brand. AOL was the kahuna. Its “partners” were, well, not really partners. (AOL argued that customers came to AOL to chat and then look at the information. The info providers argued the opposite, that customers came to get news or make travel plans or read a magazine. Given that the vast majority of time on AOL was spent chatting, AOL was probably right.)

  In an effort to deal with mounting disarray and animosities, Case hired William Razzouk from Federal Express to bring order to this chaos. He prescribed early morning meetings and precise executive apparel rules. Corporate organization was no match, however, for chaos, and within weeks he announced that, on second thought, he really preferred Memphis.

  If AOL wasn’t Federal Express, then perhaps it was—why not?—MTV.

  Chairman Steve hired Bob Pittman, MTV’s founder. Leonsis was sent off to run something called the AOL Studio, where, with any luck, he would think up an I Love Lucy for AOL. But for now it was Pittman’s show. (One of Pittman’s recent assignments had been as the CEO of Time Warner’s Six Flags amusement park; Pittman said that running AOL was just like running a theme park.)

  And then, in the fall of 1996, came flat pricing. Responding (rashly responding, many people say) to the sudden new reality of the $19.95-per-month unlimited connect time offered by many ISPs, and the evident commoditization of online connectivity, AOL abandoned its hourly charges and signed everybody on at $19.95 for unlimited hours.

  Bob Pittman and flat pricing. It was a cable model with a cable visionary. The move had profound and immediate consequences:

  1. The AOL business model was turned on its head; instead of making more money the longer a person stayed connected to the service, now the longer a person stayed online, the more money AOL lost.

  2. AOL became a household word. Because it didn’t cost money to stay online, no one got off. Therefore, no one could get on. The hue and cry that went up from AOL’s seven million customers, and was echoed by state attorneys general across the country, had the effect of making the entire country think it was missing something. People without computers called to complain that they could not get onto AOL.

  These developments changed AOL’s business. It was no longer in the business of selling connect time or selling information or selling service. Now it was in the business of selling its customers. In the classic media business model, having gotten the attention of the public, having brought it here through come-ons and gimmicks, now it would sell this audience again and again, over and over. It hoped.

  We were in our conference room—Jon Rubin, the factotum, the EVP, the technology advisor, Alison, and I—waiting for the AOL executive to arrive.

  “This is going to work,” Jon Rubin said. He was in an excited, nervous mood.

  Because that sounded to me like a jinx, I said, “You know AOL. We have to make sure everything is one hundred percent explicit. Everything has to be spelled out. Who’s saying what
to whom. Who’s calling whom. The next ten meetings have to be scheduled and planned before we leave here.”

  “I have a very positive feeling,” Rubin said. He was not about to have his good mood downgraded.

  “What do you envision?” the factotum asked, with just the slightest trace of skepticism.

  “I know where I’m taking this,” Rubin said, not imprisoned by the factotum’s literalness.

  “Are you thinking about an acquisition, Jon,” Alison queried, “or an investment?”

  “This guy is not a finance guy, he’s not a lawyer; he’s a salesman, like everybody at AOL. That’s your mistake when you deal with these guys,” Rubin said to me, and for the benefit of all the other plodders in the room. “You want them to agree to things that they just don’t know how to agree to, instead of getting them to sell shit that they know how to sell.” Rubin paced.

  “And the pitch is . . . ?” I prodded.

  Rubin was working something out on a scrap of paper.

  “How many of our books did you tell me they sold recently?” Rubin asked the EVP.

  “Fifteen thousand. In one morning! It takes a year for Barnes & Noble to do that!”

  “They made a mistake recently, too,” I said. “They flashed one of the books on the pop screen, just one flash—we hadn’t agreed to it yet—and instantaneously sold twelve hundred copies. They were very apologetic.”

  “We don’t need an investment from them,” Rubin said. “What we want is to lock into a distribution arrangement. If we can do that, if they’ll commit to selling our books and our ad avails, if we can make it worthwhile for them to do that, we’ve made this company. Story finished. We’ll have flipped from free fall to success.”

  He was envisioning the kind of underlying, symbiotic one-hand-washes-the-other arrangements that are, perhaps, the fertilizing moment of all successful businesses. He was imagining the way the cyber business was coming together. He was feeling it.

  It depressed me, in a way. We had worked awfully hard just to become a part of AOL’s grand strategy. Strategy, on the other hand, was not the first word you’d immediately associate with AOL. This was more of a random symbiosis, which seemed even more depressing.

  Our glass conference room was positioned so that you had a bird’s-eye view of visitors arriving at the reception desk. You had an opportunity to take an instant measure of your business opponents as they presented themselves to Ann, the receptionist. Almost all of the people (virtually all of them men) who arrived to discuss alliances or financings or M&A propositions (how many meetings like this had I had in a year? Three hundred? Four hundred?) arrived as delegations. To come alone was to be vulnerable, lesser, feminine. The message here is partly that a businessman is not alone but instead is a reflection of group-think, organizational concerns, market considerations. It was always interesting to watch the earnestness, the purposefulness, the gravity of these men of affairs as Ann helped them with their heavy coats and briefcases and as they composed themselves, used the men’s room, and prepared to get down to business.

  The AOL Exec, however, breezed in alone, carrying nothing, handsome, grinning. In a moment Ann was laughing, too.

  Jon Rubin went happily to greet him.

  Together, they came into the conference room with their heads bent over the AOL Exec’s new cell phone (digital, micro, and just out on the market).

  The AOL Exec was dressed in a dark tweedy, almost literary, style, except this was obviously the expensive version of the look, cashmere instead of wool. Contentedly, he put his feet in his half boots up on the table.

  “What do you want to do?” he asked, grinning.

  He was not only comfortable here with us, I guessed, but comfortable everywhere with anyone.

  Overeager, I got the cue wrong and plunged into my standard windup song and dance: “Why don’t I give you a snapshot of the company and where we think—”

  “Don’t bother, don’t bother. If there’s something I don’t know, you’ll tell me later. But I get it. No problem.” Big grin (just for me).

  It was nice not to have to go through the bullshit, but unnerving, too. Playing with the cool guys might be more fun than playing with the squares, but the rules are less clear.

  Jon Rubin laughed. Chortled. “How fast do you want to go?”

  “Fast.”

  “Do you have a proposal?” asked the factotum, a classic square guy without terribly much patience for the cool, ironic, handsome cats.

  The AOL Exec put up his hands, mugged for the camera, for another audience somewhere, as if to say, who was this guy, the factotum, this square, come on? “Really,” he said, “whatever you want. We should have done this a long time ago. I can’t believe those putzes haven’t put something together here. What fuckups. Who have you spoken to?”

  I knew not to play this game, ratting out other executives, but he prodded. “Tell me. Come on.”

  I was naming names before I knew it.

  To each name, the AOL Exec attached some shiv-like description, laughing at the incompetents and losers who populated AOL. Having had a brief period in Hollywood, land of the corporate shiv, I knew about companies like this. No one was in charge. It was just a hurtling fireball of separate embers of ambition. There were people on top and there were toadies and there were other people trying to get on top. It was also, probably, a little like prison. Maximum security. Hard time.

  “Okay,” the factotum said. “Should we be thinking in terms of an acquisition?”

  “God, save me!” said the AOL Exec, throwing up his arms in mock horror. “Shit! You know, we have fucked up every acquisition we’ve done. But sure, we could do an acquisition. If that’s what you want, we’ll do it. But”—he rolled his hands—“let’s think of something else. Let’s be creative. Make it sing!”

  “Okay,” said the factotum, clearly not very happy with any of this.

  “Look,” Jon Rubin said. “We know what we have to sell, and we know that you can sell it.”

  “Great!” the AOL Exec said, happy.

  I said, “We sold fifteen thousand books off the AOL pop screen in a morning.”

  The AOL Exec chuckled, truly chuckled; this was very amusing to him. “We could sell anything off of that screen. If we said click here for nothing, absolutely nothing, just nineteen ninety-five for nothing, we’d sell it. It’s total, like, hello? What are you, stupid? You fuck!” He shook his head. “Who are these people?”

  “Nevertheless,” I tried to justify, “I think that our products—”

  “Yeah, yeah.”

  Jon Rubin laughed. He was the only person on our side not particularly rattled by this wholesale dropping of business pretense and manners.

  “You want a cigarette?” Rubin asked him.

  “Can we smoke here?” The AOL Exec looked around happily, if furtively.

  “Come on,” Rubin said. “Come on. Let’s go outside. Let’s work this out.”

  It was embarrassing. The rest of us were left on our own to—what? throw spitballs? It did feel like the teachers had stepped out of the room. We tried to pretend we had something to do. The factotum propped open his briefcase and hunkered down with his cell phone.

  “Do you know what’s going on?” Alison asked warily.

  “They’re having a cigarette downstairs,” I shrugged, annoyed that she might think I didn’t know what was going on. I imagined them down in front of our office building, with all the other unreconstructed smokers, planning the future of my business.

  “I don’t get it. I just don’t get it,” she said. “What is the AOL explanation?”

  The AOL explanation is . . . sex. It always surprised me that this was not widely known and appreciated.

  I had often wondered, as AOL works to transform itself into a great, new American family-centered company, putting its product into living rooms and finished basements across the continent, what will happen if (what will happen when) the forces of reaction and hellfire and religious oppression a
nd white bread get a clear idea of what’s going on here?

  How many reports do we need of a teen traveling from a chat room to an assignation in a mall and onto some not pretty picture described (almost gleefully) in USA Today for us to get the message? But most of us think of this, rightly I would guess, as marginal behavior and stop thinking about it there.

  When in fact it is, at the same time, quite possibly the outermost manifestation of a whole new rich stew of social and sexual behavior, perhaps as momentous a behavioral development as the sexual revolution itself.

  I mean, people talk about it. People are always saying, “Sex is an early market for new technologies.” The home video business grew up from porn rentals; 900-numbers, cable, Hollywood, all sex inspired, of course.

  But that discussion, that kind of long view, that I-don’t-know-anyone-who-is-a-part-of-this position, doesn’t begin to give the flavor of what’s going on here.

  There were almost 8 million AOL members by the end of 1996, with nineteen thousand chat rooms operating each evening, according to USA Today. Rumor (AOL is highly secretive about its numbers—about who goes where for how long doing what at what time) has it that as much as 80 percent of prime-time activity is spent in those rooms.

  The irony is that AOL knows more about what an individual is doing at any given moment than any monitoring scheme that’s ever been invented. Double irony: part of AOL’s compelling programming is that it offers users the ability to know what other users are doing, which makes AOL something of a community of stalkers.

  After logging on to the service, AOL members descend, Dante-like, from the cheerful, servicey, slightly vapid airline-magazine tone of the opening screen to the People Connection, a level with a kind of mixer atmosphere of off-color, tongue-hanging, “let’s get friendly,” boy–girl, girl–boy, girl–girl, boy–boy humor; to the member rooms, which present a series of doorways into Fellini-like fetishes, and down deeper into private rooms, where autoeroticism rises at least to the level of pulp fiction if not to some new form of entertainment or even twenty-first-century sexuality.