TOPICS > Economy

AOL to Offer Free Services as Part of Company Restructuring

August 3, 2006 at 6:35 PM EST
LISTEN SEE PODCASTS

TRANSCRIPT

RAY SUAREZ: America Online became synonymous with the Internet in the 1990s with this ubiquitous greeting…

AOL VOICE: You’ve got mail!

RAY SUAREZ: … but AOL has fallen on hard and uncertain times since its merger with Time Warner in 2000, as the Internet business has evolved and companies like Google and Yahoo have prospered.

Long a subscriber-based service, AOL announced yesterday that it will almost completely shift its business model to a free service, supported largely by advertising revenue. AOL expects to lose many of its subscribers in the process; it lost nearly one million in the last quarter alone.

And here to bring us up to date on this latest version of AOL is Kara Swisher, technology writer for the Wall Street Journal and author of two books about AOL.

Kara, welcome. For millions in the late 1990s who were getting their first taste of the World Wide Web, AOL was literally their gateway, their portal. What happened in the meanwhile?

KARA SWISHER, Technology Writer, Wall Street Journal: Well, you know, I think their slogan was, “So easy to use, no wonder it’s number one,” and that was the whole thing. The Internet was really complicated and hard to use, and AOL brought it to them in a very easy and friendly fashion in a way that wasn’t technological, but was consumer-oriented about communications, about community, and they did a great job at that. Unfortunately, that was their greatest time.

Keeping up with the Web

Kara Swisher
The Wall Street Journal
Watching AOL is like watching someone fall down a very long flight of stairs that they keep falling down and almost push themselves down. AOL has made so many errors over the past recent years especially.

RAY SUAREZ: Well, since then, search engines have gotten a lot better and people now have ways to get on the Web where they don't need somebody to sort of take them by the hand.

KARA SWISHER: Right.

RAY SUAREZ: Was it just sort of consumer experience and people learning their own way that made AOL less necessary?

KARA SWISHER: No, I mean, there's -- gosh, watching AOL is like watching someone fall down a very long flight of stairs that they keep falling down and almost push themselves down. AOL has made so many errors over the past recent years especially.

But I think, yes, it was Internet on training wheels. That was what it was called by a lot of people and disdained by a lot of geeks. But in fact, you know, they really didn't keep up with what was happening on the Web. And companies like Google and Yahoo and many others, even today like Flickr, and YouTube, and MySpace, just surpassed them easily because there was no innovation going on, on the AOL service.

RAY SUAREZ: Well, in 2002...

KARA SWISHER: And that's what it's all about. I mean, it's all about innovation right now.

RAY SUAREZ: In 2002, the company hit its high watermark. It had 35 million subscribers.

KARA SWISHER: Right.

RAY SUAREZ: It's got a lot less now. Where did they go?

KARA SWISHER: Well, they left, because no one is doing dial-up phone service. I mean, nobody does that. It's not convenient. Broadband is finally proliferating in this country.

Our country is way behind other countries, but finally a lot of people are using broadband. And the whole idea of a dial-up service is very antiquated. It's sort of like having a horse and buggy to get around the Internet when there's all these speedy cars going on.

And so AOL was continuing to market to that group and hoping to transition them over to broadband, but other companies, like Yahoo, with SBC, satellite companies, all sorts of companies were, you know, in the space. And AOL just couldn't keep up.

Now, they had the chance, because they were merged with Time Warner, which is the biggest cable system. And they have a huge high-speed cable business, but they never merged the two because of the acrimony of the merger. Things got very personal, and, of course, it took it out on the business.

Lost opportunities

Kara Swisher
The Wall Street Journal
I mean, it was kind of a classic merger story where they aren't thinking about the customer and what's next. They're thinking about, you know, their status and place within the organization.

RAY SUAREZ: Well, as more people got at-home Web access, did AOL have opportunities to shift that it simply didn't take? Were there sort of roads not taken that ended up really hurting them?

KARA SWISHER: Well, for both Time Warner and AOL, yes. I mean, Time Warner years ago had Pathfinder, which was one of the biggest disasters, Internet debacles in the short history of the Internet.

But AOL had the chance to merge, for example, with the cable system. And there were a lot of fighting between the AOL people and the Time Warner people. And, you know, while they fought, everything burned down around them.

I mean, it was kind of a classic merger story where they aren't thinking about the customer and what's next. They're thinking about, you know, their status and place within the organization. And they never made that one key part of the merger which would have been to merge AOL with its high-speed cable service. And I think they might have been dominant today had they done that.

RAY SUAREZ: Well, everybody in the early days of the merger talked about what a great idea it was, since Time Warner was such a huge content producer. And everybody says, "Well, AOL is a content aggregator. Time Warner is a content producer. Now, all you have to do is hook up those two pipelines and, boy, oh, boy, it's going to start flooding into people's houses."

KARA SWISHER: Right, right.

RAY SUAREZ: Why didn't that happen?

KARA SWISHER: Well, again, fighting between the top executives. I mean, there was so much -- you know, it was like a Shakespearian play up there up at Time Warner Center. Steve Case, Gerald Levin, even Dick Parsons, they all just didn't get along, and therefore nothing happened and nothing gelled.

Now, you know, a lot of people thought the content would easily go over these content distribution channels. Meanwhile, companies that actually aren't in the content business, like Google, just rose up because of advertising. And other companies, like MySpace, which is now the biggest site on the Internet, which was not around just a few years ago, benefited because of user-generated content, which was AOL's real calling card in its early days.

I mean, AOL invented MySpace. MySpace would not be around without the influence of AOL, and yet AOL is dwindling and MySpace is growing.

Utilizing an open internet

RAY SUAREZ: Well, you've talked about MySpace, about YouTube, about a lack of innovation. Yet if you weren't paying attention, it seemed like every five minutes on television there was another AOL ad telling you about new features, and new access, and new, new, new. Was there, in fact, really not that much new going on at the AOL site?

KARA SWISHER: Well, they had really good ads. I mean, it's just like Hewlett-Packard. Really nice ads, I really like them. But I think a lot of people, you know, were moving to these services, like Flickr and YouTube, because they're very user-friendly.

And I think a lot of what AOL was doing was keeping people within. They wouldn't share instant messaging. They wouldn't allow you to move your e-mail around. You know, consumers after a while don't like to be kept and sort of being told what to do. And right now on the Internet, the biggest trend again is, you know, social networking which where the user is in charge and the user is even creating content.

And I think the companies of the futures are the ones that are most open, at least in the Internet space, the ones that allow openness, sharing, that allow an ecosystem of sorts where they don't have to like capture customers and hold onto them for dear life.

Too little too late?

Kara Swisher
The Wall Street Journal
Free was something that was a good idea five years ago. I don't know why it's going to work today. I mean, they should have done it when they had the chance many years ago.

RAY SUAREZ: Well, let's talk about what AOL does from now on. It still has a base of millions of fee-paying subscribers. As it shifts to this new free service, what happens to them?

KARA SWISHER: You know, free was something that was a good idea five years ago. I don't know why it's going to work today. I mean, they should have done it when they had the chance many years ago. They should have spun the thing off, really, because it had no ability to buy really interesting new companies.

I don't know what it's going to do, because it can't -- you know, it doesn't want to spend money on marketing. Now they're laying off all these marketing people, you know, the people on the phones that drive you nuts at AOL.

And I don't know quite how they're going to hold onto people, because they lost I think a million people in the last quarter which is astonishing. At the same time, they grew so quickly. I don't know how you hold onto customers when there are so many free alternatives, like Google Mail, Yahoo Mail. You don't really need a service.

And now that AOL is free, you might stay there, but if it doesn't have the features that the others have, people move away, especially young people. And it is all about the young people. They move away very quickly to things they like.

And even MySpace is threatened if they don't continue to innovate and not sort of fill the service with commercial, you know, come-ons and sort of all this flash and to much, because the kids will move right off of it if they perceive something that isn't useful to them.

RAY SUAREZ: Well, briefly, Kara, before we go, it was just the blink of an eye ago when this was a killer brand. It was the most well-known brand in that space. Is there still value embedded in that brand that gives you a pedestal from which to start something new?

KARA SWISHER: You know, years ago, Barry Diller wanted to buy. He's another one who's been another mogul that's been in the Internet and wanted to buy AOL. And the AOL people, the Time Warner people, wanted to charge too much for it.

I mean, anybody could take a base of 17 million consumers and do something with them. It's just whether they have the commitment at the top of Time Warner to do so. And I just get the feeling, when you visit companies like Yahoo, and Google, and Flickr, and YouTube, that this is where things are happening and the real excitement is there.

And I don't know how you bottle that and bring it within AOL any more. And it may be just one of those -- you know, I always say that plains are covered with the bodies of pioneers, and AOL might be one of those pioneers.

RAY SUAREZ: Kara Swisher from the Wall Street Journal, thanks for being with us.

KARA SWISHER: Thanks a lot.