America Online is arguably the most interesting Internet success story of the 1990s, in large measure because it is fundamentally anti-Net. AOL doesn't want you to take full advantage of the World Wide Web. It wants you in its ropes, paying $21.95 a month for its proprietary content, its easy-to-use email, its messaging services, its chat rooms. The notion that AOL's content is of greater value than all of the content on the Web (almost all of which is free), or that its email is easier to use than any number of free email services, is, to put it mildly, nonsense. Nonetheless, the company has more than 19 million subscribers, each of whom pays $21.95 a month. You do the math.
The question is whether AOL can survive the coming decade, or even the next two or three years. Investors are betting heavily that the company will not only survive but also thrive. AOL is a core holding of virtually every technology fund and of almost every growth fund. Purchase recommendations from all of the major financial houses bejewel the company's stock like diamonds. With a market capitalization of more than $100 billion, AOL stands in a class of its own on Wall Street.
Such confidence seems incredible when you take into account the challenges that AOL faces. Any one of these challenges could significantly cut AOL's market capitalization. A couple of them could together reduce the company to also-ran status in a matter of months. All of them coming at once could render the company a relic — black-and-white television in a color-TV world.
Consider just one threat: the Microsoft Network (MSN). Microsoft is on a mission to destroy AOL. While Microsoft probably won't initiate hostilities until it resolves its antitrust problems with the U.S. Department of Justice, that doesn't mean the company isn't preparing to strike. This past summer, Microsoft tipped its hand in the pages of the Wall Street Journal. "We intend to be aggressive with access," said Brad Chase, a key Internet strategist. "AOL might think about it as a profit center. That's not how we think about it."
No one thought he was bluffing. Earlier in the summer, Microsoft had initiated a $400 rebate program with several retailers and computer-equipment manufacturers — an act that spoke volumes about Microsoft's willingness to spend money now to own the market later. With $17 billion in cash, Microsoft can afford to offer free Internet access to anyone who wants it. And it has more than enough money to spread the word that it will soon be doing just that.
It's not hard to imagine that in the near future Microsoft will run ads — on every TV and radio network, in every newspaper and magazine, and on every Internet home page — that ask consumers to make a simple choice: AOL for $240 a year (at the special annual rate), or MSN for free. When both are positioned at $240, AOL defeats MSN by 16 million customers. When the game changes to $240 versus $0, it's reasonable to assume that Microsoft will grab one-third or more of AOL's customers — even if AOL cuts its own fee in half.
Which leads to another major problem that AOL faces: Its fee structure is unsustainable. It has admitted as much by offering its service for $9.95 a month to customers who access AOL through an alternative Internet-service provider. As Jim Seymour pointed out in a September 1999 column in TheStreet.com, that offer has yet to prove especially compelling, because broadband, high-speed access has yet to become widely available. But we are entering what Seymour calls the Broadband Era, and high-speed access will soon be a fact of life in many, if not most, major markets.
As we move into the Broadband Era, more and more people will sign up for AOL's alternative $9.95 service. No one is going to pay MediaOne as much as $50 a month for high-speed cable-modem Internet access and then pay an additional $21.95 a month for direct dial-up access to AOL. To make matters worse for AOL, Microsoft will probably joint-venture with MediaOne and every other cable-modem access provider to lower the service charge by about 20% — in exchange for signing on as an MSN customer.
That leads to yet another major problem for AOL — a problem that involves what might be called the Web Intimidation Factor. Vast numbers of people are overwhelmed by the Internet and fearful of it, and that fear has greatly aided AOL's growth: In a scary world full of weird people, AOL is decidedly nonthreatening. It makes cyberspace easy. And it makes users feel important ("You've got mail!").
But the world is scary only if you feel that it has you at a disadvantage. Speech-recognition technology will change how we interact with the Web. This year or next, a Belgian company partly owned by Microsoft will introduce speech-recognition software that will most likely work well with other Microsoft products, including MSN. Stitch together free Web access, broadband capability, and speech-recognition technology, and suddenly the Web Intimidation Factor evaporates. You'll be able to talk to the Web: How scary is that?
All of these probabilities are causing AOL great concern. AOL knows only too well that a decline in fee revenues will result in a devaluation of the company's currency, which is its stock. If Wall Street decides that AOL is less like a cable-TV company (market capitalization equals number of subscribers times dollar value per subscriber) and more like Yahoo! (market capitalization equals earnings times multiplier), then AOL will lose at least half of its market value — just like that.
Against this triple-whammy threat, all that AOL has going for it is simple, down-to-earth human nature. What AOL provides is an Internet environment that works. Perhaps the only common denominator for Americans today is that no one has any free time. Despite the most advanced technology, time famine eats away at all of our lives. So, for most people, content is much less important than convenience. Keeping up with every new twist in Internet technology is not something that most people have time to do. What most people are looking for is an Internet solution that gathers all of the best Web sites in one place.
That place doesn't have to be the first one to offer such a solution. It doesn't have to offer the most advanced technology. It doesn't have to offer the highest-quality content. It doesn't have to be an industry leader. The only thing that place must do is continue to help its customers combat the problem of time famine — by eliminating drudgery and by enhancing fun.
And continuing to do that is the core of AOL's strategy. The company has forged alliances with four regional Bell operating companies (RBOCs), and it is likely that by the time you read this, it will have one or two more signed up. For better or for worse, we're stuck with the RBOCs until wireless telephony becomes ubiquitous and crystal clear — and that could take another decade or longer. Once the RBOCs roll out a high-speed modem service, with AOL as their "content partner," most of us will go with that option for one reason: convenience. One telephone line, one Internet service, one content provider — one bill. And since the RBOCs are the last companies on Earth that you would expect to make the Internet easy, they need AOL more than AOL needs them.
The rest of AOL's strategy is to provide as much convenience as possible to as many people as possible. The company is working on two offerings — a bill-paying service and a full-service bank — that will not only offer convenience but also save time. Once those services are operational, AOL's online-shopping services will be even more convenient than they are now — which is why companies like the Gap are entering into partnerships with AOL. They're paying hefty fees to do so, but if AOL maintains its customer base and continues to focus on what those customers really want, then those fees will be well worth it.
And therein lies the real strength of the AOL brand. AOL's customers believe that the company will keep current with the most convenient options that the Internet has to offer. AOL may not have the best products in every category, but it will definitely cover all the categories. It may not be the first to offer a bill-paying service, for example, but its customers believe that when it does offer such a service, that service will meet their needs. And as long as AOL maintains its customer base, marketers will have to come to it, since that's where their customers will be.
The major complaint that you hear about AOL (aside from its susceptibility to technical malfunctions) is that it gets in the way. Why get political news from AOL when you can get it from the Washington Post? Why get an airline ticket from AOL when you can get one for less from priceline.com? Why go to an intermediary when you can buy direct? Disintermediation is where it's at. Go to the source. Middlemen only mark it up and muck it up.
That's great, except for one thing: the way that most people live. Most people use the Internet for email. Most people don't have the inclination or the time to figure out how to make the Internet work for them. They want someone to do it for them. They like sound-bite service because they have a hundred other things to do. And as baby boomers age and echo boomers grow up, that time crunch will only get crunchier.
In the 1990s, the Internet was largely about disintermediation. In this new decade, it will largely be about reintermediation. The problem with disintermediation is that it's open-ended: It requires a flexible time investment. The beauty of reintermediation is that it enables a company to extract the best of the Web and then offer up a manageable menu of services.
There won't be a demand for a bunch of companies that offer multiple services under one roof. Two or three will do. And one of them will be AOL. It's true that AOL faces a tough couple of years ahead. It's true that AOL's fee structure will come under severe attack by Microsoft and others. And it's true that AOL's stock price will take a hit as a result.
But Wall Street is probably right about AOL's future: It's not content that we most care about; it's the chance to create a cozy, convenient environment. One of the most important trends in consumer behavior over the past 25 years is something that people in marketing call "home is a haven." The basic idea is that no matter what kind of chaos is going on in the real world, your home offers comfort, safety, control, and (if you're lucky) something beautiful. And, therefore, it's worth spending money on.
The same rule applies to one's home in cyberspace: People need a haven from the Web that's on the Web. AOL offers a safe harbor in a storm. That's why the company's long-term future is bright.
John Ellis (email@example.com) is a writer and consultant based in New York City. You can, of course, visit America Online on the Web (www.aol.com).