Photo illustration by Glen Wexler
"I used to ask,'What does AOL want to be when it grows up?'" That question, from former senior vice president of technology Sree Kotay, has hardly gone unexplored. AOL held several meetings from 2004 to 2006 at the swank Lansdowne Resort in Virginia, in part to tackle the topic. "There were a lot of epiphanies and arguments," Kotay says. "At one off-site, someone said, 'We ought to get rid of 60% of the senior executives. It doesn't matter whose voice is heard, just as long as someone's is.'"
The voice in charge during those years was Jon Miller's. He came aboard as CEO in mid-2002, a Harvard Business School grad and former top executive at Barry Diller's USA Interactive who had also worked at Nickelodeon and Boston's WGBH. The corporate culture he inherited was sick and wheezing. The accounting system, for instance, was snarled by thousands of arcane codes, each corresponding to a different "special offer" for Internet access. There were so many billing systems that the company launched an investigation just to identify them all. Meanwhile, the general ledger recognized only two forms of revenue: subscription and "other."
In AOL's organizational structure, known as "the Matrix," employees were assigned to centralized departments according to function. When a new project began, managers would assemble a team from those areas. Given the hierarchical hurdles, decision making took forever. "Somewhere between four and eight departments needed to cooperate before a product would reach a consumer," says Bill Wilson, EVP of programming. Adds David Corboy, a vice president in the technologies group: "Everything was decided by committee, so there was no real neck to choke when something went wrong." There were constant reorganizations; some people couldn't identify their own bosses. In the halls at Dulles, employees would joke: "So, who are you working for today?" The opacity gave rise to a career track known as "rest and vest," where people would hide out until their incentive pay matured. "AOL lacked a risk-taking environment," says one exile. "It was about self-preservation."
To make matters worse, Miller faced an unenviable business dilemma: What was good for AOL's future was bad for its present, and vice versa. While dial-up Internet service was doomed, it was also the company's most significant source of revenue. Major budgets were dedicated to updating AOL's software suite, loading it onto discs, and carpet bombing the country with them. As late as 2003, "The mind-set was, every dollar we have, we're going to invest in mailing a disc," says one former senior executive.
Some believed that AOL's best option was to compete on the open Web as an ad-supported business. But that strategy would crush existing cash flow. AOL knew that many of its customers paid their monthly fees only to keep their email addresses, and that offering mail for free would cost millions of subscribers. The company estimated it would take 10 free customers to generate enough ad revenue to match one dial-up subscription.
Then there were the technology challenges. AOL's sites were written in a proprietary code, Rainman, that was incompatible with standard browsers and search engines. Ad servers couldn't read it either -- one reason ad revenues slumped from $2.6 billion in 2001 to $781 million in 2003. The company would have to invest a fortune in tech upgrades just to get to the starting gate.
Miller also had to manage a hostile corporate parent. If AOL had been independent, he might have had the freedom to use its still-enormous subscription revenue to invest in acquisitions. Colleagues say he had his eyes on YouTube and MySpace, among others. But Time Warner's board, already burned by a historic $99 billion write-down from the 2000 merger, had little stomach for new-economy startups, especially ones that hadn't yet turned a profit. Although he bore no blame for AOL's sins of the past, "Miller had the problem of being only one degree removed from the team that Time Warner hated," explains a former executive. "He could have been Einstein and Gandhi combined, and the corporate immune system would still reject him."
Not that Miller was blameless. In April 2005, he launched AOL Internet Phone, an entirely new product that he spent millions developing. To recoup costs, the monthly fee was set at almost double what competitor Vonage charged. "The rationale they told each other internally was that, 'Oh, well, we have all these extra features customers want,'" says a former executive. "In fact, people didn't want features. They wanted a phone, cheaper." And because of tangled billing systems, at first only AOL's ISP customers could subscribe to Internet Phone. This was no small glitch: Internet Phone ran on broadband only. So AOL's dial-up subscribers would need a separate high-speed connection to make it work. As if that weren't farcical enough, sources say that just before the launch the company's board refused to let the service compete in cities where Time Warner Cable was offering its own VOIP service. In the end, Internet Phone had a mere 2,000 subscribers when it was canceled in October 2006.
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Recent Comments | 13 Total
March 22, 2008 at 12:07am by Not Disclosed
///Then there were the technology challenges. AOL's sites were written in a proprietary code, Rainman, that was incompatible with standard browsers and search engines. Ad servers couldn't read it either -- one reason ad revenues slumped from $2.6 billion in 2001 to $781 million in 2003. The company would have to invest a fortune in tech upgrades just to get to the starting gate.///
This is just pure BS. Which is perpetuates from an article to an article. The saddest part is that AOL execs believe that even today.
There was nothing that prevented Rainman from generating the content that was quite compatible with "standard browsers and search engines". It was done and it is done even today. Take AOL France Welcome Screen as an example.
Technical illiteracy of AOL execs made them trust snake oil salesmen. But that did not help either, did it?
Let me ask you: why it was so important to make AOL "go after Yahoo"? Why not make a bunch of Web brands they had chase Yahoo and leave AOL Flasgship service alone? Netscape, AIM, ICQ, Winamp, Compuserve! Sure they could make a thriving web brand from at least one of those if there was a theoretical possibilith of thatthey, couldn't they? And they would not have to deal with that dreadful Rainman. why not just leave the AOL Sevice alone? The "New Coke" marketing lesson: don't mess with the products that work! I guess they did not teach that in Harvard business school.
March 25, 2008 at 9:50am by Bob Jones
To be fair, S&B didn't know what they were getting into. While AOL was growing, there were still problems that needed to be dealt with. There continued to be a need for a vision about where and how AOL would play as a Web company - we can't expect S&B to have that vision as they were relative newbies. S&B and TW thought they could go in with purely execution in mind while riding the gravy train to growth. Big mistake. After spending the first 6 months learning about the company, the industry, and the problems they faced, S&B tried what they thought to be fast and prudent moves to solve the problems but it was 1 year too late and some of it backfired. Instead of treading new ground, AOL was back to playing catch up to the competition. This is the problem when office politics overrule logic and vision. And, in my opinion, is largely a result of the shark infested waters at TW.
March 25, 2008 at 2:23pm by Media Maven
Turning around AOL was a task no one could accomplish, given the constant demands from the parent company to generate income growth to offset the performance of Time and other old media assets. That tactic forced the company to obsess about mechanisms to prop up the dial-up cash cow, even as the tectonic plates of technology were shifting underneath them. Did AOL, at some point over the last 5 years, have assets to exploit to shift to a new business model? Yes, but at no point could the transition to an ad and search model be supported without re-baselining the business, a journey that Dick Parsons, Jeff B, and others were unwilling to undertake. They have a major role in the accountability chain for the whole AOL journey.
So, with these short-term earnings constraints, what did you get? A half-hearted transition, with the dial-up business still generating the majority of the earnings out of an aging and not very credit-worthy user base.
I think that some of the moves (the purchase of advertising.com, userplane, weblogs, the formation of TMZ.com, and the shift to a more robust free portal to retain customer traffic, etc.) were all decent moves, given the performance and investment constraints imposed on AOL, but without a new wave of initiatives to keep the journey moving forward at speed, in 2007 you began to see the languishing advertising growth starting to occur. In my eyes, Bebo is the first real new move by Randy Falco and Ron Grant that isn't a derivative of the Jon Miller-crafted playbook (I would say their hubris in claiming some intellectual highground over Miller was bad form as leaders, but that's another topic), and that's how I will grade them as business strategists going forward. I wish AOL the best of luck, but with the TWX stock trading at new lows, even when rumors of AOL being purchased hitting the wires, I think the analysts (Jessica Reif Cohen et al) still bullish on the stock should have their tickets pulled - they have done their clients a huge disservice by keeping them in the stock as it fell from its $23 peak...
March 25, 2008 at 3:37pm by Anonymous still anonymous
What a sad testimony to a fallen dynasty - one that others should take note of. AOL's problem was one of arrogance - pure and simple. The universe took care of this by installing a "tower of babel" that still exists today. The only thing left are employees who wistfully yearn for the "good old days".
March 25, 2008 at 5:43pm by Mark Zorro
I have not followed anything about AOL but I find the responses to this article as well as David Case's piece highly insightful. Normally I don't focus on corporate autopsies or ugly micro-details but I can learn much by digging into the piece because David Case has written comprehensive piece (with or without flagged sections by respondents) and the prose laced with meaningful numbers is brilliantly presented. It actually surprised me to read this level of detail here and I really am only going to significantly grow my learning if I continue to come across pieces that are incomprehensible to a dweeb thinker......M.
March 26, 2008 at 9:15pm by James Belle
perhaps they should have learned from Yahoo's mistake in hiring a guy from Hollywood to do a tech job! I don't think AOL is necessarily a dead man walking, they can still turn it around.
March 26, 2008 at 11:40pm by Bill Later
Enough already... Can someone just please shoot this company in the head? Elvis left the building when Pittman moved to NY in 2000 to take his ill-fated CEO in waiting spot at TW. There hasn't been any talent left in Dulles since. Idea: Number the employees and fire the odd-numbered ones (hell, ok, the even ones then). Then distribute all the savings to shareholders in a dividend. They deserve it after the stock's performance for the past 8 years.
May 2, 2008 at 5:25am by Desmond Haynes
Interesting read http://techwatch.reviewk.com/2008/04/comscore-reports-increase-in-traffi...
... building AOL into a major digital ad-sales firm.” The content push “is part of AOL’s bid to reinvent itself as an ad-supported Web company following its August 2006 decision to make its Internet-access service free. Visits to AOL’s Web sites slowed as a side-effect of that decision. … To draw visitors back, AOL redesigned sites in the news, sports and health categories. It also created a half-dozen new sites that don’t use the AOL name, such as a technology-focused site called Switched, a hip-hop site called BlackVoices, and a Web trend tracker called Urlesque.com, as well as Asylum. Dropping its name was an acknowledgement that the brand wasn’t hip enough for the consumers AOL was trying to attract.” AOL “also adopted some common tricks of the trade, such as making its sites appear higher in search-engine results....
May 16, 2008 at 5:02pm by Kasey Marcum
Very well written, David.
I am surprised that the employees aren't fleeing at an alarming rate. It has been obvious for a while that AOL should just give it up. Not sure why one would continue to work in this kind of environment.
October 26, 2009 at 2:54am by Somchai Yhai
I agree with James Belle,
"Tech job for tech guy".
Somchai Yhai
VP of Marketing at หางาน