Digital Matters - Issue 31

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?