AOL The Emergence of an Internet Media Company

1. AOL-AMERICA
ONLINE
GROUP 12
ARUN KUMAR
NAPOLEON
NIJANTHA KUMAR
PRADEEP S
RAJARAMAN S
SWAMINATHAN G

2. COMPANY VISION
• Envisioned by Steve Case as a consumer services company, not a technology
company focused on “customer experience”.
• This led to a graphical user interface (GUI) for the service derided by many observers
as the "Internet on training wheels."
• AOL realized early that the overwhelming majority of U.S. consumers wanted their
online service to be easy to use above all else.
• According to Chip Bayers, the mass market appeal and the lack of sophistication is
the “key to AOI’s success”.
• Average AOL user in 1999 spent 544 minutes on the service per day.

3. Case became the
CEO in 1992.
Main rivals-Prodigy
and CompuServe
1985-company
renamed to quantum
computer services-Q
link online service
COMPANY HISTORY
1983- Steve Case started as
pizza and using “Source”-
joined control video in a
marketing job.
1989-debut of AOL as a
service, for macintosh.
1991-renamed formally
At the end of fiscal year
1992, AOL had 181,000 paid
subscribers less than half
the number of Prodigy

4. SILVER COASTERS-LAUNCHING INTO THE
FORAY
• In 1994 and 1995, AOL launched a major direct marketing blitz.
• Direct Marketing by AOL.
• A 3 month free trial version with a version of AOL that enabled login.
• 300 million disks and 1 million subscribers by August 1994.

5. • Emerging threats in 1994 and 1995-ISPs and internet browsers.
• ISPs afforded their users the freedom to browse the World Wide Web for content.
• AOL tried to compete by purchasing Booklink technologies in 1994 and integrated
it with its service..
• While AOL members had easy access to the Internet, chat rooms remained
closed to nonservice members.
FACING NEW THREATS-ISPS AND INTERNET
BROWSERS

6. • ISPs-fixed price focus ($19.95) a month; AOL-focus on the online experience.
• AOL -“welcome” during login, “You’ve got mail”, the "buddy list" , the "Instant
Message" etc.
• AOL – parental controls.
• February 1992-2 million paid subscribers-average 250,000 new subscribers per
month.
• Market leader and responsible for 30% of internet access.
AOL-FOCUS MORE ON THE EXPERIENCE

7. “ALL YOU CAN EAT”-THE INITIAL PRICING
• Feb 1996-AOL had 5 million members-but in came a new threat: price
pressure.
• AOL’s subscription fee=Monthly fee($9.95 per month for 5 hours) + Hourly
charge($2.95 in excess of 5 hours per month).
• For moderate users, monthly fee-$30; for heavy users, bill ranged from $100 to
$200.
• ISP Charge-flat fee of $19.95 for a month of unlimited access.
• Another major challenge in March 1996-Microsoft’s switch in price to $19.93 per
month on unlimited basis.

8. • A new flat rate of $19.99 for unlimited access was set in 1996.
• New joiners: more than1 in the first month of the change; plummeting of traffic
levels.
• In the press, America Online became known as “America On Hold”.
THE REVISED PRICING….AND ITS CHALLENGES

9. • Advertising, transaction royalties, and
merchandising-contributed >10% of AOL’s first
quarter revenue in 1996-with advertising as a
large revenue source.
• By 2000, 60 to 70 percent of AOL’s revenue
came from members.
• Most observers expected that percentage to
decrease as access increasingly became a
commodity.
EFFECT OF NEW CHANGES IN PRICING

10. • On the cost side, the industry had three primary expense categories:
• (1) Telecommunications, (2) Customer Acquisition, and (3) Content Royalties.
• Telecommunications expenses:
 Substantial in the industry.
• Customer acquisition :
 Increasingly more expensive due to competition.
• Content royalties:
 Traditionally amounted to 15% to 30% of overall revenues in aggregate.
EVOLUTION OF STRATEGY

11. • AOL launched the “Greenhouse Program”-the company took equity stakes in over 50 start-up
studios.
• AOL-did investment and provided support to these studios.
• Early 1996-AOL had 23 greenhouse services running; planned to have over 100 by June 1996.
• This success of Motley Fool led to perusal of other programs.
THE GREENHOUSE PROGRAM

12. • President of AOL services-Ted Leonsis, directed greenhouse services.
• Increase in membership: tenfold; revenues jumped from less than $100 million to more than $1.5
billion.
• AOL downplayed the importance of its relationships with traditional media companies.
• Lost some content to major companies-NBC content to Microsoft and Time Warner content to
CompuServe-but that didn’t deter them.
• 1996-Leonsis became president of a new division called AOL Studios to focus on content
creation.
DOWNPLAYING TRADITIONAL SERVICES…

13. • In 1996-enter Bob Pittman, founder of MTV, to run AOL’s day-to-day operations while Case
stayed on as company CEO, focusing on corporate strategy and product development.
• Two goals for AOL: to make the company profitable and to make AOL one of the leading
brands in the world.
• Customer acquisition costs-reduced from $375 to $90.31.
• Focus was given more in solving network traffic problems and in settling lawsuits.
• New strategy in February 1996-scaling back developing and producing entertainment and
used content providers to pay for carriage.
….AND ENTER NEW LEADERSHIP, NEW STRATEGIES

14. AOL PARTNERSHIP DEALS
• Partnership deals - Pittman with providers and advertisers involved a
combination of cash payments & cross-marketing provided to AOL.
• This was provided in exchange for carriages on the AOL Service and a
guaranteed number of impressions by AOL users.
• Price tag associated with a particular deal was determined by a number of
factors:
• The level of exclusivity on AOL
• The areas in which placement was guaranteed on AOL
• The AOL brands on which a content partner gained carriage

15. AOL PARTNERSHIP DEALS
CONTD…
• Four types of partnership deals with AOL:
• Anchor tenancy: Each of AOL’s 18 channels had up to 4 anchor tenants with fixed
placements on their respective pages.
• Exclusive provider: USA ($500 million) & Barnes&Noble ($100 million) paid for its exclusive
relationship with AOL.
• Primary provider: An AOL primary provider was the featured provider in a particular space;
eToys ($18 million) & Preview Travel ($32 million) paid to be primary commerce provider of
toys on AOL.
• Premier provider: Included a combination of Anchor Tenancy, some exclusive content, and
multi-faceted placement and promotion; In 1999 CBS MarketWatch ($21 million) & Electronic
Arts (EA) ($81 million) paid AOL.

16. PARTNERSHIPS/ACQUISITIONS
• In 1990s, AOL had established strategic alliances with dozens of companies including
Time Warner, ABC,, Tribune, Hachette, IBM, American Express, etc…
• This is to provide content, distribution, and the latest technology to its users.
• Early 1996 - Alliances with Microsoft and AT&T.
• AOL made Microsoft’s Explorer their featured Internet browser in exchange for an
AOL icon in every copy of Windows 95.
• AOL and AT&T alliance- to offer a link to AOL from its WorldNet Internet access
service providing AOL with potential access to AT&T’s 80 million customers.
• In 1999, AOL purchased Netscape Communications at a price of about $10 billion in
stock.

17. INTERNATIONAL
• In fiscal year 1999, AOL International topped with 3 million members outside the
United States.
• In 1999/2000, AOL partnered with Mexico’s Cisneros group to launch AOL Latin
America services in Brazil, Mexico, and Argentina.
• The company also launched AOL Japan and AOL Australia, and made a strategic
investment in China.com.
• This is to strengthen AOL’s role in that region and to set the stage for the launch
of AOL Hong Kong in 2000.
• By August 2000, AOL operated in seventeen countries worldwide

18. TIME WARNER
• In 2000, Time Warner was the world’s largest media company.
• It published and distributed books and magazines, recorded music, movie
and television programs.
• Owned and operated retail stores, Cable TV systems.
• Owned and administered music copyrights.
• The company owned 75 percent of Time Warner Entertainment which was
comprised of Warner Bros., Time Warner Cable and several other
entertainment holdings.

19. TIME WARNER’S BUSINESSES
• Cable Networks
• Publishing
• Music
• Filmed Entertainment
• Cable Systems

20. TIME WARNER’S BUSINESSES
Cable Networks:
• TBS Entertainment: The Turner entertainment networks housing TBS Superstation, TNT,
Cartoon Network, Turner Classic Movies, and the new Turner South.
• CNN News Group: CNN featured more than 77 million U.S. subscribers and over 600
news affiliates in the United States and Canada.
• Home Box Office: This division featured both HBO and Cinemax, with 35.7 million
subscribers in the United States and 10 branded channels.
Publishing:
Time Inc., featured thirty-six magazines with a total of 130 million
readers.

21. TIME WARNER’S BUSINESSES
Music:
• Warner Music International, Atlantic, Elektra, Rhino, Sire, Warner Bros.
• The Group had thirty-eight of the top 200 US albums in 1999 and owned 1 million music
copyrights.
Filmed Entertainment:
• Warner Bros. owned 5,700 feature films, 32,000 television titles, and 13,500 animated titles,
including 1,500 classic cartoons.
• New Line Cinema produced four of 1998’s top twenty-five box-office hits.
Cable systems:
• Time Warner Cable featured the Road Runner high-speed online service.
• Time Warner cable had more than 12.6 million customers and passed 21.3 million homes.

22. CROSS-PROMOTION
• Time inc and warner bros merged in 1989 which brings together in
the media platform and also to promote each other.
• Time warner failed to exploit its strategy of leveraging the media
assets until acquisition of tuner broadcasting systems in 1996.
• Tuner asset is considered as third side of the triangle.

23. • Main complaint-time and warner did not make much of their merger a decade ago.
• Main competitors:
 MSN network, investing $1 billion in Comcast and $5 billion in AT&T.
 Rupert Murdoch's News Corp. which had structured itself around a future in which consumers
would demand wireless Web access and interactive TV.
 Sony, with the main unifying asset being video games and also a major part of their revenue.
 Viacom, which became even more expansive after its merger with CBS.
 General Electric: With MSNBC, CNBC, and NBC, General Electric, which earned $100 billionin
1998 revenue.
 AT&T was the largest telecom company in the United States, with more than 80 million
customers.
OTHER PLAYERS IN THE SYSTEM

24. WARNER’S EARLIER EFFORT ON INTERNET
• Launch of pathfinder in 1994, a portal to its various media properties.
• Due to the problem arising in the pathfinder and the site is dropped in may 1999.
• Company also spent $15 million dollar on the portal.
• By changing the internet strategy to emphasize 5 vertical hub websites.
• The launch of entertainment hub called “entertaindom”.
• At February ,the website also ranked 664 in overall and 66 in the entertainment
category due to this issue the top management is changed and some executives
were forced out.

25. MERGER
• On January 10, 2000,
• $165 billion merger.

26. MERGER( CONTINUED)
• Within 5 weeks -2 companies - lost almost $50billion of market
capitalization.
• Reminiscent of Barry Diller's failed $22 billion attempt to merge his USA
networks with the internet portal Lycos.
• Disney’s struggle to convince investors of the value of its $1.6 billion
acquisition of internet portal Infoseek.
• Convergence of old and new media:
• Combination of hitherto separate Internet Service Providers (ISPs),
portals, and content providers, and that AOL was uniquely suited to
lead this convergence.

27. CONDUIT VS CONDUCT
• In 2000, growth outlook cable network industry – good.
• In 1999, total cable network revenues $24 compared to the $16 broadcast
network advertising
• Reason for the merger may have been plumbing rather than programming.
• Time Warner’s cable properties would give AOL control of valuable
broadband distribution assets.
• AOL -lack of broadband distribution capability.

28. CONDUIT VS CONDUCT
CONTD
• AOL needed fast, inexpensive connections to its customers to
remain competitive as broadband delivery increased in
popularity.
• Most vocal opponents to merger - The Walt Disney Company.
• Disney feared that AOL, acting as a broadband gatekeeper,
could choke off access to Disney’s crown jewels⎯ its content.
• NBC, General Electric, joined Disney.

29. NOW A WORD FROM OUR SPONSOR
• Advertising and e-commerce lifeblood of the merged AOL Time Warner.
• Revenue increased by 23 % at Time Warner-Q2, 2000.
• During AOL’s Q4 2000 ending June 30, revenues increased more than 80
percent from the previous year

30. CALLING AOL
• Series of acquisitions - easy to access the service via any medium.
• AOL enabled access to its service (DSLs, announcing alliances with GTE,
Ameritech Communications, and Bell Atlantic, (ADSL) service to subscribers.
• Voice service (VoIP).
• 5.4 % stake in Internet telephony company Net2Phone .
• 10 % stake in Palm.com

31. CALLING AOL
CONTD
• AIM, ICQ and Buddy Lists made the company telecommunications
player.
• ICQ had 62.4 million registered users - average of 75 minutes per day.
• AOL's AIM and ICQ software - 130 million users.
• Not allowing other ISPs to link to its ICQ system brought charges of
anticompetitive behaviour from ISPs.
• Attention from the Federal Trade Commission (FTC).

32. CALLING AOL
CONTD
• Competitors Microsoft and AT&T iCast and Tribal Voice criticized
AOL for its refusal to allow people using other products to trade IM
with its users.
• AOL tried to block competition.
• Renewed urgency for AOL
• Reviewing the Time Warner deal.

33. REGULATORY UNCERTAINTY
• Regulatory issues.
• Open access.
• Potential reclassification of internet over cable lines as a
telecommunications service.
• U.S. Circuit court of appeals -internet service over cable should be
classified ⎯ and potentially regulated by the fcc⎯as a form of
telecommunications service.
• Telecommunications services were regulated as "common carriers,"
forbidden from discrimination.
• Cable providers-allowed companies to select which channels their
customer receive.

34. REGULATORY UNCERTAINTY
CONTD
• Legal battles between ISPs and cable operators.
• Creating substantial uncertainty for investors and consumers.
• FCC Chairman William Kennard said
“the FCC might decide to conduct its own proceeding to reclassify
Internet service over cable as something other than a
telecommunications service or the agency might adopt the court's
classification but exempt such service from telecom rules.”

35. CONCLUSION
• After the merger was announced, the key roles were already determined.
• CEO -Gerald Levin.
• Bob Pittman, AOL’s President and COO , co-COO role with Time Warner’s President, Dick
Parsons.
• Pittman-subscription, advertising, and commerce businesses.
• Parsons-run content from film, television production, music, and books.
• Ted Turner, Time Warner’s Vice Chairman-Senior Advisor.

36. CONCLUSION
“The merger tested the ability of AOL (an Internet pure play with 12,000 employees) to
make something greater than AOL and Time Warner (a 67,000-employee traditional
media conglomerate would otherwise produce independently.”
• AOL has evolved from an Internet Service Provider (ISP) to control a wide variety of
Internet and media assets including vast content arms (e.g. Time Magazine),
broadcasters (e.g. CNN) and cable systems.
• The business models sustaining many of AOL Time Warner’s assets are fundamentally
different from that of an ISP.

37. QUESTIONS
• The skill sets needed to manage the conglomeration are very diverse.
• Was it necessary to bring these assets under one firm?
• How can AOL Time Warner incorporate these assets to create something greater
than if ownership of the two companies stayed separate?