America Online, Inc.

America Online, Inc.

8619 Westwood Center Drive
Vienna, Virginia 22182
U.S.A.
(703) 448-8700

Public Company
Incorporated: 1985 as Quantum Computer Services, Inc.
Employees: 124
Sales: $40 million
Stock Exchanges: New York
SICs: 7375 Information Retrieval Services

America Online, Inc. is the fastest-growing provider of information services that are delivered to customers’ personal computers (PCs) over phone lines. The America Online service includes a wide variety of electronic mail facilities, bulletin boards, conferences and classes, as well as software, games, and publications. America Online’s trademark has been easy-to-use, visually oriented services which make the on-line environment accessible and not intimidating to ordinary customers.

America Online got its start in the mid-1980s as an adjunct offering for owners of one type of personal computer and expanded by branching out to other brands. In the 1990s, America Online’s offerings were restructured and updated for more current operating systems, and, after the institution of an aggressive marketing drive, the company’s customer base skyrocketed. Profitable from the start as a niche-based product, America Online later expanded through agreements with a wide variety of computer manufacturers and media companies, considerably broadening its offerings and its reach.

America Online was founded by Stephen M. Case, a marketer who worked in the consumer division of PepsiCo Inc. In 1982, Case became intrigued by the possibilities of interacting with other personal computer owners through electronic telecommunications. At the time, there were small networks available for use, including the sharing of news and other data, but they were extremely difficult and cumbersome to use, and, as a consequence, were mainly employed by computer buffs or other specialists in the field. Case reasoned that the demand for online computer communication would be much greater if it was easier for people to use.

In 1985, Case got an opportunity to put some of his ideas into practice when he formed Quantum Computer Services, Inc., in partnership with Commodore International, Ltd., a leading manufacturer of personal computers, and Control Video. Using $2 million in venture capital, Case created an exclusive on-line service for owners of Commodore computers. The deal worked well for both partners. Commodore had an added selling point for its products, and Quantum had a ready-made pool of customers for its service. Named “Q-Link,” the service consisted of a few rudimentary bulletin boards, to which users gained access from their personal computers via a telephone modem.

Within two years, the Q-Link concept had proven its merit. Quantum’s revenues had reached $9 million by 1987, and the company had started to turn a profit. With the Commodore Q-Link service as a model, Quantum then branched out to offer programs to owners of computers made by other companies. First, the company set up an alliance with the Tandy Corporation, which manufactured IBM-compatible computers. In November 1988, on-line services for owners of IBM-compatible PCs were introduced. Later, Quantum also began offering services to owners of Apple computers. This service began in September 1989, after a dispute with Apple about whether its name would include the designation “Apple.” As personal computers became cheaper and more plentiful, and new, more powerful software and modems were developed, Quantum’s subscriber base grew quickly and the company boomed.

In October, 1989, Quantum introduced a new nationwide network for computer owners under the name “America Online.” Two years later, the company changed its name to that of its main offering. At the same time, the company began to reorganize its operations, consolidating the services it offered to owners of different computers and focusing its efforts on the IBM-compatible and Macintosh market.

In addition, America Online undertook an ambitious marketing campaign to increase the number of its subscribers. Each customer who signed up for the America Online service was charged $7.95 a month for the first two hours spent on the network, and then ten cents a minute after that. In mid-1991, the company expanded its pool of possible subscribers when it introduced services for IBM-compatible computers using DOS operating systems.

As part of its push to expand its subscriber base, America Online devised a number of creative ways to attract new users. In keeping with a policy of growth through strategic alliances, America Online entered into a joint venture with the Tribune Company, the owner of the Chicago Tribune, in an effort to ease its move into the Midwestern market. America Online created a news and information service designed especially for Chicago by making use of materials from the local daily paper. The product was a success, as thousands of Chicago residents began logging on to the service to exchange opinions on local politics, team sports, and other issues. In addition, America Online gained additional capitalization from the deal, as the Tribune Company bought a 9.5 percent stake in the company for $5 million.

In another such arrangement, America Online teamed up with a group called SeniorNet, an organization formed to encourage senior citizens to use computers. With its 5,000 members, SeniorNet provided a new source of customers for America Online, which paid the group a premium for every new member who signed on. In return, America Online offered specialized programming to attract seniors, instituting special news and bulletin services covering topics of interest to them, such as health care.

Case described America Online’s strategy as being focused on exploiting niches, such as those formed by the senior citizens group. Rather than trying to enroll the general population, as some larger network services did, America Online has turned a profit catering to smaller special groups. “We see ourselves as a series of specialized magazines catering to specific interests,” he told Business Week in 1992.

In May 1992, America Online capitalized on its history of solid growth when it sold stock to the public for the first time. The company’s offering was greeted with enthusiasm, and its stock price rose sharply. At the end of June 1992, America Online reported its fifth annual profit in its last six years of operation. The company’s revenues had reached $26.6 million, yielding profits of $3.5 million, a stark contrast to the persistent red ink generated by its larger competitors in the on-line services field. Continued growth and profitability appeared likely, as America Online’s subscriber base grew rapidly, increasing by nearly 50 percent every 12 months.

At the end of 1992, America Online announced another important strategic alliance when Apple Computer Inc. signed a licensing and development agreement with America Online to use its technology in Apple’s own future information services. The company was to earn $15 million from the agreement over five years. In addition, Apple contracted to pay for America Online’s conversion of its technology for use on Apple machines. The two companies announced that they intended to improve the America Online technology and develop it into an industry-wide standard for on-line information services. This joint venture lent weight and authority to America Online’s efforts to expand its market share beyond the ten percent it then held.

In January 1993, America Online expanded its offerings further, introducing an on-line service designed especially for the Windows operating system. As users of IBM-compatible computers moved in droves to the new, easier operating system, America Online saw an opportunity to convert them to its own graphically-based on-line environment. The America Online Windows service featured the company’s trademark high-quality graphics and ease of access, and quickly became the most popular new product America Online had ever marketed.

America Online formed another corporate alliance when it reached an agreement with the Sprint Corporation, a long distance telephone company, in April 1993. In return for discounts on the telephone usage that America Online needed to send its service out to users, America Online gave Sprint a large package of stock options.

By the spring of 1993, America Online’s success had attracted the interest of another innovator in the computer industry, Paul G. Allen, a cofounder of the Microsoft Corporation. When Allen’s stock holdings in the company began to approach 25 percent of America Online’s outstanding shares, the company’s board of directors moved to prevent him from threatening America Online’s independence by adopting a secret shareholders’ rights plan that would go into effect if any one party’s holdings in the company topped one quarter. In response, Allen filed documents with the Securities and Exchange Commission indicating his interest in acquiring America Online. He also stated that he might seek a seat on the company’s board of directors and reported that he had refused to sign a statement proposed by America Online promising that he would not involve himself any further in the company’s affairs.

Case and other America Online executives were concerned that any one overwhelming alliance would limit America Online’s ability to maneuver and negotiate with other companies. “We’ve built this company by establishing strategic alliances with a wide range of companies, and we believe it’s the best strategy for the company to remain independent,” he told the Wall Street Journal. On May 11, 1993, Allen met with America Online executives and proposed that America Online and his other high tech ventures work together to develop software for use in multimedia formats. This overture was initially rebuffed by America Online. Ultimately, Allen withdrew from his attempt to increase his involvement in America Online, as the two parties worked out an agreement to collaborate on some future endeavors.

The fruits of another America Online alliance were unveiled in June 1993, when Casio, Inc. and the Tandy Corporation, two computer manufacturers, introduced the “Zoomer,” the first in a new generation of products called personal digital assistants. This device incorporated software developed by America Online to offer electronic communications, such as fax, electronic mail, and access to other on-line services. The company believed that devices of this sort would open the interactive services market to a much broader segment of the population. Consequently, it agreed to work with Apple on its hand-held Newton product and with Sharp on its Personal Digital Assistant.

By the end of June 1993, America Online’s annual revenues had topped $40 million, an increase of 50 percent over the previous year. In addition, the company’s subscriber base had grown to exceed 300,000, also an increase of two-thirds. Not surprisingly, these gains made America Online the country’s fastest growing commercial on-line services company. By September, America Online’s consumer base had grown even more, as an additional 50,000 customers logged on, pushing subscriber growth to 80 percent.

As America Online’s subscriber base grew exponentially, the company began to move away from its early emphasis on niche marketing—the strategy which had provided its initial growth and profitability—toward a stress on a broader array of services which would appeal to its new, broader selection of customers. As part of this effort, the company took a number of steps. It announced that it would offer access to the Internet, a consortium of smaller governmental and academic computer networks that was run as a cooperative. In this way, America Online hoped to tap into the popularity of the Internet, which had a reputation as the fastest-growing on-line service, with over 10 million users in more than 50 different countries. Internet was known as a difficult on-line environment to master, but America Online hoped to simplify its use by offering its customers access to the network through its own software.

In addition to its Internet venture, America Online also embarked upon a series of alliances with media companies. The service added features from the Knight-Ridder newspaper chain, Time, Omni, the Atlantic, and the New Republic, among other magazines, and from the cable network CNN. America Online also joined a branch of the Disney entertainment conglomerate called Disney Adventures.

Along with its expanded offerings, America Online instituted an aggressive marketing program to insure that its subscriber base would continue to grow at a healthy rate. The company started selling membership kits at bookstores and computer supply stores, and also began to have starter disks bound into selected computer trade magazines. In addition, America Online continued to pre-install its software in many computers, making it particularly easy for new computer buyers to join the on-line community. Manufacturers incorporating America Online software into their products included IBM, Apple, Compaq, AST, Tandy, NEC, and Compudyne. Finally, in an effort to make its service appear more economical, America Online revised its pricing structure, lowering some costs. Although this move would have a negative impact on the company’s revenues, America Online believed that this would be offset by the fact that more people would sign up, and those who were already signed up would keep paying for the service longer.

By October 1993, America Online’s campaign to increase its subscriber base and enhance its market share had pushed its number of users past 400,000, as its blistering pace of growth continued. The size of the company’s customer core had more than doubled in the last twelve months. This was followed in the same month by a report that quarterly revenues had also doubled for a year before. In addition, the company’s web of media linkages became more complex, as it brought on-line National Public Radio, the San Jose Mercury News, and a number of publications produced by Matra Hachette, the world’s largest magazine company. In November 1993, America Online sponsored an “interactive event” with Christian evangelist Billy Graham. At a pre-arranged time, America Online users could send messages to Graham through their computer and receive general or, possibly, personal messages in return.

At the start of December 1993, America Online took another step to maintain its position on the cutting edge of information technology when it announced that it would join with three other companies to take part in a trial in California in which America Online’s interactive service would be delivered to customers through a cable network, instead of through a telephone line hooked up to a modem. Cable delivery paved the way for fuller integration of video and sound into the multimedia mix of text and graphics already provided through personal computer-based services. In this way, America Online hoped to position itself to survive and thrive in a changing information services market and mitigate the danger that advances in technology would leave its offerings behind, or that huge information, communications, and computing behemoths, such as AT&T and Microsoft, would move into a revolutionized marketplace and squeeze smaller competitors such as America Online out of business. To this end, the company also announced plans to work with General Instrument, a manufacturer of cable television equipment, to develop services for interactive television.

In addition to these futuristic plans, America Online continued to strengthen its position by adding subscribers, whose number had passed the half-a-million mark by the end of 1993, and by adding media partners, including Rodale Press, a health and fitness magazine publisher, a re-invented on-line Saturday Review, and the New York Times. In the area of hardware alliances, America Online added Dell and US Robotics to the list of manufacturers which incorporated America Online products into their own.

By the end of January 1994, America Online’s subscriber base had topped 600,000 members, and quarterly revenues had grown by 130 percent, as the company’s customer base continued to skyrocket. “The unprecedented demand for America Online has caught us by surprise,” Case announced in a company press release. “Our focus now is on expanding our infrastructure.” As part of that process, America Online cemented its second agreement with a major television network when it added NBC Online to its offerings. In addition, at the end of January 1994, the company announced a further use of the network’s interactive capabilities when it joined with Shopper’s Express to provide a grocery and pharmacy ordering and home delivery service.

As America Online moved into the mid-1990s, the company appeared to be ideally situated to prosper in the ever-accelerating field of interactive information networks and services. Although the rapid pace of technological development and the uncertain nature of the future market made the survival of any participant in the industry far from certain, America Online, with its easy-to-use product and policy of forming strategic alliances, appeared more than capable of continuing its success.

Further Reading:

Eng, Paul M., “America Online Is Hooked Up for Growth,” Business Week, June 21, 1993.

Miller, Michael W., “Tycoon Is Tapping into On-Line Service,” Wall Street Journal, May 24, 1993.

Schwartz, Evan I., “For America Online, Nothing Is as Nice as a Niche,” Business Week, September 14, 1992.

—Elizabeth Rourke