Case, Steve 1958–
Director, Time Warner
Education: Williams College, BA, 1980.
Family: Son of Dan (attorney) and Carol (teacher; maiden name unknown) Case; married Joanne Baker (divorced); children: three; married Jean Villanueva.
Career: Procter & Gamble, c. 1980–1982, marketing; Pizza Hut, c. 1982–1983, new product manager; Control Video, which became Quantum Computer Services in 1985, which became America Online in 1991, 1984–1992, various positions including vice president of marketing; 1991–2001, chief executive officer; AOL Time Warner, 2001–2003, chairman; Time Warner, 2003–, director.
■ Stephen M. (Steve) Case went from marketing hair care products and pizza to establishing the highly successful online Internet service called America Online (AOL). Unlike other computer and Internet gurus who forged giant companies and made fortunes from the rapidly advancing computer industry, Case did not have a background in technology. Rather, he relied on his marketing expertise to outmaneuver and outperform competing Internet service providers such as Prodigy, Compuserve, and Microsoft. In 2001 Case completed AOL's buyout of the media giant Time Warner and became chairman of the newly named AOL Time Warner. Two years later Case went from being one of the most important media moguls in the world to resigning as chairman of AOL Time Warner as the company's stocks floundered. Despite this turn of events, industry analysts have noted that Case was a true Internet pioneer whose determination and vision helped establish online services as an integral part of the new era of Internet communications and commerce.
SHOWS YOUNG ENTREPRENEURIAL SPIRIT
Steve Case was born and grew up in Hawaii. He showed an early entrepreneurial spirit, when he and his brother, Dan, set up a lime juice stand in their neighborhood. In their teens the brothers formed Case Enterprises, a mail-order business that sold watches, seeds, and Christmas cards. For an article in Fortune, Case's mother, Carol, told Andy Serwer, "But they were also competitive. They both had typewriters, and you could hear them typing away their ad circulars" (November 22, 1999). Steve also started a number of businesses on his own, including operating an airport shuttle and selling fruit baskets, which helped him make money while he was attending Williams College in Massachusetts. Case even wrote music reviews so he could get free tickets to shows and was a singer in two new-wave rock bands.
After graduating in 1980 Case was dismayed when all his applications to MBA programs were rejected. He applied for jobs at the prestigious New York advertising firm of J. Walter Thompson and at Time's cable-TV network, HBO. Both rejected him. Nevertheless, Case was already thinking big. As reported by Richard Linnett and Kathleen Sampey in Adweek Eastern Edition, Case had written in his applications that he envisioned a future when two-way cable systems would make the standard television set "an information line, newspaper, school, computer, referendum machine and catalog" (January 17, 2000).
Case ended up working for Procter & Gamble in marketing. After two years trying to sell items such as Abound hair conditioner, he left and joined Pizza Hut, where he became manager of new pizza development. As he tested new product combinations and offered them to the public, he found that people continued to like the plain old cheese and sauce pizza best. Case noted that he learned to keep it simple, and the lesson would later serve him well.
FROM PIZZA TO HIGH TECH
Developing new toppings for pizza was not exactly Case's idea of being an entrepreneur and he left in 1983 to join Control Video, a video-game specialist company backed by the company where his older brother, Dan, worked. Control Video was pioneering the still-fledgling computer online world and setting up a service for users of Atari computer games. Although Case admitted that he had hated the one computer science course he ever took in college, he had found that communicating via computer was exciting. While working for Pizza Hut he had bought a Kaypro computer, and it took him two weeks to figure out how to hook it into an online service. He told Joel Shore in Computer Reseller News, "But when I finally logged in and found myself linked to people all over the country from this sorry little apartment in Wichita, it was just exhilarating" (November 15, 1999). Now he was working for a company that was more aligned with his vision of two-way cable information systems.
Control Video soon encountered financial problems and was re-formed as Quantum Computer Services in 1985. Case was made marketing vice president and set out to establish Quantum's new Q-Link online service for Commodore computer users. The service was successful and Quantum soon expanded to form online deals with Apple Computer and Tandy. When Apple departed company with Quantum, Case's marketing experience told him it was time to give the company a whole new image as it launched a new nationwide online service. Case held a contest to choose a new name for the service and ended up picking his own suggestion of "Online America," which was changed to America Online. In 1991 the company officially changed its name to America Online, and Case took over as the company's chief executive officer the following year.
AOL GOES PUBLIC
On March 9, 1992, Case and AOL went public on the NASDAQ and raised $66 million through an offer of two million shares for $11.50 each. Although many believed that on-line services were going to be a passing phase and of little use when the Internet and World Wide Web were fully developed, Case saw the future differently. From the beginning, as noted in Fortune, he described AOL's mission as building "a global medium as central to people's lives as the telephone or television … and even more valuable" (February 7, 2000). Case was not the only one high on the potential of online services. Paul Allen, who was partnered with Bill Gates in Microsoft in 1992, wanted to buy AOL. Case turned him down.
Although Case was confident, AOL only had 181,600 users in 1992. Furthermore, AOL was battling other online services, most of which had more financial backing, for the relatively new and growing market. In addition, within a year major mergers of companies like Time Warner and Turner Broadcasting led many market analysts to predict that Case's smaller online service would be swamped by these behemoths' better offers.
Fortunately for AOL, Case's background in marketing enabled him to make AOL competitive and ultimately to help it come out on top. First and foremost, he recognized that the online service had to be user-friendly, truly useful, fun, and affordable. His goal was to create a medium that anyone, not just computer aficionados, could take full advantage of. Case also recognized that AOL would have to leverage technology and partner with a variety of companies to create that experience. AOL started to send free computer disks in the mail to Americans who owned computers so they could easily load AOL onto their computers and log on to the fledgling World Wide Web. From 1994 to 1996 AOL added five million new customers, more than the New York Times and Washington Post had added during the previous 50 years. As a result, AOL became the largest online service provider.
THE WEB THREATENS
Despite these successes, Case and AOL were facing several serious problems in 1996. Service blackouts and busy signals on the telephone landlines, because of the high volume that AOL's unlimited usage pricing plan had created, angered many customers. There was also a mounting threat from Microsoft as it created a rival service to AOL, which would eventually become the Microsoft Network. Case's marketing strategy proved too much, however, for even the giant Micro-soft to overcome, and AOL would eventually form a partnership with the company. But many market analysts saw the real competition to AOL and all other online service providers as being the Internet and the World Wide Web itself, which computer users could access in a number of ways without a sophisticated Internet service provider such as AOL.
While many saw the Web as a competitor to AOL, Case saw the Web as a niche filled with thousands of disparate home pages with little marketing strategy. The Internet, in Case's view, was just a piece of what consumers would ultimately want. Case was intent on continuing to package AOL in a way that Main Street would find valuable. He proclaimed that the Web was really an opportunity for AOL to expand, emphasizing that the proprietary content service AOL provided was a way to make the broken-up world of Web sites and organizations into a more consumer-friendly entity.
Case realized that the Internet without an organized online service provider would require consumers to buy various software packages, plug-ins, and add-ons in order to take part fully in the experience. Furthermore, they would have to surf the Internet and subscribe to services they wanted on an individual basis. Case told Gene Koprowski in an article for Forbes that the approach was fine for those who were technologically astute but was too complicated for the average consumer. He added, "TV would never have gotten a 90 percent market penetration if it had been that hard. If you want to reach a mainstream audience, you have to make it more plug and play. One-stop shopping" (October 7, 1996).
Although in 1997 AOL suffered a $499 million loss that led many to believe the market analysts were right in predicting its fall, Case soon changed their minds. The following year, 1998, AOL garnered $91.8 million in net income on revenues of $2.6 billion. Several factors helped Case to turn things around. First of all, he and the president of AOL, Robert Pitt-man, continued to rely on old-fashioned marketing campaigns. They increased AOL's direct-mail campaign and flooded American homes with AOL diskettes and CDs, making it easy for consumers to sign up for the service. Case and Pittman also began luring online merchants to advertise and sell their wares to AOL's millions of subscribers. Case saw these e-commerce revenues as perhaps eventually being even more lucrative than subscription fees. By 1999 AOL had 17 million members and Case had turned the company into the first true blue chip Internet stock.
LOOKS TO THE INTERNET CENTURY
By 2000 Case and AOL had accomplished several things that signaled AOL would be one of the leaders of what Case had dubbed the coming "Internet century." Among them was a $4.2 billion deal to buy Netscape Internet portal, which AOL acquired in March 1999 along with Netscape Communications Corporation. The portal was among the most popular destinations on the Web.
Although AOL was nearing 25 million subscribers, Case was facing a threat. High-speed cable Internet access was under development and owned by large corporations, such as AT&T and Time Warner. With the promise of greatly increasing the speed of downloading Internet sites, Case knew the threat to AOL was significant. He had spent much of 1999 lobbying Congress, the Federal Communications Commission, and local governments to force cable companies to open their networks so that AOL and other unaffiliated Internet service providers could bring high-speed access to their customers. But Case also had other plans. He was positioning AOL for the impending broadband explosion by cutting deals with satellite delivery companies and telecommunications companies that offered digital subscriber line services.
In January 2000 Case's next move was clear. He announced that AOL was buying the media conglomerate Time Warner in a merger that would create the new company, AOL Time Warner. The company would combine AOL's online services with Time Warner's vast media and cable assets. Many industry analysts saw it as a coup for Case, who could now pursue his dream to package, distribute, and sell both information and entertainment in radically new ways. Case was made chairman of the new company in January 2001 and was charged with focusing primarily on the technological developments and policy initiatives concerned with the global expansion of the new interactive media. Many industry analysts saw the move as firmly establishing the Internet as a medium for audio and video as well as for traditional text and graphics. In an article on CNET News.com, the industry analyst Phil Leigh noted, "It is probably the most significant development in the Internet business world to date" (January 10, 2000).
The purchase was basically an all-stock deal involving about $160 billion. On the day of the deal's announcement, Time Warner's stock soared up $25.31, or 39 percent, to $90.06. But AOL's stock fell 2 percent by the end of the day to $71.88. According to some analysts, AOL's stockholders had good reason to be cautious. Although Case and AOL seemed on the verge of heading a new world that combined online services with media, they still faced many challenges and competitors. Many analysts also thought that Case and AOL had given up an essential and important aspect of the company. Throughout the years Case had been extremely focused on his goals for AOL. He had beaten out Gates and Microsoft in the Internet service provider war because he and the people under him lived, breathed, and dreamed about on-line services, while Microsoft and other competitors had to pay attention to various non-Internet aspects of their businesses. Analysts noted that with the merger Case and AOL were also going to have to deal with disparate businesses, such as TV networks, cable systems, magazines, books, and movies. At the same time Microsoft was increasing its focus on the Internet. As for Case, he told Jennifer Gilbert in an article for Advertising Age that he saw the merger as a way to build bridges among various communications formats. He noted, "The future is more about the PC and the TV and the telephone all connected in a seamless way" (April 17, 2000).
MANAGEMENT STYLE: LOW KEY BUT FOCUSED
Many analysts noted that Case's personal style probably had a lot to do with his ultimate success in taking AOL to the top of the Internet service provider heap. Case had been described as an unassuming and down-to-earth leader who was not boisterous in his managerial style. He understood clearly the need for good PR and the power of the inside strategy of talking one-on-one with people to get what he wanted. For example, he continually met with politicians of all persuasions in Washington, D.C., as he tried to iron out concerns about the Internet, including the availability of pornography. At the same time, he won concessions that virtually eliminated AOL's liability for crimes committed by users of its network and derailed antipornography pressure. He also helped defeat privacy legislation that would have limited online companies' ability to gather marketing information about the Internet habits of teenagers.
Industry analysts noted that AOL became successful because of Case's diligence and vision, values that he ingrained in AOL's corporate culture. For Case, there was no alternative to the Internet and AOL's future domination of it. His stubbornness about building the company was apparent, said analysts, when Case and AOL could have sold out for millions of dollars early on but rejected the deal. They also noted that Case was relentless in reengineering his company around a marketing sensibility that he knew well.
Although coworkers and others observed that Case had a healthy ego, they also said that it never stopped him from hiring people who were more flamboyant and creative. They also said that he did not take a threatening approach to management and worked well with the technological talent he needed to make AOL grow. Writing in MC Technology Marketing Intelligence, Michael Schrage commented, "Steve Case was able to attract and retain a conglomerate of truly talented and—in the entrepreneurial sense—effective team of executives" (March 2000).
AFTER THE FALL
Although Case and many industry analysts expected the new AOL Time Warner company to prosper, the market value of the new company had fallen $50 billion by the time of the annual meeting in May 2002. During the meeting, Case took most of the heat for the company's poor performance. Many claimed that Case went from being a visionary to a mere executive. Case himself apologized for setting the company's profit targets too high and sticking with them too long. Further compromising Case's position was a growing AOL accounting scandal that had Securities and Exchange Commission investigators probing into whether AOL had made suspect deals to overinflate its revenue numbers while it had been trying to buy Time Warner with a stock deal.
AOL Online was also presenting many problems for Time Warner because revenues from advertising and subscriptions had decreased $1 billion in one year. Its ad sales were also dying, and AOL could not establish its broadband sales. The debate was heated over whether Case's vision for the company was working. In February 2003 Case stepped down as chairman of AOL Time Warner but remained a director on the board of the newly named Time Warner. Few believed, however, that Case would have much to say in the running of the company.
Although many industry analysts believed that Case's vision was correct, they noted that a number of factors contributed to his departure. First of all, the timing for Case's takeover of Time Warner probably could not have been worse. On the personal front, as the merger took place, Case spent long periods away from the company to spend time with his older brother, Dan, who was dying of cancer.(Dan Case had also become extremely successful as the CEO of Hambrecht and Quist and then chairman of the board of JP Morgan H&Q.) On the national front, the economic recession and the terrorist attacks of September 11, 2001, crippled the new technologies sector. As one of the most outspoken proponents of interactive services, Case's high profile made him an easy target. In addition, once the inflated Internet currency that Case had used to buy AOL finally burst, AOL Time Warner was in dire straits financially. Many insiders also noted that Case's management style and intellect did not transfer well to an established, conservative company like Time Warner. Case had made his name and established his style with a one-time startup company that did not initially answer to stockholders and remained narrowly focused on its goals. As a result, the corporate cultures of AOL and Time Warner never really meshed.
By the time Case stepped down, nearly $200 billion worth of shareholder value in AOL Time Warner had been lost. As described by Michael Maccoby in Forbes, Case was among a number of "chief executives who sold themselves and their companies on innovation and vision, only to be kicked out and quickly replaced by bosses whose immediate goals are cost-cutting, debt reduction and steady and predictable growth" (March 3, 2003). While some analysts thought it would be unwise to cut Case totally loose from the company and that his vision could still serve Time Warner well, others commented that it would be best for AOL to separate completely from the company and bring Case back on board.
Despite his fall, Case remained optimistic about the future. Case commented that the difficult environment in terms of the economy, advertising, and the Internet sector certainly contributed to the company's difficulties. However, he noted that consumer and technology trends were giving consumers more choice, control, and convenience and that these factors were going to ultimately transform media, entertainment, and communications. In an interview with CNN's Paula Zahn, he said, "And our company, AOL Time Warner, is best positioned to ride that wave" (January 14, 2003). After leaving the company, Case spent most of his time concerned with the philanthropic efforts of the Case Foundation.
See also entries on America Online, Inc. and Time Warner Inc. in International Directory of Company Histories.
sources for further information
"AOL Buys Time Warner in Historic Merger," CNET News.com, January 10, 2000, http://news.com.com/2100-1023-235400.html?legacy=cnet.
Cappo, Joe, "A Case of Pioneering in Communications," Crain's Chicago Business, November 22, 1999, p. 8.
Gilbert, Jennifer, "Steve Case," Advertising Age, April 17, 2000, p. 134.
Koprowski, Gene, "AOL CEO Steve Case," Forbes, October 7, 1996, p. S94.
Linnett, Richard, and Kathleen Sampey, "Gray-Flannel Fantasies," Adweek Eastern Edition, January 17, 2000, p. 70.
Maccoby, Michael, "The Narcissist-Visionary," Forbes, March 3, 2003, p. 36.
"A Scapegoat Named Steve Case," BusinessWeek, January 27, 2003, p. 124.
Schrage, Michael, "Mr. Bland," MC Technology Marketing Intelligence, March 2000, p. 30.
Serwer, Andy, "Mother Knows Best: The Word on Dan and Steve Case," Fortune, November 22, 1999, p. 340.
Shore, Joel, "No. 2: The Gatekeeper," Computer Reseller News, November 15, 1999, p. 131.
"Steve Case: Decision 'Right Thing' for Company," CNN.com, January 14, 2003, http://www.cnn.com/2003/US/01/13/cnna.steve.case/.
"These Guys Want It All," Fortune, February 7, 2000, p. 70.
Steve Case (born 1958) is the co-founder of America Online, an Internet provider service that boasted its own unique content as well. It was instrumental in leading a vast number of people onto the "information superhighway." The company experienced rapid growth early on, and despite some stumbles, continues to be the most popular of its kind in the industry, capturing roughly 60 percent of the world market after its acquisition of CompuServe in 1998.
Before the rise in online services, the Internet could be a confusing technological jumble to most users. Generally, only the savvy "computer geeks" were accessing its communicative powers, using modems to reach other users. However, companies soon began tapping into this unknown territory, and began offering computer users a logical, easier-to-use interface through which they could send e-mail and access information via the Internet. In 1985, Steve Case was one of the leaders of this drive to make the Internet understandable, founding a company that later became America Online. There were other firms in the same business, such as CompuServe (the oldest online service) and Prodigy, but Case's design was more successful in the long run. With his user-friendly graphics and innovative marketing strategies, he made the Internet easy and fun. The number of users who logged on to hear a clear, pleasant voice inform them, "You've got mail!" increased exponentially throughout the 1990s. "The geeks don't like us," Case told Time in 1997. "They want as much technology as possible, while AOL's entire objective is to simplify."
Case was born in Honolulu, Hawaii, on August 21, 1958. His father is a corporate lawyer and his mother a teacher. Case has an older brother named Dan, an older sister, Carin, and a younger brother, Jeff. At the age of six, Case and his brother Dan opened a juice stand. They charged two cents a cup, but many of their customers gave them a nickel and let them keep the change. Several years later the two boys started a mail order company, selling a variety of products by mail and door-to-door. They then started an affiliated company which sold ad circulars. In addition, the two shared a newspaper route. So Case's hard-driving entrepreneurial spirit surfaced at an early age.
When Case attended Williams College, he majored in political science. "It was the closest thing to marketing," he told Business Week. While there he became the lead singer in two rock groups. One, The Vans, was an imitation of The Cars. The other, The The, was influenced by The Knack, whose one and only hit was "My Sharona." After graduating in 1980, Case landed a marketing position at Proctor & Gamble. One of the products he worked on was Lilt, the home hair permanent kit. He left the company after two years. Case then joined the Pizza Hut unit of PepsiCo. There he was manager of new pizza development. The job required much travel, looking for new ideas for toppings. His evenings out on the road provided the time to explore a new technological development, the personal computer (PC). He purchased a Kaypro portable computer and subscribed to an early online service called The Source. "I remember it being frustrating, but actually magical when you first got into the system and got access to information and were able to talk to people all over the world," Case recounted to Michael Dresser of the Baltimore Sun.
Formed Prototype Online Service
In 1983, Case's brother Dan, who became the CEO of an investment firm, introduced him to the founders of Control Video Corporation. The company was starting an online gaming service for Atari computer-game machine users. Case was offered a job as a marketing assistant and he accepted. Unfortunately, as Case told Steve Lohr of the New York Times, "I arrived there just in time for the death of the video game business." The company went broke and the board fired the existing management team and brought in Jim Kimsey as chief executive officer. Kimsey and Case sought out venture capital and, in 1985, they co-founded Quantum Computer Services Inc. The company was an online service for users of Commodore computers, then a leading brand.
Quantum soon expanded to serve other computer users. Case made a deal with Apple Computer in 1987. Software packages were developed for the Apple II and Macintosh. Tandy Corporation quickly followed and a package was developed for the Tandy computer. Packages were also introduced for the DOS and Windows operating systems. By 1990, management decided to bring all of its segmented services together into one overall service and in 1991 the company was renamed America Online, or AOL for short. A year later AOL went public, raising money for further expansion. Case was named CEO shortly thereafter.
When he took over as CEO, Case saw his company lag behind CompuServe and Prodigy, the two major online services at the time. AOL had only 200,000 subscribers. Case developed a maximum growth strategy and put it in place. In early 1993, AOL cut its prices well below those of CompuServe and Prodigy. Massive numbers of diskettes were mailed out offering free trials. After this, membership grew at an accelerated rate. By the end of the year, AOL had trouble handling the huge influx of new subscribers. Users would get abruptly disconnected and in a real-time chat it would take minutes to post a message. Getting on the service during peak hours could actually take an hour. Numerous complaints led Case to send a letter of apology to subscribers, promising technical improvements.
AOL Branched Out
Case signed deals to bring a number of content providers to AOL, including the New York Times, NBC, Time, Hachette magazines, and the financial services company Morningstar Inc. In August of 1994, AOL purchased Redgate Communications, bringing in multimedia expertise. In November of that year, it bought ANS, creator of the Internet network, gaining high-speed network capacity. In December, AOL acquired Booklink Technologies, which provided the service with a World Wide Web browser. Case also developed partnerships with cable companies such as General Instrument, Comcast, and Viacom. Cable provides the opportunity for a "high-bandwidth conduit, which will allow us to offer our customers much more engaging, multimedia-rich kinds of services," Case said to Kent Gibbons of Multichannel News.
Also in 1994, AOL announced a corporate reorganization, creating four new divisions. One aim was to pursue "a global strategy," the Wall Street Journal reported, seeking out business partners in Europe and Japan. John L. Davies, former senior vice president, was named president of AOL International. Case himself became head of the Internet Services division, in addition to his duties as president and CEO of the parent company. Michael Connors, another former senior vice president, was appointed president of AOL Technologies, to develop technology for the company. Ted Leonsis, president of recently-acquired Redgate Communications, was made president of the AOL Services division, overseeing the company's basic services and their development. Allyson Pooley, a securities analyst for Chicago Corporation, told the Wall Street Journal that the reorganization was a "positive move that will allow the company to better focus on areas where it sees growth." Commenting on the new structure to Jeffrey D. Zbar of Advertising Age, Case said, "We want to be the No. 1 consumer online service. We want to be the leader in the Internet. We want to be the leader internationally. We want to be the leading technology innovator."
A move by the giant Microsoft Corporation, headed by Bill Gates, caused some consternation for Case. The Microsoft Network, which was announced in 1994 and introduced the following year, bundled with Microsoft's Windows 95 operating system software. Integrating the network with the next generation of its widely used Windows software would be an "unfair advantage," competitors argued to the Justice Department. The government pursued a case against Microsoft, charging unfair business practices.
To strengthen its international presence, early in 1995 AOL formed a joint venture with Bertelsmann, a major German media company. In June of 1995, the Global Network Navigator (GNN) service was purchased. Originally an online magazine, AOL reworked it into an Internet access company and launched it in October 1995. Case told Robert Hertzberg of Web Week that the service was introduced "with more local dial-up numbers than any other national Internet access company." As to why AOL would want a second strictly-Internet service, Case remarked to Cathi Schuler of CeePrompt! Computer Connection, "People who are sophisticated users of the Internet and are seeking a full-featured Internet-only offering will likely opt for our new GNN brand. People who want a simple and affordable package that provides them with access to the widest possible range of content-included but not limited to Internet content-are likely to continue to opt for our flagship AOL brand."
By 1995, AOL had over three million subscribers and was still climbing fast. Business Week noted that, since 1993, "naysayers have predicted that Case would falter and AOL spin out of control," but both continued to forge ahead. Late in 1995, Case was elected chairman of AOL. In February of 1996, AOL bought Johnson-Grace, a data compression software maker, to help speed the transfer of text and image files. That same month Case brought in William Razzouk from FedEx as chief operating officer, a new position. Razzouk was to manage day-to-day operations. In March, Case put together several major deals to greatly expand AOL's reach. The company announced a deal with Netscape; it would now offer the popular Netscape Navigator browser for use with GNN. It announced a pact with Microsoft; AOL would now integrate Microsoft's Internet Explorer into its online software. Microsoft, in turn, would include AOL in its Windows 95 operating system. A partnership with Apple Computer would put the AOL software on that system. Also, AT&T agreed to promote AOL and make it available on its WorldNet Internet access service.
AOL Led Despite Troubles
AOL had five million subscribers by 1996 and had become "the nation's leading online service and single largest Internet access provider," reported John Simons of U.S. News & World Report. The company had kept up its momentum, Case told Simon, "because we embrace new technology, then mask its complexity." Not all was going smoothly for Case, though. In June of 1996, William Razzouk resigned after just four months with the company. Case was to resume the duties that had been assigned to Razzouk. The Wall Street Journal reported that Razzouk's departure came about because "insiders say he came across as a button-down, command-and-control executive in a company so casual it hosts on-site beer bashes."
Critics were also attacking AOL's accounting practices. Abraham Briloff, emeritus professor of accounting at City University of New York, called the company's methods "in-your-face arrogance." Briloff questioned AOL's accounting for the costs of acquisitions and also its deferral of marketing expenses for attracting new subscribers. With marketing expenses, for example, the typical company charges expenses against profits as it spends the dollars. AOL was spreading its costs over 24 months, increasing short-term profitability. Briloff argued that by applying more rigorous accounting principles, AOL would break even. "Push the pencil a little more," he added, "and it comes out negative." Allan Sloan in Newsweek noted that AOL has had to battle a rising turnover rate among subscribers. In the March 1996 quarter, "AOL added 2.2 million new customers, but lost 1.3 million old customers," Sloan related. The Wall Street Journal wrote that while some analysts think its turnover rate is "alarmingly high," others do not view it as excessive for the industry.
Case continued to make deals, establishing a Japanese joint venture with Mitsui and Nikkei. On July 1, 1996, AOL announced its new 3.0 software for Windows. A company press release said the new software would give its users "a faster and more convenient online experience, easier navigation, enhanced communication, and personalization of AOL to fit individual member's needs." In a July 19, 1996 statement, Case said that the company ended the June quarter with 6.2 million subscribers worldwide. He declared that the company was aiming for 10 million by the middle of 1997, a figure he reached by the fall of that year.
On August 1, 1996, the company announced that it was filing for a listing on the New York Stock Exchange. It had been traded on NASDAQ. A few days later AOL announced the purchase of the ImagiNation Network, a multiplayer games company, from AT&T. According to the press release, this would "dramatically expand AOL's online games offerings." August 7, 1996, however, was to become AOL's day of infamy. While conducting routine software maintenance early that morning, the company ran into problems and had a nationwide outage which lasted for 19 hours. The blackout was frustrating for users and embarrassing for the company. Newspapers across the country reported it. "All day long and long after AOL was A-OK, the press painted a grim portrait of Webbies all wired up with no place to go," remarked George Vernadakis of [email protected] Week. Case issued an apology to subscribers, Peter Coy of Business Week noted, but he added, "I would like to be able to tell you that this sort of thing will never happen again, but frankly, I can't make that commitment."
The next day, AOL announced that revenues for the fiscal year ending June 30, 1996 had passed the billion-dollar mark, almost triple that of fiscal 1995. Late in 1996, a huge number of new customers came on board when the company began offering a flat rate of $19.95 a month, as opposed to its previous practice of charging hourly rates. However, by 1997 some pundits again were predicting a decline because AOL was not providing enough access numbers for its ballooning customer base, causing a legion of frustrated users who could not connect due to busy signals. In addition to AOL having to wipe from the books every dime of profit, some individuals filed lawsuits against them for breach of contract, and 36 states threatened action over billing practices as well. In January of that year AOL began offering refunds to customers who could not enter the service due to user overload, and its stock took a tumble.
CompuServe Folded into AOL
AOL experienced an upswing in 1997 when the announcement was made that it was purchasing rival Compu-Serve, which would operate separately but allow AOL to dominate the market, adequately fending off the Microsoft Network. Counting roughly 60 percent of all online users as customers, its stock rose 600 percent in 1998. By the end of that year, AOL had its best fiscal quarter ever and boasted about 17 million total customers worldwide, 15 million on AOL and the other 2 million on CompuServe. Its 1998 revenue was $2.6 billion, with a net profit of $92 million. Even though it raised its price in 1998, to $21.95 per month, subscribers did not flinch, because the service had established itself as more than just a gateway to the Internet: It was a "portal," with a distinct brand identity.
Late in 1998, AOL began an aggressive course of expansion and agreed to purchase a number of Internet-related businesses. First, it announced it was acquiring Netscape, the browser company that had seen its market share plummet from about 80 percent to roughly 40 percent due to competition from Microsoft's Internet Explorer. (This was also an issue in the U.S. Justice Department court case looking into Microsoft's business practices.) After this deal, Netscape cofounder Marc Andreesen joined the ranks at AOL, as chief technology officer. In early 1999, the company announced it was also buying Moviefone, the telephone service that provides local film listings and offers ticket sales. It also had plans for AOL TV, a service for accessing the Internet through a television instead of a computer (other firms, such as some phone and cable companies, were simultaneously working on this as well). AOL projected that it would see $300 million in net profits by mid-year.
Throughout AOL's skyrocketing success, Case has received high praise. He is determined to make the online world of AOL an attractive, entertaining, and informative place for the masses.
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Computerworld, November 4, 1996, p. 2.
Dallas Morning News, April 27, 1998, p. 1D.
Detroit News, November 15, 1994, p. 3E; January 1, 1996, p. B1;April 10, 1996, p. C1.
Forbes, January 11, 1999, p. 152.
Fortune, February 19, 1996, p. 58; February 15, 1999, p. 69.
Internet Business Report, May 1996, p. 3.
Multichannel News, June 13, 1994, pp. 3, 44.
Newsweek, May 27, 1996, p. 48.
New York Times, August 14, 1995, p. D1; February 2, 1999.
PC World, January 1997, p. 51; April 1998, p. 55.
Red Herring, April/May 1994.
San Francisco Chronicle, January 26, 1999.
Time, September 22, 1997, p. 46; December 7, 1998.
United Press International, January 27, 1999.
U.S. News & World Report, March 25, 1996, p. 53.
Wall Street Journal, September 8, 1994, p. B12; March 22, 1996, p. B1; August 8, 1996, p. B1; July 9, 1998, p. B4.
America Online press releases, July 19, 1996; August 1, 1996;August 6, 1996; August 8, 1996. Available at http://www.aol.com.
CeePrompt! Computer Connection, January 1, 1996. Available at http://www.ceeprompt.com.
Hoover's Online, March 2, 1999. Available at http://www.hoovers.com.
HotWired, June 19, 1996. Available at www.hotwired.com.
Next Generation Online, March 14, 1996. Available at http://www.next-generation.com.
Web Week, December 1, 1995. Available at http://www.webweek.com . □