Jun 25, 2020
Today we’re going to cover America Online, or AOL.
The first exposure many people had to “going online’ was to hear a modem connect.
And the first exposure many had to electronic mail was the sound “you’ve got mail.”
But how did AOL rise so meteorically to help mainstream first going online in walled gardens and then connecting to the Internet?
It’s 1983. Steve Case joins a company called Control Video Corporation to bring online services to the now-iconic Atari 2600. CVC was bringing a service called Gameline to allow subscribers to rent games over a dialup connection. Case had grown up in Honolulu and then gone to Williams College in Massachusetts, which until the rise of the Internet culture had been a breeding ground for tech companies. Up to this point, the personal computer market had mostly been for hobbyists, but it was slowly starting to go mainstream.
Case saw the power of pushing bits over modems. He saw the rise of ARPAnet and the merger of the nets that would create the Internet. The Internet had begun life as ARPAnet, a US Defense Department project, until 1981, when the National Science Foundation stepped in to start the process of networking non-defense-oriented computers. And by the time Case’s employer Control Video Corporation was trying to rent games for a dollar, something much larger than the video game market was starting to happen.
From 1985 to 1993, the Internet, then mostly NSFNET, surged from 2,000 users to 2,000,000 users. In that time, Tim Berners-Lee created the World Wide Web in 1991 at CERN, and Mosaic came out of the National Center for Supercomputing applications, or NCSA at the University of Illinois, quickly becoming the browser everyone wanted to use until Mark Andreeson left to form Netscape. In 1993 NSFNET began the process of unloading the backbone and helped the world develop the Internet.
And the AOL story in that time frame was similar to that of many other online services, which we think of today as Internet Service Providers. The difference was that today these are companies individuals pay to get them on the Internet and then they were connecting people to private nets. When AOL began life in 1985, they were called Quantum Computer Services. Case began as VP of Marketing but would transition to CEO in 1991.
But Case had been charged with strategy early on and they focused on networking Commodore computers with a service they called Q-Link, or Quantum Link. Up until that point, most software that connected computers together had been terminal emulators. But the dialup service they built used the processing power of the Commodore to connect to services they offered, allowing it to be much more scalable. They kept thinking of things to add to the service, starting with online chat using a service called Habitat in 1986. And by 1988 they were adding dedicated fiction with a series they called QuantumLink Serial.
By 1988 they were able add AppleLink for Apple users and PC Link for people with IBM computers and IBM clones. By 1989 they were growing far faster than Apple and the deal with Apple soured and they changed their name to America Online. They had always included games with their product, but included a host of other services like news, chat, and mail. CompuServe changed everything when they focused on connecting people to the Internet in 1989, a model that AOL would eventually embrace.
But they were all about community from the beginning. They connected groups, provided chat communities for specific interests, and always with the games. That focus on community was paying off. The first Massively Multiplayer Online Role Playing Game, Dungeons and Dragons Neverwinter Nights got huge. Sure there had been communities and Massively Multiplayer games. So most of the community initiatives weren’t new or innovative, just done better than others had done it before them.
They launched AOL for DOS in 1991 and AOL for Windows in 1992. At this point, you paid by the hour to access the network. People would dial in, access content, write back offline, then dial back in to send stuff. A lot of their revenue came from overages. But they were growing at a nice and steady pace. In 1993 they gave access to Usenet to users.
In the early 90s, half of the CDs being pressed were for installing AOL on computers. By 1994 they hit a million subscribers. That’s when they killed off PC Link and Q-Link to focus on the AOL service and just kept growing. But there were challengers, and at the time, larger competitors in the market. CompuServe had been early to market connecting people to the Internet but IBM and Sears had teamed up to bring Prodigy to market. The three providers were known as the big three when modems ran at 9,600 bits per second.
But as the mid-90s came around they bought WebCrawler in 1995 and sold it to Excite shortly thereafter, inking a deal with Excite to provide search services. They were up to 3 million users. In 1996, with downward pressure on pricing, they went to a flat $19.95 pricing model. This led to a spike in usage that they weren’t prepared for and a lot of busy signals, which caused a lot of users to cancel after just a short time using the service. And yet, they continued to grow. They inked a deal with Microsoft for AOL to be bundled with Windows and the growth accelerated.
1997 was a big year. Case engineered a three0way deal where WorldCom bought CompuServe for $1.2 billion in stock and then sold it to AOL. This made way for a whole slew of competitors to grow, which is an often-unanticipated result of big acquisitions. This was also the year they released AIM, which gave us our first taste of a network effect messaging service. Even after leaving AOL many a subscriber hung on to AIM for a decade. That’s now been replaced by What’s App, Facebook Messenger, Text Messaging, Snapchat to some degree, and messaging features inside practically every tool, from Instagram and Twitter to more community based solutions like Slack and Microsoft Teams. AIM caused people to stay online longer. Which was great in an hourly model but problematic in a flat pricing model. Yet it was explosive until Microsoft and others stepped in to compete with the free service. It lasted until it was shut down in 2017. By then, I was surprised it was still running to be honest.
In 1998 AOL spent $4.2 Billion to buy Netscape. And Netscape would never be the same. Everyone thought the Internet would become a huge mall at that point. But instead, that would have to wait for Amazon to emerge as the behemoth they now are.
In 1999, AOL launched AOL Search and hit 10 Million users. AOL invested $800 million in Gateway and those CompuServe users put another 2.2 million subscribers on the board. They also bought Mapquest for $1.1 billion dollars. And here’s the thing, that playbook of owning the browser, community content, a shopping experience, content-content, maps, and everything else was really starting to become a playbook that others would follow in the dark ages after the collapse of AOL. And yes, that would be coming. All empires over-extend themselves eventually.
In Y2k they made over $4 billion in subscriptions. 15 years of hard work was paying off. With over 23 million subscribers, their market valuation was at $224 billion in today’s money and check this out, only half of the US was online. But they could sense the tides changing. We could all feel the broadband revolution in the air. Maybe to diversify or maybe to grow into areas they hadn’t, AOL merged with media congomerate Time Warner in 2001, by paying $165 billion dollars for them in what was then the biggest merger (or reverse merger maybe) in history.
This was a defining moment for the history of the Internet. AOL was clearly leveraging their entry point into the internet as a means of pivoting to the online advertising market and Warner Cable brought them into broadband. But this is where the company became overextended. Yes, old media and new media were meeting but it was obvious almost immediately that this was a culture clash and the company never really met the growth targets. Not only because they were overextended but also because so much money was being pumped into Internet startups that there were barbarians at every gate. And of course, the dot com bubble burst. Oh, and while only 1% of homes had broadband, that market was clearly about to pop and leave companies like AOL in the dust. But, now Time Warner and Time Warner Cable would soften that blow as it came.
2002, over 26 million users. And that’s when the decline began. By then 12% of homes in the US were wired up to broadband, likely DSL, or Digital Subscriber Lines, at that time.
Case left AOL in 2003 and the words AOL would get dropped from the name. The company was now just Time Warner again. 2004 brings a half billion dollar settlement with the SEC for securities fraud. Oops. More important than the cash crunch, it was a horrible PR problem at a time when subscribers were falling off and broadband had encroached with over a quarter of US homes embracing faster internet usage than anything dialup could offer.
The advertising retooling continued as the number of subscribers fell. In 2007 AOL moved to New York to be closer to those Mad Men. By the way, the show Mad Men happened to start that year. This also came with layoffs. And by then, broadband had blanketed half of the US. And now, wireless Internet was being developed, although it would not start to encroach until about 2013.
AOL and Time Warner get a divorce in 2009 when AOL gets spun back off into its own standalone company and Tim Armstrong is brought in from Google to run the place. They bought his old company Patch.com that year, to invest into more hyperlocal news. You know those little papers we all get for our little neighborhoods? They often don’t seem like tooooo much more than a zine from the 90s. Hyperlocal is information for a smaller community with a focus on the concerns and what matters to that cohort.
2010 they buy TechCrunch, 2011 they buy The Huffington Post. To raise cash they sell off a billion dollars in patents to Microsoft in 2012. Verizon bought AOL in 2015 for $4.4 billion dollars. They would merge it with Yahoo! In 2017 as a company called Oath that is now called Verizon Media. And thus, AOL ceased to exist. Today some of those acquisitions are part of Verizon Media and others like Tumblr were ruined by mismanagement and corporate infighting.
Many of the early ideas paved the way for future companies. AOL Local can be seen in companies like Yelp. AOL Video is similar to what became YouTube or TikTok. Or streaming media like Netflix and Hulu. AOL Instant Messenger in What’s App. XDrive in Google Drive. AOL News in CNN, Apple News, Fox News, etc. We now live in an App-driven world where each of these can be a new app coming around every year or two and then fading into the background as the services are acquired by an Amazon, Google, Apple, or Facebook and then fade off into the sunset only to have others see the billions of dollars paid as a reason to put their own spin on the concept.
Steve Case runs an investment firm now. He clearly had a vision for the future of the Internet and did well off that. And his book The Third Wave lays out the concept that rather than try and build all the stuff a company like AOL did, that companies would partner with one another. While that sounds like a great strategy, we do keep seeing acquisitions over partnerships. Because otherwise it’s hard to communicate priorities through all the management layers of a larger company. He talked about perseverance, like how Uber and Airbnb would punch through the policies of regulators. I suspect what we are seeing by being sent home due to COVID will propel a lot of technology 5-10 years in adoption and force that issue.
But I think the most interesting aspect of that book to me was when he talked about R&D spending in the US. He made a lot of money at AOL by riding the first wave of the Internet. And that began far before him, when the ARPANet was formed in 1969. R&D spending has dropped to the lowest point since 1950, due to a lot of factors, not least of which is the end of the Cold War. And we’re starting to see the drying up of the ideas and innovations that came out of that period transition heavily regulated.
So think about this. AOL made a lot of money by making it really, really easy to get online and then on the Internet. They truly helped to change the world by taking R&D that the government instigated in the 70s and giving everyday people, not computer scientists, access to it. They built communities around it and later diversified when the tides were changing. What R&D from 5 to 20 years ago that could truly be beneficial to humanity today hasn’t made it into homes across the world - and of that what can we help to proliferate?
Thank you for joining us for this episode of the History of Computing Podcast. We are so lucky to have you and we are so lucky to make use of the innovations you might be bringing us in the future. Whether those are net-new technologies, or just making that research available to all. Have a great day.