In the Company of Giants

by Rama Dev Jager

  Microsoft is not this evil empire, as many would have you believe. They’re actually very solid business people. That’s why we work with Microsoft. Apple, on the other hand, has a problem. It’s as if every week there’s a new strategy and some new intrigue going on.

  Life is just too short to put up with this bullshit. Microsoft runs a solid business. They’re honest. You can trust them. You can believe what they tell you.

  This isn’t common conventional wisdom now.

  Well, it’s the truth.

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  What about Microsoft’s closed system software?

  Every system’s closed. Everyone has their own advantage.

  Well, what about UNIX?

  UNIX is closed and dispersed. There are just various different closed versions even though people talk collectively about an open UNIX.

  What bothers me most about the industry today is that people spend more time thinking about how to do Microsoft in than about how to help customers. If people just focused on doing good things for customers, things would take care of themselves.

  Microsoft’s day will come. I mean, no one is invincible. In a business where technology races so quickly, it’s funny how people spend so much time on Microsoft. Microsoft isn’t like the Robber Barons who had an impenetrable iron grip on the infrastructure. The Robber Barons had economies of scale with their factories and right-of-way with railroads. There was no way to compete with them.

  This is so different. I think that monopolies are actually really good in this environment because the monopoly serves the customer by providing standards, and the pace of technology eventually does the monopoly in, and creates a stability of plateaus.

  Plateaus?

  For example, IBM was invincible with mainframes. They missed the minicomputer. DEC and Data General raced in and created invincible monopolies which were subsequently done in by the PC.

  I think that there is too much focus on Microsoft. Every time the industry tries to do them in, they do themselves in. Instead of focusing on them, let’s really focus on something that customers want.

  That’s a much better model.

  Many say that an entrepreneur’s success mainly amounts to luck, and that there are so many people in the Valley that are talented, but only a select few like yourselves are CEOs—

  First of all, I don’t think that you can presuppose that being the CEO

  is the ultimate thing—

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  You don’t think it is?

  Well, I like the job but not everyone might. Do you think Jerry Rice wishes he were quarterback? Do you think Steve Young wishes he were a wide receiver? Great people can do different things.

  Second, chance is the dominant force in life, within bands.

  Within bands?

  Talented people do well. But how well they do is really up to chance.

  Is Bill Gates really that much smarter? I doubt he thinks that.

  But he worked his ass off. He was driven, focused, had a take-no-prisoners attitude, was competitive, paranoid, and didn’t take no for an answer—all the traits of success. But for everyone who runs a company there are hundreds of people with equal talent and ability that weren’t in the right place at the right time.

  I was a submarine officer in the Navy. They sent me to get a master’s degree in computer science. I thought that postgraduate school was a ticket-punch. But, I wanted some excitement, so I chose a hard thesis advisor—Gary Kildall—who was into microcomputers, and here we are.

  Gary might not have been in his office the day I knocked on his door, or he could have told me he didn’t want any more thesis students—all kinds of things could have happened. To believe that you have some predestiny is very naïve. But, on the other hand, I think that of the people who are given equal opportunities, some people do better than others.

  So, luck is important, but at the same time, I think that understanding the common threads between the CEOs—being able to work in a world of uncertainty and being able to make decisions without perfect information—is crucial. It’s like in the Navy—the most exciting aspect was that you’re driving the submarine around, you’re the officer of the deck, and you’re making the decisions in a world where there isn’t a perfect answer. And, I think that, in some ways, business is the same thing. You have an end objective, but there isn’t a lot of guidance on how to get there. I like that.

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  STEVE CASE

  America Online

  IT’S THE CUSTOMER,

  STUPID.

  Steve Case used to be a shampoo salesman. He didn’t sell door-to-door, but he did develop marketing strategies for shampoo and toothpaste while at Procter & Gamble. Case graduated from Williams College with a liberal arts degree and, at age 37, is one of Giants’ youngest CEOs. Like Scott Cook (who also worked at P&G before founding Intuit), Case strongly believed in an idea for a product, and persisted with his belief until the idea succeeded. With Cook, the idea was financial services software. In the case of Case, the idea was online interactive services.

  What are online interactive services? Anyone who ever has surfed the internet or used America Online (AOL) knows.

  Interactive services allow a user to transmit and manipulate valuable information—or “content”—to a user sitting at a computer. For example, AOL customers can download stock quotes, book airline tickets, read popular magazines such as Newsweek and Time, or even chat with other AOL customers 61

  Copyright 1997 Rama D. Jagar and Rafael Ortiz. Click Here for Terms of Use.

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  about the next episode of Oprah. The service is “interactive”

  because the user requests and manipulates specific data for his or her own use.

  Providing content has become big business. The number of companies offering content on the internet is exploding exponentially. So how does AOL differ from the internet? Case is happy to explain. First, AOL is much simpler to use. AOL’s interface allows a user to easily log on and navigate to easily located content that is selected and placed (i.e., packaged) by AOL employees. Second, AOL spends millions on direct mail and advertising to build brand recognition. All of those floppy disks in the mail you get are a small part of their huge campaign.

  This marketing strategy has proven to be powerfully effective. AOL has become the largest number one commercial online service provider in the world, with millions of subscribers. Located in Vienna, Virginia, the company has over 5,000 employees worldwide, and had over $350 million in revenues in 1995.

  Yet AOL’s story is not one of overnight success. The company was co-founded in 1985 by Case and struggled for a long time. AOL’s turning point came when Case partnered with PC

  manufacturers by bundling his online service with their computers in the hope that consumers would log on. They did, and AOL began to flourish.

  Today, AOL is expanding its base overseas with online services such as AOL Germany, and other international providers. But, with only 10 percent of households in the United States using online services, Case feels there is plenty of room for AOL to grow at home.

  We met with Steve Case at AOL’s new headquarters in Reston, Virginia.

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  “Technology-based markets just take a while before

  they hit their stride.”

  Tell us about the startup process and what it was like. Ten years later, what are the most vivid incidents in your mind?

  AOL was founded in 1985, but I actually became interested in online services in the late 1970s. In 1983, I joined a company in Virginia that had essentially an online video game. And in 1983, Atari video games were the rage—not many consumers had PCs at the time.

  The notion was that you would plug a modem into the game machine and turn it into an interactive terminal. I thought that was a terrific idea, so I joined the comp
any. It was a terrific idea, but the timing turned out to be horrible because our new video game product was coming to market just when the Atari video game market crashed—so the company was not going to work.

  But, some of the people I met during my work there ended up being the co-founders of what became America Online in 1985. We were able to attract a modest amount of venture capital, about a million dollars.

  In 1985, the biggest deal we did at the time was a distribution and marketing agreement with Commodore. The Commodore 64 was the dominant home computer back then, and we thought we could eliminate a lot of the market risk and expense of launching this new company if we had a marketing partner like Commodore. We structured a deal where Commodore agreed to bundle our service with all of their Commodore 64 computers and all of their Commodore modems. We broke even our second year in business with 50,000

  Commodore customers and figured that we’d do it again.

  So, we then went to Apple, and convinced them to do essentially the same deal. And then we went to Tandy and asked, “Don’t you want to join us too?” They agreed. So the first five years of the company’s existence were spent partnering with PC manufacturers—first Commodore, then Apple, then Tandy, then IBM. We essentially cre-

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  ated private-label online services for each brand of computer by leveraging their marketing distribution clout to generate awareness.

  It was only about five years ago that the company came into its own and had a critical mass of people and technology to kind of fend for ourselves. That’s when we launched America Online as our own brand and started aggregating these separate brands together under America Online. So it was a fairly gradual process and a typical bootstrap. We had a little bit of capital and a big idea and succeeded by targeting each segment of the market and partnering with PC manufacturers to reduce a lot of the financial requirements and marketing risks.

  It’s hard to argue with your success today—you have 6 million customers—but for several years, you didn’t grow that quickly. What pitfalls could you have avoided?

  Most of the slow growth had to do with market timing. A lot of these technology-based markets just take a while—usually a decade—

  before they hit their stride. For most of the interesting technologies, like graphical user interfaces or multimedia, it takes about a decade for them to come together.

  We would have grown slowly in those first few years no matter what. The other thing that really inhibited our ability to grow was capital constraints. We were a little company with a few dozen people, with some money in the bank, but not a lot.

  When we started in 1985, we were competing with big companies that had lots of money—particularly IBM, Sears, and CBS. In retrospect, it [having little capital] was probably the best thing that happened to us, because it forced us to be a little bit nimbler and think more like guerilla marketers and to provide a service that people really liked. We had to use word-of-mouth and figure out clever ways to partner with a wide variety of companies in order to do things more efficiently. Had somebody given us more capital early on, it probably would have been a bad thing.

  You wouldn’t have been as clever from a marketing perspective?

  Right. In some respects, it’s similar to when rock stars become famous when they’re 18 years old and are unable to handle it as well as when they’re 35 years old. It’s hard to be an overnight success. We had the luxury of learning as we went along, making a tremendous number of mistakes, and remaining relatively invisible. We had learned a lot of important lessons before we were in the limelight.

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  And I feel sorry for some of these companies that the whole world is watching, because they really don’t have a chance to grow up.

  Do you expect this with many of the internet companies that have recently gone public?

  Sure, but it’s a good news/bad news thing. The good news is that you start a company, a year later it’s worth a lot of money, everybody’s excited, and the company gets a lot of press.

  For some, particularly Netscape, it has turned out terrifically well. They have leveraged that momentum to create a brand, and are now leveraging that brand into the internet business.

  But there is bad news too. Many of these startups have perceived success before they have actual success. Some of their concepts are riveting, but generate very little revenue and no profits. And at some point, people ask, “Where’s the beef?” And I think it will be more difficult for them. I’m not sure whether it is good or bad. It’s just different than our experience bootstrapping and building up over time.

  If you graph the number of AOL subscribers over time, it looks like a hockey stick.

  Everybody talks about it, but it never actually happens. In our case, it did.

  So what happened at the inflection point? What was the critical juncture?

  A number of things happened and some of them related to the development of the market. We really hit our stride two or three years ago.

  Part of it involves having a better product, very strong acceptance, and very strong word-of-mouth—even when we were number 3 to CompuServe and Prodigy. We coupled that with more aggressive marketing and built our infrastructure to handle the demand we were creating.

  We also benefited in the last couple of years from sluggish competitors. Prodigy was confused because IBM and Sears argued for several years about investing more or selling off, so there was a lack of direction there. Even CompuServe was saddled by H&R Block ownership. H&R Block thought of it more as a source of earnings and was less willing to aggressively invest in it.

  But, the center of it all is having a better product. In the sub-

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  scription business, all we can do, in terms of marketing, is to get people to try the service. One thing I learned at Procter & Gamble is that bright marketing just kills a bad product faster. You can’t force a customer to pay you money every month, but you can encourage anybody to try anything once, particularly if it’s free. That was our trial strategy.

  Customers won’t pay you money every month for many years if they don’t like your offering. So it’s got to be a great service, one that captivates you. Anything else is secondary.

  Who are your major competitors? A couple of years ago you talked about Microsoft. Now some consider AT&T as your biggest threat in this market.

  It’s hard to say. What’s interesting, if you look back at the last ten years, is that most of our presumptive competitors have stumbled.

  Every year in the past ten, there has been somebody who was supposedly going to enter and dominate the market, and every year it changes.

  Three years ago, for example, the conventional wisdom was that interactive TV was going to be the real business while online services were just a transitional business; therefore, TCI and friends would really drive interactive TV. Two years ago, the dominant notion was that the media companies would try this. Time Warner was launching Pathfinder, Rupert Murdoch bought Delphi, and there was a flurry of activity in the media companies.

  A year ago, Microsoft was going to dominate the market.

  Today the conventional wisdom is that telephone companies will dominate the market, because they will provide low-priced internet access like AT&T, or Pacific Bell, or cable companies. But these things just don’t pan out like they are supposed to. Part of the reason for this is that big companies can focus too much on a big press release and not enough on creating a product or service that millions of consumers can fall in love with. They think it’s their God-given right to have a chunk of the market because of who they are.

  Companies must earn it through execution. Nobody anoints you a player in this market. So, today, I think it is difficult to predict who our competitors will be in the next few years. And, some of the companies that are perceived to be competitors may actually turn out to be partners, such as AT&T.

  If anybody
is going to compete with us, they are going to have to reach out to the mainstream computer audience with an experience

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  that’s easier to use and/or more useful and/or more fun and/or more affordable. And if they don’t do that they won’t be competitive, irre-spective of what brand they bring or how much money they throw into it. Prodigy has proved that throwing money at a problem doesn’t give you a lock on business. In the last decade, a lot of major companies and major brands have entered and exited this business.

  How have you been able to stave off your competitors?

  We’ve always had a clear view of what this was all about. We’ve always focused, for example, heavily on the consumer market, whereas some of our competitors dillydally between business and consumers.

  We’ve always said that in consumer marketing you must create a service that is easy to use, useful, fun, and affordable and if consumers fall in love with it—you’ll do well, and if they don’t—you won’t. Everything else is peripheral to that core idea of creating a more compelling consumer experience that people can’t get anywhere else.

  It must excite them so much that they’ll run down the street and tell their neighbors and their relatives to get online too. That’s really the core of what we are about, and even though there are many tactical or opportunistic strategies we can take in terms of alliances and the like, they are all a means to an end. In the end, we will create a mainstream market for tens of millions of people, with AOL as the preeminent brand.

  Since only one-third of Americans use PCs, do you think you’ll shift to a different medium anytime soon?

  We don’t care about the delivery system. AOL is about interactive experience that can excite the imagination of tens of millions of consumers. We don’t much care whether it’s delivered through PCs or PDAs [personal digital assistants, i.e., Apple’s Newton] or settop boxes on TVs. As technology becomes more mainstream, you’ll have simpler, more affordable access devices. I’m sure that will happen.

  There are some signs of that happening now.