There Must Be a Pony in Here Somewhere

by Kara Swisher

  For Jerry Levin and Time Inc., which had just completed its rocky merger with Warner Communications, the entertainment giant, the opposite would be true. Despite predictions of greatness, the company limped along due to severe corporate culture clashes and an inability to make the two businesses mesh as promised. The situation was made worse given that the stock of Time Warner would essentially flat-line until almost the end of the 1990s. The contrast in the behavior of the two companies’ stock prices would play a huge role later on when AOL and Time Warner came together. AOL’s soaring stock would allow it to have the upper hand in the deal, fueling a sense of resentment on the part of Time Warner employees—and ripping open again a nasty wound left by the Warner deal that had never really healed in the first place.

  The Battle of the Billionaires

  In the six months following its IPO, AOL enjoyed a string of attention and successes. Its membership climbed above 200,000, influential Wall Street Journal columnist Walt Mossberg dubbed it “the sophisticated wave of the future” among online services, and major investors began pouring big money into the company.

  One of those investors was Paul G. Allen, cofounder of Microsoft. “Paul thought those guys were on to something,” Bill Savoy, his right-hand man, told me in 1997. “It was the early stages of a hockey-stick kind of growth—it seemed as if they might be headed upward fast.” At first, Case welcomed the attention, which he considered flattering.

  Allen seemed like the perfect kind of investor for a long-term dreamer like Case. A burly, shy mogul with a bushy beard and deep-set eyes, Allen had transformed himself into a kind of “Johnny Appleseed” of emerging technologies. He was obsessed with the coming boom in computer-based communications, and he spent his time and considerable finances on seeking out cutting-edge companies, even if they never made any money. AOL had caught his attention early, and he’d bought 50,000 shares at the IPO.

  Over the next year, Allen continued to add to his holdings, with the aim of having a major influence at the company. But AOL, increasingly wary of Allen’s ties to Microsoft and his intentions, wanted to limit his influence. So Case suggested a “standstill” agreement, whereby Allen would not increase his stake beyond 20 percent. Allen, one of the world’s richest people, was not pleased to be dictated to by a dinky company like AOL. “We wanted AOL to play, and we were perplexed as to why we were not welcomed with open arms,” Savoy said. “Paul considered it personally rude to him . . . so we just thought, ‘Let’s just go and buy the company.’ ”

  When Allen began quickly increasing his stake, Case went into a panic. “It suddenly took on the tone of the Cuban Missile Crisis,” he recalled in 1997. So on April 22, 1993, the board met and set a “poison pill”—an antitakeover defense that floods the market with new shares and makes it extraordinarily expensive to acquire control of a company—to keep Allen from buying more than 20 percent. Thinking the company was now safe, the board adjourned. But Allen had already blown past that threshold prior to the meeting, making the protective measure moot. The board needed to act immediately.

  But Jim Kimsey and Frank Caufield had zipped off to New Orleans with a pair of dates for a weekend of partying at a jazz music festival. Getting them onboard for a new vote would prove difficult—and offer a comical moment at a crucial time. Because their cell phones got poor reception at the festival, Kimsey and Caufield were forced to race around a nearby low-income neighborhood trying to find a pay phone. When they found one, they commandeered it for the next half hour or so, mumbling “Yea . . . nay . . . yea,” into the phone in response to board votes.

  In his inimitable way, Kimsey described the reaction of the people waiting to use the phone: “There was a line of black people . . . behind us,” he laughingly explained to me, “saying, ‘I’ve got to call my mother and here are these two white boys talking about money!’ ” It was a typically tasteless comment from Kimsey, but one that would be added to the odd and evolving legend of AOL as a freewheeling corporation.

  The board managed to set a new pill, and the crisis was averted just in time. Shortly afterward, Case, Kimsey, AOL’s outside counsel Ken Novack, and Lazard Freres investment banker Steve Rattner traveled from Washington, D.C., to Washington state to meet with Allen. No offense, Case told him, but they just didn’t want him, or any major investor, playing such a major role in the company. Allen, piqued, muttered, “This is America and I should be able to invest in AOL if I want to.” But the company had successfully stymied him.

  One victory won, Case and his team then traveled about a dozen miles down the road to meet with their second aggressive billionaire of the day: Bill Gates, the king of Microsoft. Gates, who had become the most powerful man in the computer industry with his ubiquitous software, was now belatedly turning his attention to the fast-growing new world of online services. He was a bit late, a full five years after Q-Link had launched and after AOL had already gained 250,000 members.

  Nonetheless, he opened the meeting in his customarily logical, get-to-the-point way. “I can buy twenty percent of you or I can buy all of you,” he told Case in his nasal whine. “Or I can go into this business myself and bury you.” It was not a threat; it was a simple statement of what Bill Gates believed was a fact, uttered in a logical style he’d used many times before with other small companies like AOL. Interestingly, however, although many in the room that day remember Gates making this statement, Gates himself has since denied making it. But Microsoft was clearly prepared to enter the online business in a big way.

  Gates’s behavior put Case immediately on the defensive, and the discussions made little progress. “We didn’t trust Microsoft’s motives,” Case said, “because we knew they could emerge as a major competitor.” When the Microsoft side suggested a 50-50 merger, Case thought he knew what would follow. “It was, ‘Okay, we’ll help build it, teach you all about it, then just when it gets interesting, you’ll shoot us.’ ” After about an hour, the meeting ended.

  Though both sides gave lip service to the idea of continuing to explore options, it would never happen. The AOL board voted down the idea, even as Microsoft was pursuing another strategy that would spell big trouble for AOL. Out at its Redmond headquarters, Microsoft was starting to build its own online service, code-named Marvel and later renamed the Microsoft Network, or MSN.

  At the same time, big media companies, notably Disney and Time Warner, were gearing up their own strategies to get in on this new game. As little AOL fended off Bill Gates in the spring of 1993, Time Warner was preparing to plunge into the interactive space with its Full Service Network (FSN) cable TV system—a project that would, executives hoped, push the company to the top of the emerging digital heap. Yet Time Warner’s hopes for FSN would be dashed and the company would spend the next several years watching jealously as AOL stumbled upward to ever-greater heights in the new online world.

  The Race Goes to the Swift

  In the summer of 1993, AOL launched the controversial strategy that would propel it to the head of the pack among online services: The relentless, irritating—but hugely successful—mass marketing of AOL diskettes. Starting in the mid-1990s, you couldn’t go anywhere without finding an AOL diskette on your seat, in your mailbox, in your box of flash-frozen steaks, at checkout counters.

  Blame that on a smart, aggressive marketer named Jan Brandt. A Brooklyn native and career marketer, she got the idea for the mass distribution from a previous job, when she’d overseen the mailing of a free children’s book to potential customers. Because so few people really knew or understood what online services were, she figured they wouldn’t be willing to buy the software. So AOL would need to put it right in their hands.

  In July 1993, Brandt asked Steve Case for permission to spend $250,000 on a direct-mail campaign. She recalls him telling her it wouldn’t work. But she got permission, and thus began the very low-tech marketing blitz of hundreds of millions of disks that would make AOL a household name.

  Between 1993 and 1994, the marketing w
orked too well and AOL saw a huge spike in the number of new users. It was so big that it threatened to kill the company, because the influx led to pervasive slowdowns in AOL’s service. Everyone now knew who AOL was, all right—but they were calling it America On Hold rather than America Online. These types of slowdowns would happen with worrisome frequency at AOL, leading many to question the ethics of marketing a service it couldn’t actually provide. It also led to another of AOL’s many paradoxes: Everyone was complaining about the service, but people just kept signing on.

  I did the same. I had had little experience online, save for the lame internal computer-based electronic mail system at the Washington Post. But when a friend moved to Russia in the summer of 1994, I signed up for AOL, because it was hard to find a cheaper way to communicate. AOL was a crude and simple service then, mostly looking like it was put together with a dot-matrix printer and a bad graphics team. I cannot say I was immediately overwhelmed by its virtues, although I did soon use it on a daily basis.

  In fact, when my editor first approached me about reporting on AOL, my response was, “You mean the email company?” Still, I’d been covering workplace issues for the business section, a topic that had left me bored, so I jumped at the chance to switch to covering this small, local story at the end of 1994.

  It was a lot more interesting right from the start, since AOL was a dubious proposition. The Wall Street Journal had already openly pondered its possible demise in a March 1994 piece that compared AOL to a fad like CB radios. And well-known research firms like Forrester were releasing reports showing that its high growth would soon slow to a crawl. There was one piece of good news that had little to do with AOL’s talent: Its two main rivals, Prodigy and CompuServe, both turned out to be amazingly incompetent competitors.

  Owned by the giant Missouri-based tax-preparation service H&R Block, CompuServe moved slowly and deliberately in a world that required brash, nimble leadership. The company made numerous mistakes. It refused to adapt itself to the vast potential market that was looking for a simple, fun way to get online. It positioned its product as “the information service you won’t outgrow” and promoted it as a productive business tool rather than an exciting new way of communicating. It persisted in assigning cumbersome numbers as email addresses (“4956724@compuserve.com”), even as other services let users pick names. It was, in short, geek central.

  And, even as AOL proved that simple and friendly was the way to go, CompuServe waited until the game was nearly over in early 1996 before it finally offered a non-business-oriented service—the oddly named Wow! That spring, a Wow! executive visited me at the Washington Post to show off the new service. It was easy to use, he raved, and consumer friendly. “Why don’t you just make CompuServe easy to use and friendly?” I asked him.

  Prodigy—the product of a joint venture between IBM and Sears—also suffered from a lack of vision and leadership. My favorite line about the service: It was everything IBM knew about retail and everything Sears knew about computing. Its executives knew even less—Prodigy CEO Ross Glatzer, for example, had an antiquated computer that ran on the DOS operating system and didn’t even have a mouse. The company didn’t offer a Windows version of its service until December 1993, because Microsoft was an archrival of parent company IBM. And its email system was so inferior that Scott Kurnit, an online industry executive brought in to help run the service, announced he would use his AOL account until Prodigy could come up with something as good.

  The company did have some pioneering schemes, such as an online grocery delivery service. But it was an idea well before its time and it proved unsustainable. More important, Prodigy joined CompuServe in underestimating AOL, which was much better attuned to what average users wanted from their online experience. Perhaps the biggest problem Prodigy had was its reluctance to give users one of the main services they wanted: Chat. Because its parent companies were so stodgy, Prodigy wasn’t allowed to offer chat—the engine driving AOL’s growth—until 1994. As Kurnit said, “A corporate guy thought, ‘Wow, someone could type the word ‘fuck.’ ”

  And it was mostly chat that was beginning to drive AOL’s membership numbers into the stratosphere. The reason users came to and stayed with AOL was simple: The service made it possible to chat about anything at all, in near-total privacy. As Steve Case later put it, “Our bias was on creating tools, empowering people, and letting them use them in any way they thought appropriate—sort of ‘Let a thousand flowers bloom.’ ” Not to mention “Let a few million more dollars into the coffers.” Because AOL charged by the hour, the time users spent in chat rooms was terrifically lucrative for the company. It also created intense loyalty to AOL.

  I saw an example of this on a visit to AOL in April of 1995, and it has stayed with me ever since. Desperate for any press for the company, AOL’s Jean Villanueva, the head of communications for AOL and one of its highest ranking female executives, had invited me out to see Case meet with a group of quilters who had met through an online quilting chat group. Without ever having met one another, they had decided to make a quilt for Case. They designed it all online, placing a big AOL logo in the middle, and then parceled out duties to assemble it. Now they had come in person to northern Virginia to present it to Case.

  When Villanueva pitched the story to me, I cringed. I had no intention of writing anything about this Norman-Rockwell-in-cyberspace moment. Between Case’s delusions of grandeur and Villanueva’s earnest efforts to paint the company as a “community,” I was beginning to wonder if I’d stumbled into a cult. But when I walked into AOL’s conference room and saw this group of older women—not one of whom I would have imagined could even turn on a computer—I was struck by their obvious enthusiasm for the medium and their bizarre familiarity with Steve Case.

  Forcing cookies on him and pinching his cheeks, these digital quilters were the first indication to me that perhaps there might really be something to this online thing. These were not geeks, not techies, not the computer elite. They were simply like-minded people reaching out to make connections in a whole new way, much as a very young Steve Case had done years before in his little apartment in Wichita. They had never met one another, nor did they know Case. And yet they did—the direct result of this powerful new way to communicate.

  Despite the heartwarming quilting scene, of course, it’s true that most chatters weren’t trading quilting tips. AOL soon became a hub for sex chat of every stripe—or, as I called it in aol.com, “The House That Sex Chat Built.” AOL’s anonymous screen names, unmonitored chat rooms, and easy attachment of graphical files also made it ideal for trading pornographic photos. Soon enough, the nightly list of “member-created” rooms on AOL began to resemble the personal ads in a sex magazine: “married M4M,” “girls4men,” and “submissive4you” were a few of the rooms that might be available on any given night.

  Though they would increasingly try to position it as a family-friendly service, AOL knew full well the power of sex and had even once considered creating a separate gated adult service. AOLers were aware that its live-and-let-live attitude in its chat rooms set it apart from the other online services. Because of it, over the next two years, the company would quickly outdistance all its competitors. As one former Prodigy executive told me in 1996, AOL’s privacy policy in chat rooms was “[the reason] why AOL has eight million members and Prodigy had faded to a shadow of its former self.” In other words, precisely because on AOL someone could type the word fuck.

  The Beast from Redmond

  Despite the company’s ability to press on through hard times, a new threat loomed just ahead: Microsoft’s planned launch of a new online service, MSN, in 1995.

  For one thing, it was a safe bet that MSN wouldn’t make the same errors of Prodigy and CompuServe. For another, even if it did, it would have enough money to keep coming at AOL indefinitely. For AOL, the threat from the Microsoft monster was born of these simple truths—but defeating it required a bit of fantasy-making, too. So, like in any good f
airy tale, AOL had a happy, clever hero who declared he could slay the beast. His name was Ted Leonsis.

  Leonsis, born into a working-class Greek Orthodox family, had climbed his way up from being a shoe salesman to becoming an early marketing database entrepreneur. He’d also built a successful consulting career, and had landed at AOL in the summer of 1994 when it acquired his company, Redgate Communications. Ebullient, good-natured, and rotund, Leonsis was the kind of guy who caused faces to light up when he trundled down the hallway, bellowing greetings left and right. His drive to succeed was matched only by his overwhelming desire to be liked.

  But his most important characteristic was that he was precisely the person AOL needed at this moment in time, despite the fact that the service had soared to 1.25 million members. As soon as Leonsis walked in the door, he became the company’s chief anti-MSN cheerleader, whipping the AOL troops into a warlike frenzy. It was a job for which staid, unemotional Steve Case was spectacularly unsuited.

  Leonsis began stirring things up immediately, leading the now legendary “dinosaur rally” at the Sheraton Premiere ballroom in Tysons Corner, Virginia, in November of 1994. First, he referenced a Wired magazine quote that declared that AOL was on the “scrap heap of history,” “a dinosaur,” and “obsolete.” As hundreds of AOL employees roared their approval, Leonsis prowled the stage, shouting, “Someday, your children will ask you what you did in the war!” He declared finally that the online battle would be “Microsoft’s Vietnam.”

  He noted that the rich, aggressive Gates was someone people loved to hate and he zeroed in on AOL’s sympathetic role as underdog. For the 97 million U.S. citizens who were not online, AOL was the natural choice! “If not us, who?” Leonsis bellowed. “If not now, when?” He wound up the rally by declaring MSN the true dinosaur and exhorting the employees to come forward and sign their names to a cheap dinosaur wooden cutout he suddenly brandished. A crush of people surged forward, many with tears in their eyes.