There Must Be a Pony in Here Somewhere

by Kara Swisher

  AOL would also use less showy—but more underhanded—tactics, including pushing the Justice Department to stop Microsoft’s online foray, pointing to the potentially monopolistic integration of MSN with its ubiquitous operating system. There was no proof this would give Microsoft any real advantage, but Steve Case, quite cleverly, warned against the dangers of letting the software giant own the “digital dial tone.”

  To further scare people and put Microsoft on the defensive by creating overblown expectations, Case and others made up massive estimates for MSN, claiming it was likely to sign up nine million subscribers in just one year. An exasperated Microsoft marketing executive called me during this time and sighed, “We don’t have one customer yet and now we have to get nine million or look like losers.” Case snickered quietly when I told him this later.

  Still, AOL was genuinely scared. When MSN launched in August of 1995, AOL employees nervously rushed to check out the competition. Jean Villanueva had been using MSN’s beta version for a few months, and it was so bad she was convinced that Microsoft was pulling a ruse. “We kept thinking some secret switch would be flipped, and the real service would come online,” she remembered. But there was no secret switch: MSN was simply not very well designed. To begin, it was without a vibrant community element, its email was glitchy, and its interface was simplistic instead of simple. In addition, it was available only for those with the new Windows 95 software, which limited its audience drastically at the start. This kind of weak and underwhelming product launch was typical for Microsoft, which often took several iterations before getting it right.

  Despite its reputation for getting it wrong in initial versions of its software and then improving it by the third cycle, MSN looked like it might take a while before it could even begin to compete with AOL. It was so bad, in fact, that the Wall Street Journal’s Walt Mossberg ranked it “dead last” in a column he wrote comparing the major services. Customers agreed, staying away in droves. In the first year, MSN drew only 375,000 members in its first three months. By comparison, AOL was then drawing 250,000 new members per month.

  But even though AOL was widening the gap with every passing month, it didn’t take long before the chorus of doomsayers began chirping again. If the canary of cyberspace wasn’t going to be killed by CompuServe, Prodigy, or MSN, AOL would, the critics carped, be put out of business by the Internet itself. A new goofy technology term, disaggregation, had taken hold of the digerati, which posited that no one wanted bundled services when the Web was so full of free stuff.

  AOL had always offered its own proprietary content, as well as chat rooms. But, as of late summer of 1995, it still didn’t offer access to the nascent commercial Internet. By then, scores of critics were again predicting the company’s demise. “The Internet is an ocean, and these online services are isolated ponds,” declared James Gleick, a writer and founder of an early online service called Pipeline. “Their days are numbered.”

  Others were even more definite about the fate of AOL. “Every day the Net gets closer to filling its ambitious promise, their clock ticks closer to midnight,” wrote Newsweek’s Steven Levy. “They look a lot like dead men walking.” This attitude was most pervasive in Silicon Valley, where everyone derided AOL as the “Internet on training wheels.” And yet, I often wondered, if you want to ride a bicycle but have never done it before, wouldn’t you want training wheels? The snooty attitude of the Net elite pointed up a pervasive problem among those who design computer products: Why was their presumption that complicated always equals better?

  For his part, Steve Case was ready to prove that AOL could be all things to all people. If customers wanted Internet access, they’d get it. And at the same time, they’d have the homey, safe environment of the walled-in AOL content to fall back on. First, the marketer in him decided to use the simple trick of adding the word Internet to AOL’s moniker as the “world’s largest online company.” And, to back it up in reality, he had undertaken a round of deals and acquisitions using AOL’s overpriced stock. None of these deals ever amounted to much, but they were critical at the time to give AOL a Web image.

  In a yearlong spree, AOL purchased BookLink Technologies Inc. (for its browser), NaviSoft Inc. (for its high-end Web publishing and development tools), and Advanced Network & Services (to build out its own network). Case also attempted to buy then-tiny Yahoo for $2 million, but he was rebuffed. And he tried to buy a substantial stake in Netscape Communications, the owner of the hottest Internet browser, as well, but CEO James Barksdale demurred.

  Barksdale would soon feel the heat from AOL, though, as the company unveiled what would become another of its defining strategies: A hardball and even questionable negotiating style. This strategy became especially apparent during the “browser wars” of early 1996, when AOL negotiated with both Microsoft and Netscape to use their browsers, then stunned the online world with its decision.

  Executives at Time Warner would have done well to pay attention to the browser fight. Five years later, following the AOL Time Warner merger, they would complain bitterly about two elements of AOL: The arrogance of its deal makers and their cutthroat negotiating style. Both were in plain view during this time, for anyone who cared to notice.

  The Cowboy Culture

  AOL’s lead negotiator in the browser wars was a stubble-bearded, nasal-voiced tough guy named David Colburn. Despite the cowboy boots he always wore, Colburn had actually grown up in a tame Midwest suburb. But he had acquired a troubling swashbuckling reputation—one that would later cause a lot of trouble for AOL.

  There was no question that Colburn, who’d come to AOL in the mid-1990s, was a savvy, smart deal maker, and a talented lawyer. Unfortunately, he also had become known as someone who took particular delight in tormenting whoever happened to be across the table from him. Getting a deal signed wasn’t enough—Colburn had to extract the maximum amount of blood from the other side, many observed. And even that wasn’t really enough. If he could get maximum blood and leave the other guy feeling frustrated and humiliated, his growing myth posited, that was a truly excellent deal.

  When I first interviewed him in 1996, Colburn smiled craftily as he teasingly tortured the PR person who accompanied me. “Can I say ‘fucking asshole’ when I refer to him?” he queried her, referring to one of his competitors, trying to get a rise out of her. “Or just ‘asshole’?” He kibitzed about whom I had interviewed before I saw him, providing me with a ribald running commentary about exactly what he thought of each of them, which was actually pretty accurate. “You’ve heard I’m a real jerk, a real big jerk,” he needled me with a sly grin.

  I didn’t find him so, but others would consider him extremely difficult. That included Netscape, which was relying on AOL to keep their market share dominant. Despite having bought BookLink for its browser, AOL sought to make a deal to get one of the two best-known browsers—either Microsoft’s Explorer or Netscape’s Navigator. The choice was an important one for the industry, since AOL was fast becoming the way most average people jumped onto the Internet.

  Netscape was the obvious choice. It had become the first wunderkind of the Internet age following its astonishingly successful IPO on August 5, 1995. On that date, which most mark as the beginning of the Internet economy mania, Netscape offered five million shares at $28 each, then saw its stock price double by day’s end. The tiny company was suddenly worth billions.

  Microsoft was, of course, AOL’s sworn enemy, and some simply couldn’t fathom the idea of a Microsoft-AOL alliance. “After what we had just been through with MSN,” Ted Leonsis recalled, “the idea of doing a deal with Microsoft was just out of the question.”

  Yet David Colburn felt differently. “I didn’t care what the hell Silicon Valley thought, or that Microsoft was the anti-Christ, or that Netscape was so cool,” he told me in 1997. “I only thought, ‘Who’s got what we need?’ ” At the time and as usual, Colburn was looking for the best deal for AOL.

  Negotiations went on through the
first few months of 1996. There were numerous points of discussion, and on many of them Microsoft was coming out ahead. Netscape wouldn’t alter its browser to suit AOL’s needs, for example—and Microsoft would. Netscape wanted AOL to pay for its browser on a per-user basis—and Microsoft offered Explorer for free. Microsoft even offered the ultimate come-on: A folder on the Windows 95 desktop with an AOL icon inside.

  These were all significant factors, but the one that might have pushed it over the edge for a guy like Colburn was Netscape’s arrogance. “Netscape thought we had nowhere else to go,” Colburn told me. “It was like, ‘AOL has to do a deal with us.’ ” By comparison, Microsoft was downright humble. Bill Gates himself even called Steve Case to try to move the deal along.

  Even so, on March 11, 1996, AOL announced it had reached a deal with Netscape. Wall Street reacted with excitement, sending Netscape’s stock up 16 percent that day. Gleeful Netscape executives spun the deal as a slap at Microsoft. But they only got a day of glory. On March 12, AOL made the announcement that stunned the online world. In a conference call he conducted with Bill Gates, Steve Case announced, “Microsoft will become our primary technology partner in this Internet space.”

  Colburn and his team had negotiated a nonexclusive arrangement with the Netscape team, which had apparently never considered the notion that AOL might make deals with both companies. Colburn, many Netscape executives insisted to me later, had point-blank denied he would ever do a Microsoft deal when they asked directly. Colburn, in turn, told me he never said that, and that Netscape officials had only assumed AOL would not. Whatever the truth was, prior to the announcement, Steve Case had called Netscape’s Jim Barksdale to break the news. Though Barksdale, the consummate southern gentleman, responded politely, he told me later he’d felt totally sandbagged.

  AOL, as exemplified by David Colburn, had played this deal as close to the edge as it would go. It hadn’t done anything illegal or, some would argue, even unethical in the browser wars. But it had turned and stung a friendly partner for their own gain. Was this a sleazy tactic—or simply a smart business move? Whatever it was, Wall Street loved it, sending AOL’s stock up another 15 percent to $55.50. And that—in a pattern that would become way too familiar—was too soon all that AOL cared about.

  Colburn’s role in the AOL Time Warner merger, as well as other AOL deal makers, would involve similar borderline behavior. In retrospect, the Netscape browser debacle foreshadowed a deal-making style that would raise serious questions later. At the time, though, it would be glossed over, seen more as an overly aggressive move made by a fast-growing company. By the end of 1995, AOL was nearing the five million member mark, doubling its size in less than one year. Its stock was climbing, its brand recognition was expanding, and the executive team was working together smoothly.

  But as usual at AOL, things never seemed to go well for very long before some new worry set in.

  Online Soap Opera

  In the first week of March 1996, Steve Case and Jean Villanueva informed the company’s board that they were embarking on a personal relationship. This was trouble for several reasons. For one thing, both Case and Villanueva were still married to others (though separated from their respective spouses). For another, Villanueva—who was AOL’s powerful head of communications—planned to continue working at the company. Yet how could she, when Case would obviously not be able to manage her objectively? And how would the other executives react to this strange new balance of power?

  Gossip about the relationship flew through the halls at AOL. And the situation was made even more volatile because of the personalities involved. Villanueva, a sometimes-prickly and tough-minded executive, had long served as a kind of lightning rod for Case, deflecting criticism and taking on many of the tasks that might make him look bad. “It was a damn difficult issue, which went right to the question of Steve’s judgment,” one board member told me at the time, comparing it to a popular soap opera drama on television. “I thought I had walked into the middle of Melrose Place.”

  Both Case and Villanueva were extremely sensitive about how their new relationship would be perceived. Villanueva chose to break the story by telling me about it in the spring of 1996, at a lunch where I thought we were going to talk about an upcoming deal to bundle AOL with a new AT&T online access service. I figured she and Case had decided to tell me to better control the news. Perplexed at what to do with this unusual development, since I was a business reporter, I passed it to the Washington Post’s gossip columnist, who broke the story under the headline “AOL’s Love Connection.” The romance would garner coverage in People magazine and even in a cover story on the rise of AOL and Case in Business Week. The items irked Case, as did most reporting about his personal life.

  To calm him down, Dan Case teased his brother that he had bigger worries, observing that, “The joke is that once you’re on the cover of Business Week, that’s just when your stock is about to drop.” Unfortunately, his teasing would prove prophetic. Though AOL’s stock was soaring and the numbers were good, new signs of trouble were arising. Membership growth was slowing again, the result of an industry phenomenon called churn. In increasing numbers, new customers would try AOL, then dump it in favor of another service.

  AOL’s strategy for the past three years had been growth at any cost. Case had always seen these early years of the online industry as a land grab, believing it would never be easier or cheaper to get new members. “We want more audience,” he would tell the Wall Street Journal in August of 1996. “We’re willing to sacrifice short-term profitability to long-term leadership.” Yet the company was now having trouble holding on to those very members they had fought to sign up. According to one top executive, the monthly churn rate was 6 percent—meaning the annual turnover rate of members was an astonishing 72 percent.

  There were several possible reasons for this, but one loomed above all others: The ticking clock. Unlike some other Internet service providers, which had begun to offer unlimited Internet access for a flat monthly fee, AOL continued to charge hourly rates for time spent on the service. Many people were willing to pay, either to use the chat rooms or to keep their email addresses, among other reasons. But, increasingly, many more were not. And AOL would—sooner or later—have to find a way to compete with those flat-fee services. The problem was that either way AOL turned, it would lose. If the company went to flat-fee pricing, it would lose the lucrative hourly fees that kept its revenues high. If it didn’t, it would lose customers.

  There simply was no middle ground. Fears turned ugly after Microsoft started to ready a flat-fee plan and revamped service with a TV-like style, and AOL’s president of only four months, former FedEx executive Bill Razzouk, left the company. He had been brought in to bring discipline to AOL, and now it seemed that he had left under uncertain circumstances. He had actually been let go by Case after repeatedly clashing with others in the freewheeling culture, but it looked very bad at the time.

  AOL’s stock dove from a high of $71 in May to $24 by the end of the summer. Wall Street Journal columnist Chris Byron wrote what a lot of more conservative number crunchers had long been grumbling about as they watched the rise of AOL’s market value. This was the moment, Byron hoped, “when the last great investment zit of the 20th century gets popped.”

  While AOL was trying to put a better spin on things—by launching a pricey new marketing campaign, announcing it was going to go into the business of creating private intranets for companies, and even shifting itself to the more stable New York Stock Exchange from the wilder NASDAQ—the company was still fighting a perception that it was simply a flash in the pan. The Washington Post’s David Hilzenrath said it best in a front-page article in September of 1996. Noting that AOL was a company on the brink, he wrote: “The brink of greatness. Or the brink of irrelevance.”

  AOL had managed to come this far—but was it doomed to fail anyway?

  The Night the Lights Went Out in Virginia

  By this time, I’
d been covering AOL for less than two years, but I’d already been witness to several cycles of dizzying ascents and sickening drops. I remember wondering if there was ever a dull moment at this company and thinking it would make a great book, since it was the best example of the pains and triumphs in the birth of a new medium.

  To me, it seemed as if writing about AOL was like being in the front seat at the start of the television industry. AOL represented the best and the worst at the same time—sometimes ugly, sometimes comic, sometimes tragic, sometimes a bit sleazy, and always riveting. And it was the place where I thought the online world was about to move from being a fad to a necessity.

  In fact, I can trace that realization to a precise date: August 19, 1996. That was the day AOL suffered its epic blackout. It was an event that at first seemed devastating to the company, but that later seemed like a strange sort of blessing.

  Short outages weren’t uncommon for AOL, and the service had been scheduled for routine maintenance that day, so no one on the tech team seemed too worried when it didn’t immediately come back up. As the morning hours ticked by and no one could figure out what was wrong, however, panic set in quickly. All over the country, people at home and at work were unable to get their email, check their stock quotes, or send important documents online. And they were getting plenty angry about it.

  Throughout the day, CNN covered the outage, and promos for the local evening news shows kept viewers apprised of AOL’s status. At the company’s new headquarters—an antiseptic concrete-and-glass office building perched in a field in rural Dulles, Virginia—Villanueva and the public relations staff struggled to field calls from reporters. It was a media nightmare, of course. No one had any idea why the blackout had happened or when the service might be up and running again. The only piece of good news was that AOL had been able to determine that the outage was not the work of hackers.