by Kara Swisher
When the problem was finally discovered and fixed—19 hours after the blackout began—it would turn out to be relatively prosaic. A routing error went undetected because the diagnostic systems had been down for the routine upgrade. The national response to it, on the other hand, was anything but commonplace.
“America Online Goes Offline” blared the Washington Post in a front-page headline. “[email protected]!” trumpeted the New York Post, which over the years relished any problem at AOL it could find. And all the major networks led their evening newscasts with the story—even ahead of the news that a scientific report released that same day had suggested there might be life on Mars.
But it also indicated that AOL was needed. Steve Case echoed that sentiment in a letter to users apologizing for the blackout. “Without making light of yesterday’s outage, an additional interesting theme did emerge that’s noteworthy,” he wrote. “The disruption caused by the temporary unavailability of AOL illustrates more clearly than ever before how important AOL has become in the daily lives of our members. From a high-tech gimmick, AOL has evolved over the past several years into a critical part of real people’s lifestyles and it is missed when it’s not available.”
AOL users were not impressed by Case’s spin on the situation, considering it appalling to turn a disaster for consumers into a compliment of AOL. But this was classic Case, of course—he was as incapable as ever of delivering any kind of empathetic response. It was exactly this kind of tone-deaf commentary that would drive Time Warner to distraction following the merger. And once again—as with David Colburn and his team’s hardball negotiating tactics—it was on plain view for anyone who cared to notice.
But to Case and others at AOL, the blackout was a turning point. Up until that point, AOL had seemed more like a frivolous service than a tool. But now, for the first time, it was clear that people didn’t just want AOL; they actually required it.
But did they need it enough to keep paying $2.95 an hour, when the other major services were switching to flat-rate pricing? When MSN announced on October 10 that it, too, would offer unlimited usage for $19.95 a month, the AOL hierarchy decided the answer was no. It was time to make the leap. The company planned to make the announcement on the pricing shift on October 29.
That same day, they’d also make two other important announcements. One would bring glamour, glitz, and a sense of renewal to the company. The other would lead some to think it was doomed. And both developments would later play big roles in AOL’s disastrous merger with Time Warner.
Enter Bob Pitchman
Compared to “Vanilla Man” Steve Case, Robert W. Pittman was a multiflavored sensation when he arrived at AOL in the fall of 1996 as the president of AOL Networks.
The cofounder of MTV, Pittman was a smooth-talking Southerner with a mane of thick, dark hair and a taste for the high life. Born and raised in Brookhaven, Mississippi, the son of a Methodist minister, he’d taken his first job as a radio deejay in his teens in nearby Jackson so he could pay for flying lessons. Within a few years, with stops in Milwaukee, Detroit, Pittsburgh, and Chicago, he’d made his way to New York City’s WNBC, where he soon became one of the hottest young radio programmers in the country.
While he never did get around to graduating from college, Pittman was typical of the kind of hardscrabble overachievers whose burning ambitions and ability to morph into whatever is needed often vault them ever upward. When his radio career took off, he bought himself a plane (which he apparently had no trouble flying, despite having a glass eye as the result of a horse-riding accident when he was a boy) and a Harley-Davidson motorcycle. This well-constructed image of the businessman maverick was one that would carry Pittman far.
In the late 1970s, Pittman took at job at Warner Amex Satellite Entertainment Company (WASEC). It was there, in 1981, that he took an already existing idea for a televised music show first floated by his boss John Lack and turned it into Music Television. The first all-music cable channel, MTV not only became a hot new brand, but also changed American culture and the cable business with its memorable “I Want My MTV” marketing mantra. More than two decades after MTV was founded, the quick-cut, visually arresting style of its videos has permeated ads, television shows, and movies. It took marketing and music to a whole new level and introduced the idea of attitude and not plot as a selling point in entertainment. And while many competitors—including even Ted Turner—tried to emulate MTV, it was impossible to beat Pittman’s head start.
And, through the early 1980s, Pittman did, in fact, seem impossible to beat. While he basked in his MTV success, which many thought he took too much credit for, he married socialite and fellow adventure seeker Sandy Hill, made routine appearances in the gossip pages, and cultivated glamorous friends like Rolling Stone’s Jann Wenner and NBC’s Tom Brokaw. He was a runner-up for Time magazine’s Man of the Year in 1984. But when MTV was sold off to Viacom—after Pittman tried unsuccessfully to buy it with the help of Forstmann Little & Co.—Pittman was left with only a few million dollars in stock options and a scary possibility that he would never replicate his boy-wonder success.
He tried to recapture the glory by forming an investment company called (ironically enough) Quantum Media Inc., backed by $15 million entertainment giant MCA, to make media acquisitions and create new properties. But it was hard to succeed in the difficult late-1980s economic climate. Quantum had one short-lived hit with The Morton Downey Jr. Show, but overall its efforts were mostly lackluster, including a failed attempt to take over the J. Walter Thompson ad agency.
Soon enough, Pittman returned to Time Warner, brought back by his old mentor Steve Ross to run Time Warner Enterprises, a business development arm of the company. There his biggest job involved his turnaround of the Six Flags theme park chain. Time Warner bought the chain for $600 million in 1991, and Pittman spent the next few years goosing its revenues and profits. By 1995, he sold it off to Boston Venture Partners for more than $1 billion, earning himself a $40 million payout as part of the sale.
In the process, though, Pittman lost his job when the purchasers didn’t want to take him or his demands with the parks. And despite his success with the Six Flags turnaround, there was no room for him at Time Warner. Because there was jealousy over his longtime, close relationship to Ross, who seemed to delight in Pittman’s brash style, Pittman was especially vulnerable after the great showman died in 1992.
He had also developed a reputation as an impossibly ambitious executive with a proclivity for flash over substance. While many thought Pittman’s potential and talent were huge, he was also branded as someone more interested in short-term fixes than long-term solutions. It was a reputation that would continue to dog Pittman when he later returned to Time Warner after the AOL merger. In yet another portent of things to come, Time Warner CEO Levin dispatched his number two, Dick Parsons, to deliver the bad news to Pittman.
But Pittman was not down for long. He already had an offer of a job working for another longtime mentor of his, Henry Silverman, as CEO of the Century 21 real estate chain. This seemed a bizarre choice for a man with his finger forever on the pulse of everything hip. But Silverman offered Pittman an enticingly lucrative contract that included a $1 million bonus as well as 8 percent of Century 21.
As soon as he’d parked himself out in the pasture of real estate, however, Pittman knew he needed to find another way to stay current. So in 1995, curious about the company at the vanguard of the online revolution, he’d called Steve Case. He had put a Century 21 site on AOL and was impressed by its ability to generate leads, the heart of the real estate business.
At their invitation, he joined Case and Ted Leonsis for lunch at a modest café in the soulless office sprawl of northern Virginia, and Case immediately began needling Pittman about his most recent career move. Case had quickly made up his mind: He wanted Pittman to join the board of AOL, with the ultimate goal of getting him to come on as a top executive. And so Case wasted no time going for the jugular in convinci
ng Pittman to do so.
“Woooo, love those yellow jackets, Bob,” Case taunted, referring to Century 21’s trademark apparel which Pittman had actually purged. “Very fashionable.” Then he pushed further. He asked Pittman: “Is this really your purpose in life? To work with a real estate company?”
For someone like Bob Pittman, there really was only one possible answer to that question. Still, although he was intrigued by the possibilities at AOL, in 1995 the timing was wrong—he’d just started with Century 21 and had promised Silverman two years. But by 1996, he and Case began talking again. In August, Ted Leonsis rented a yacht and took Pittman on a Mediterranean cruise to close the deal. By the beginning of the fall, Pittman was ready to ditch Century 21 and come on board at AOL, part of a new life that included divorce and a new marriage to a woman named Veronique Choa.
“I’ve seen this movie before,” Pittman declared incessantly, comparing AOL to all his past successes in radio, theme parks, and cable, specifically at MTV. But the movie turned out to be more of a thriller than he ever expected. On October 29, 1996, the same day AOL announced Pittman’s hire and its move to flat-fee pricing, the company made one other announcement as well—one that would tarnish the company for a long time to come.
In reporting results for the quarter, AOL told Wall Street what it should already have known if it had carefully read the company’s last few financial statements. Not only were there no profits, there actually never had been in the entire history of the company. Instead, there was a single, devastating number that wiped them all out: $353.7 million.
This was the amount that AOL had lost in the quarter, the result of a massive $385 million write-off of something it had long called deferred subscriber acquisition costs. This was the very hefty price of all that heady past growth, overspending on acquiring subscribers, and relentless churn. For the past few years, AOL had been spreading out its marketing expenses—largely due to the disk blitz—over two years, rather than charging them to each quarter. It was a practice that made the company’s financial results look better.
It was good enough to maintain the appearance of profits that allowed AOL to continue to raise hundreds of millions of dollars in capital and investments and use its fast-rising stock for acquisitions. It also allowed AOL executives—first and foremost Case—to regularly cash in their hefty options and become extremely wealthy. All this, as many observers of AOL’s accounting tricks would note, simply because the company had pushed the accounting pencil in a slightly more aggressive direction.
Although it had been disclosed in the company’s filings and it was well known among analysts, this type of accounting had increasingly incurred the wrath of purists, who saw it as a sleazy trick to prop up the numbers. When the buzz of disapproval over the tactic had grown to a din, Case realized he’d have to change it. The result: A massive loss and a public relations black eye.
Still, Case continued to insist that AOL’s past behavior was standard, though he was abandoning it for a new model. He also added that accounting in the nascent online industry was still evolving, trying to position its businesses as radically different from other media. The change, he summarized, was made only because he wanted to “address the needs of Main Street and the concerns of Wall Street.” Case largely glossed over the implications of what AOL had done and gotten away with.
The architect of AOL’s accounting practices, CFO Len Leader, also angrily denied that the company had done anything wrong. “We take strong exception to any notion that we are playing games,” he told the Wall Street Journal.
Others knew better. The master of the scatological metaphor, Jim Kimsey, even had taken to calling the accounting issue “the big turd,” since it “sat in the middle of the company and smelled up the place.” And critics outside the company were even less kind. Abraham J. Briloff, a university professor and well-known critic of unorthodox accounting practices, called it “in-your-face arrogance.” In an interview with me, short-seller David Rocker blustered, “They are morally bankrupt! For them, every revenue is ordinary, and every expense is extraordinary.” And respected Newsweek columnist Allan Sloan wrote, “I’m intrigued by AOL’s ever-changing accounting and by the way it manages to keep telling Wall Street whatever it wants to hear.”
As Sloan pointed out, AOL actually hid few of these practices—making it another lesson Time Warner should have been paying attention to. But caught up in their own failures to generate any growth in their digital efforts and blinded by the immense growth of companies like AOL, few at Time Warner would remember this incident. The stench of the big turd would not reach there for years to come.
Money, Money Everywhere
After they vaulted over that hurdle, AOL added insult to injury. On December 1, 1996, AOL switched to a flat-fee pricing structure. For $19.95 a month, users could spend as much time as they wanted online. The result, operations head Matt Korn had joked in an earlier meeting, might be like “drinking from a fire hose.” Once again, to AOL’s detriment, a joke would prove prophetic.
Right out of the gate, the leap in usage was phenomenal. On average, AOL members had been logging about 1.6 million hours online per day. On December 1, they logged more than 2.5 million hours, leading to widespread slowdowns in service. It was only the first day, but Korn and his team were already in danger of drowning. By the end of December, 500,000 new members would sign on and old users would not log off for fear of not getting on again.
Going to flat-fee pricing was, in the words of David Rocker, “like inviting busloads of fat people to an all-you-can-eat buffet.” People were obviously going to take advantage of unlimited use, and AOL was never going to be able to keep up with demand. So in January 1997, Steve Case issued an extraordinary plea in his monthly letter to users.
There is, he wrote, “something you can do to help, and that is to moderate your own use of AOL a bit during our peak evening periods. . . . Just as you would be sensitive about using a public phone booth if others were waiting in line to use it (although you are entitled to use it as long as you want, most people are considerate of the people waiting to get a turn), it would be helpful if you could be considerate of the needs of other members of the AOL community.” He advised “restraint.” Given that he was taking money from the people for a service they expected to be delivered, the request naturally appalled users. In the two days after the email letter went out, Case received 17,000 emails in response, crashing his mailbox.
Though AOL had always had its share of detractors, with sites like aolsucks.com sprouting all over the Web, this marked the beginning of a new level of ire. Now, according to many critics, AOL didn’t simply suck: It was greedy, unethical, and possibly even criminal. Three dozen state attorneys general went after the company, eager to bolster their reputations by winning concessions for their constituents, who had already become inflamed earlier in the year by a billing practice that rounded up minutes. And as the face of AOL, Steve Case found himself the target for vitriolic attacks, both in the press and from users.
As 1997 began, things started getting out of hand. In a Mad magazine parody, a character warned the fictional Steve Nutcase to be careful: “No offense, Steve, but I hope you have a bodyguard with all the enemies you make.” But it was no joke. Case received enough threatening emails that he was persuaded to take a defensive driving course in case someone tried to run him off the road. Internet polls asked whether Case should be sacked. Late-night comics spoofed his bland demeanor in the face of endless busy signals. And editorial writers chastised him for misleading customers. In an online poll on whether to ax Case due to the near-daily blunders, they dubbed it “Dumb, Dumber and AOL.” And Case was further embarrassed when he was called up to the stage to give a presentation at a tony tech conference to the sound of busy signals.
CompuServe, which had fallen far behind AOL in member numbers, gleefully skewered the company in an ad played during the Super Bowl. Against the backdrop of a blank screen, the ad played the sound of a mo
dem repeatedly trying to dial up. Silence fell, then a tagline appeared: “Looking for dependable Internet access? CompuServe. Get on with it.” The number to call: 1-888-NOTBUSY.
Though AOL promised to spend $350 million on new servers and modems to solve the problem and reluctantly agreed to cut back on marketing and not accept any new members, many thought it was too little too late. The Wall Street Journal’s Thomas Petzinger blasted Case in his “Front Lines” column: “The service breakdown at AOL is an ethical issue,” he wrote. “Today’s topsy-turvy business world does not excuse a company from offering a product it knows it cannot reliably deliver.” At the end of the column, he offered one more slap, publicly dumping his AOL account: “Please note my new email address, [email protected].”
Case was incensed. In an interview that winter, he told me, “To attack someone’s character without knowing the facts is terribly unfair. [The column] said I was immoral, and I’m not. We went to unlimited, and we had problems. The motive was to do the right thing for members and our profits even took a hit.”
But I was not feeling very sorry for Steve Case, who appeared not to realize that he might be at fault in any way. The lingering accounting issues and the disastrous move to flat-rate pricing once again raised troubling issues about AOL’s willingness to stretch rules to their breaking point. That tone pervaded AOL’s culture and few people expressed any embarrassment over the issue.
That’s because Case still had the stubborn righteousness of an entrepreneur with a big vision and seemed unwilling to see that others should not pay the price for his miscalculations. In fact, Case and others at AOL actually had the audacity to compare the situation to when my newspaper, the Washington Post, failed to deliver the paper because of a winter storm. What they conveniently left out was that AOL had created the bad weather that had left everyone stranded deep in the snow.
