Burn Rate

by Michael Wolff

  Then there’s the member directory, a remarkable tool. From this you can know what secrets lurk in the hearts of man. Really. Want to know how many women are dying for a spanking in Phoenix? (Spanking—a cultivated and esoteric interest, one would think—seems all the rage in cyberspace.) Want to find one of those Phoenix spanking women right now? She’s in the Strict Parents chat room, or if that room is full, maybe she’s in SP Regulars.

  Anyone can have sex on AOL. Many, it seems, do. Curiously though, recognition of this phenomenon has not yet become part of the overall understanding of what AOL is about, or part of the business analysis of what moves the industry.

  But this, the sex stuff, is New Media. Everything else is largely a redistribution of media as it’s always been. This sex stuff is, really, new—a paradigm shift.

  For one thing, you have ordinary people, millions of ordinary people, engaged in a narrative enterprise. Writing dialogue, crafting descriptions, setting scenes, developing characters. You have real dramatic engagements. It’s a new form of story, of the written word, of the way we communicate fantasies, desires, aspirations. I’m serious.

  This is interactivity.

  Then there’s the social thing. I’d love to see numbers on this. How many private room dalliances shift to direct phone contact? How many phone callers take the next step to a Bennigans? My guess is that if a reliable study were ever done, the results would have a Kinsey-like effect on our worldview.

  Okay. People like sex. Even baroque sex. So what else is new?

  It’s just that sex has not historically been a main motivator, to say the least, in the software business. So it will be curious to see what happens at this unexpected intersection. What happens when not only consumers but the technology industry comes to terms with the interesting fact that the cyber business is motivated by an itch. When Microsoft understands—duh . . . it’s sex!

  Perhaps it is exactly at the meeting point of technology and sex that mass media is created.

  Now, although cybersex has been the mighty engine of AOL’s hyper-growth, AOL has been trying maniacally to distance itself from this fact. There is the engine room and then there are the promenade decks, sort of.

  Moving from its chat service roots, AOL, in the early 1990s, started to add content. The notion was to broaden the appeal of the service, to offer something to users who might not be as interested in spanking as in, say, country inns. But perhaps more important, the idea was to keep the spanker, then paying six dollars an hour for his AOL visits, online a little longer. Spankers, after all, might need to look for a country inn, too.

  The cable business got a big initial push because it offered consumers a glimpse of things never seen before, perhaps hardly ever imagined, in an American home. But cable then proceeded to narrow and contain those offerings until they were only some late-night, low-rent oddity. AOL, on the other hand, grew its sex business even faster than it grew its “content” business.

  You might not know it—and if you did know it, ironically, you could hardly admit to it—but underneath AOL’s layers of Time and Disney beats a heart of astounding carnality. Indeed, without the restraint of hourly charges, AOL becomes the greatest sex business in the history of the world. A nonstop orgy really means something here.

  This was, then, what had brought AOL, against all odds and logic, to the precipice of owning the industry.

  Jon Rubin and the AOL Exec came back upstairs from their smoke in a playful good humor. Frisky almost. They were masters of the universe. They were above it all. We were all geeks whereas they were two guys who could cut a deal.

  Rubin had not only set up the shot but now he was getting ready to make the goal, too.

  Taking his time, prolonging the wait, enjoying the tension, he made a phone call first, languidly arranging his evening plans.

  The AOL Exec had plans, too; he confided into his little phone.

  Everyone else in the conference room was an afterthought.

  “We’re not going to be able to do anything with AOL,” Rubin said to the factotum, grinning.

  “It’s such a shitty company, anyway,” said the AOL Exec, having fun, too.

  “You mean America On Hold?” said the factotum, taking his best shot at repartee.

  “Okay,” Rubin said, pulling a piece of scrap paper from his pocket and putting his foot on the chair. “Are you ready? Do you want to hear it?”

  Alison, the factotum, the EVP, and the technology advisor each got out their pads.

  I sat on tenterhooks.

  The AOL Exec settled into a chair and put his feet back up on the table.

  “This isn’t complicated,” Rubin said.

  “No bullshit,” the AOL Exec said. “No lawyers.”

  “Okay. Ready?” Rubin made us wait for another moment. “AOL guarantees us enough cash to cover our monthly burn rate,” said Rubin. “On the first of every month we get a check.”

  He continued: “AOL recoups from selling our books on the pop screen at standard discount, plus AOL, which will provide us with traffic, becomes the exclusive rep for all of our ad avails.”

  “What’s the term?” Alison asked.

  Rubin turned to the AOL Exec. “Three years?”

  “Sure.”

  “AOL receives nineteen point nine percent of the company and has a six-months option to purchase the rest of the company for forty million dollars. Okay?”

  “What else?” the factotum said.

  “That’s it.” Rubin spread his hands to indicate the ease of victory.

  I looked over at the AOL Exec. “Beautiful,” he said. “Tell me we don’t need lawyers.”

  “We may need a few,” said the factotum with his helpless literalness.

  There was beauty to the deal. Symmetry. Proportion. By giving AOL part of our company, it would give us access to its audience. The monthly guarantee would force AOL to make good on this access; what’s more, we were encouraging AOL with a solid profit basis—the more AOL opened its audience to us, the more money AOL made. Then, too, by giving AOL control of our ad sales, AOL would be motivated to open the spigot of its audience to us. Then, after having made us a profitable company, they could buy us for a relative discount; indeed, they would be motivated to make us as profitable as possible to increase the size of their discount. If they made us widely profitable, which they had the ability to do without much thought, Wall Street would be pleased that they could buy us for only $40 million and would then send AOL’s stock up a notch or two, thereby paying for our acquisition. AOL would, therefore, be buying us for nothing.

  I wondered if in this snapshot you couldn’t see how industries are reduced to a few giant players. All the struggles, all the sleepless nights, and all that entrepreneurial zeal come to this, I thought with sudden nostalgia.

  “If you,” said the AOL Exec, looking to the factotum, “could put this into memo form—not long, two pages tops—that would be great. I’ll just walk it through. Good deal. Perfect. Easy. No one’s going to break a sweat here. Done.” He took his feet off the table. He was ready to go.

  “Let’s not complicate it,” Rubin said. He didn’t want the factotum, or Alison, to start to ask the kind of questions that bankers and lawyers ask.

  I didn’t want them to ask those questions, either.

  But I did want to do something. Having been here, I wanted to force it a little more. Apply some glue.

  I said, “Are there any obstacles between here and closing the deal?”

  “I know that you’ve had problems with us before, but I’m giving you my word. This is a done deal. Done! Absolute outside, end-of-the-year closing.”

  Forty-five days.

  “Just,” I said, “so I don’t have to kill myself on New Year’s Eve, are there any impediments, any at all, to moving this through the AOL bureaucracy and getting this signed, sealed, and delivered by January 1?”

  “Only,” he grinned, “if you doubt my abilities as a salesman.” Is the Pope Catholic?

/>   There was a restaurant that Alison and I went to sometimes. It was a place that might make you crazy with envy if all wasn’t right with your world, but if you had put it together, if you had pulled it off, sowed and reaped, you could be very comfortable there. I called for a table.

  A lot of business seems to be about ending up where you never wanted to go. It’s about toeing the line. Accepting reality. Going with the power. The fact that the entrepreneurial impulse runs against that grain just means that you have to develop a sense of irony.

  Early on, I had rejected AOL. What did they know, after all, about the information business? They were a computer bulletin board service, a BBS; this was, really, CB radio stuff. It was AOL who pursued us, trying to buy an ad in one of our books. Who buys an ad in a book, anyway? Clearly, they had no idea how the media world works. We did, however, take their $5,000 for a page somewhere after the index (in a bit of AOL dysfunction, they sent us $150,000 instead of $5,000 for the page).

  Then there was a snobbish thing, too. We were an Internet company. AOL was a “proprietary system.” It had nothing to do with the Internet; it wasn’t at all part of this grand new adventure in communication, community, and free information; it was uncool and headed, surely, to the ash heap of history.

  But you could make money from AOL. Rosalind Resnick, formerly a reporter at the Miami Herald, was NetGirl on AOL, a cyber Miss Lonely Hearts, whose cut of the connect time, the pennies out of every dollar spent connected to the service and through to NetGirl, amounted to $40,000 every month. Then there were the Motley Fools, the irreverent investment advisors, whom AOL had turned into near stars. Then the Gay and Lesbian Forum, raking it in. And Hoover’s (offering profiles of American companies), whose first monthly AOL check in August 1992 was for $123 and who by 1996 was netting more than $35,000 a month from AOL.

  This was real money, in cyberspace.

  But because what happened at AOL was so often unplanned for, inadvertent, a surprise to all concerned, a true algorithm of unintended cause and effect, it was hard to get the institution to respond with any predictability or logic or business process.

  In the spring of 1995, I had gone down to AOL’s offices with Pat Spain, the CEO of Hoover’s, who had arranged a meeting for me with AOL executives.

  Hoover’s, then called the Reference Press, a book publisher in Austin, Texas, was started in 1990 by Gary Hoover, a retail savant who had created the first book superstore chain, called Bookstop, which grew in six years from one store to the fourth-largest chain in the country before being bought by Barnes & Noble. Gary Hoover was an information geek, with a small-college-size library of reference books located in a separate building on his Texas estate. He had hundreds of thousands of books about trains, books about war, books about travel, books about business. It was more or less natural that he would start a reference publishing company after he sold his bookstore chain. He figured he could take high-priced information and retail it at attractive prices to ordinary consumers.

  It may be a meaningful footnote in the life of the book business that one of the real geniuses of retail book sales was not able to sell his own books in bookstores. Disappointed with the publishing business, Hoover let Pat Spain, a disaffected lawyer and 1980s M&A guy and a friend from the University of Chicago, try his hand at running the company.

  In many ways, what Spain began to do, slowly and inadvertently, was to create perhaps the first successful alternative to consumer print publishing. With the philosophy that “no deal is too small,” he began signing up with any electronic information distributor that would take the information he had to sell. A skilled and patient negotiator, he was able to resist the one convention of the online business at that time—exclusivity. “In the end, we were too small for exclusivity to be so important. Besides we just wouldn’t do it.” The first deal was with AOL. Other pre-Web deals would include CompuServe, Dow Jones, eWorld, Lexis/Nexis, and Bloomberg. At one point, highlighting the contradictions that would soon threaten the old-line online providers, the same Hoover’s info that would cost you pennies on AOL could cost you more than twenty-five dollars on Lexis/Nexis.

  What Hoover’s began to see was a distribution model that would allow it to sell its information for the same price and for potentially greater margins to the same audience it had hoped to reach in Barnes & Noble without unit and promotional costs and without the risks of returns.

  In 1994, Larry Kirshbaum, president of Time Warner’s Warner Books, looking toward the end of books in paper form, bought 30 percent of Hoover’s.

  In early 1995, in a further oddity of the relationship between books and bookstores and readers and information, our company published a book called NetMoney that featured Hoover’s on the cover and doubled Hoover’s traffic on AOL.

  I went down with Spain to Vienna, Virginia, to AOL’s unprepossessing faceless brick headquarters at the end of a road. Spain had done this trip innumerable times. He knew the routines and the rhythms. Just go. Just sit there. Purge yourself of ego. In the great maelstrom of history, of which AOL increasingly saw itself as a key part, the individual was of little consequence. Just be there when they needed you. Let someone else worry about the big picture, concentrate on the details.

  We sat around a conference table. No one at AOL seemed to know what to do with us. “Did we know you were coming down today?” asked several affable execs. Spain took no offense. He just didn’t move.

  It took a little while, but before long we had a real meeting on our hands with nine or ten people (only one of whom looked to be out of college) with large titles and wide areas of concern—business, sports, entertainment. It was as though each of these concerns was being addressed for the first time. It was very much an undergraduate seminar mood. These were deep, broad, meaningful, as well as meaningless, questions being tended to.

  Something was going on here. The online world had always had a pretty clear idea of mission and function. Its metaphor was a straightforward one. An online service was a newsstand. It was very happy with this metaphor because it was simple and it was businesslike, very clearly dividing up talents and skills. Newsstands brought you other people’s information. Online systems did that and, in addition, made it possible for you to get this information with a whole range of technological advantages and added value. But an online service was not in the information gathering and creating and processing and packaging business. The online service was not in the content business.

  But AOL obviously had plans. They denied it: they weren’t content creators, they said. Except for look and feel. And except for navigational issues. And except for chat. And except for the opening screen. And except for celebrities. And except for news.

  Still, while I was disturbed by this arrogance, this mix-up of roles, this changing of the rules, I was not foolish. Not only was the AOL payday real, but their interest in what our company might offer them, how they might put our content to use, as they put it, seemed genuine. They overflowed with ideas about how we might “work together”; it was a free-for-all of notions and ideas and opportunities for all. I left the meeting with point people assigned and follow-up steps in place.

  “Thank you,” I said to Spain. “I appreciate that. They seemed really receptive.”

  “You’ll never hear from them again,” he said.

  I laughed. What he was saying, I knew, was that the follow-up was always hard. Follow-up, in fact, is everything. Most entrepreneurs will fail in follow-up. They don’t press hard enough. Or press too hard. They get lost in the turnaround. Or lose the enthusiasm of the meeting. Or they find out their point person has been canned or promoted. A hundred things can go wrong. I knew that, of course.

  But that’s not what Spain meant. He meant that I wouldn’t hear from them again.

  Four months passed with absolutely no response to the variety of e-mails, phone calls, and colorful packages of books I sent in their direction.

  “What do I do?” I asked Spain.

  “Just
keep doing what you’re doing. It won’t hurt, anyway. But you should probably go down again.”

  Then one day, very early on a Saturday morning when I happened to be grabbing a silent hour in the office, AOL called. “Just wanted to follow up, see where we are. Find out about the next steps,” said the affable point person.

  I was ready to play the game: “I’m going to be in D.C. at the end of the week. Maybe we can get some face time together. I can come out to Vienna.”

  “Great. Lunch?”

  And so, only a season after my last meeting with AOL, I flew to D.C. and took a cab from National Airport through the Virginia foliage to Vienna.

  At this meeting, with a large spread of cold cuts, there were almost twenty people, none recognizable from the last meeting except the person who had made the Saturday morning call.

  Every encounter at AOL, I started to understand, is a process of starting over again, because an organization that is growing as fast as AOL is, from month to month, is almost a new organization. My history with the company, I realized, was now longer than that of most of the people at this table.

  AOL wasn’t pretending otherwise. It was an organization that begged tolerance. It was hard not to be tolerant as I looked around the table at the eager, flushed, young faces, all wanting to do well in their first job.

  There was the enthusiasm here of wartime. A good war. People full of idealism flooding into Washington. “Let’s do everything we can.” “Let’s run it up the flagpole.” “Let’s throw it against the wall and see if it sticks.” And perhaps, in this, an absence of personal responsibility, because the individual is dwarfed by the forces of history. AOL was part of the tide now. AOL would happen. The online revolution would happen. New Media would happen. No matter what anyone at this table did.

  I was assigned another point person. We agreed on a list of “action items.” I was invited to the next AOL partners conference.