The AOL Exodus Effect
Once a Magnet, Firm's Departure May Alter Local Tech Landscape

By Zachary A. Goldfarb and Kendra Marr
Washington Post Staff Writers
Monday, February 18, 2008

Barry Schuler moved to Washington from Silicon Valley to join AOL during its golden days, one of the many top technology professionals the Internet giant recruited to the region. But when the former chief executive left in 2003, he returned to California to become an investor and start a technology company, following other executives who have drifted away from the region.

"We gravitated back to our roots," Schuler said. "This area, the Bay Area, continues to be the epicenter of emerging technology."

Departures like Schuler's are one reason Washington's technology industry is still struggling to mature a decade after Dulles-based AOL became a magnet for talent.

Without schools such as Stanford or MIT, Washington counted on AOL to build up the local consumer tech industry, just as Microsoft did in the Seattle area. And for a time it did just that, becoming the country's best-known online company and recasting the region's image as more than a sleepy town of opaque government contractors.

But AOL has suffered a long decline, and as it moves its headquarters to New York in a business realignment, a debate is stirring over whether the industry that grew up around AOL will also diminish. The question became a bit more urgent when Sprint Nextel, the troubled wireless carrier, announced last week that it is moving its headquarters, from Reston to Overland Park, Kan.

"A leading company attracts a steady flow of top talent to a region, some of whom eventually spawn new ventures in the area that then grow to be leading companies," said Adam Lehman, a former AOL senior vice president and Bethesda venture capitalist. "In the absence of having an Internet leader here, we risk the negative version of the cycle, where quality talent migrates elsewhere, with innovation, capital and employment growth following them."

These days, a network of executives, venture capitalists and technology lawyers are trying to make sure that doesn't occur. Former AOL chief executive Steve Case's Revolution, a company trying to use technology to transform health and other industries, is the best known and has generated national buzz. AOL alumni also have had a hand in dozens of other local technology companies -- such as ad firm Mobile Posse and online widget maker Clearspring -- though these hardly have become household names.

"We're trying to target major industries that we think are ripe for significant change," Case said. "We're hopeful that one or more of them will emerge as iconic companies in the D.C. region."

It isn't the first time the region has tried to build a long-lasting technology sector, but for each step forward there been steps back. The local telecommunications industry that matured around long-distance giant MCI never fully rebounded from the company's merger and eventual breakup with WorldCom.

"We just don't have the high-end Googles and Facebooks that are monsters. We tend to have doubles and triples here," said John May, who heads a Vienna network of investors in tech start-ups. "AOL gave rise to the hope that we could have multiple killers here. When it reversed fortune, we weren't able to use that as a building block to have mega hits."

For its part, AOL notes that it is still one of Northern Virginia's largest employers. "We are a global company and in 2008 we will be headquartered in New York, but that doesn't mean we've lost sight of this community and our ties to it," AOL spokeswoman Anne Bentley said.

Still, AOL has shrunk its local headcount from about 5,700 employees to 3,000. And AOL recently said that it would be scaling back its community investment, pulling funding from local outreach and education programs, and slimming its community investment office.

You've Got Growth

The story behind AOL's rise and fall has a straightforward arc: The upstart used its high-flying stock to buy media giant Time Warner in 2001, only to quickly find itself saddled with an accounting scandal and a problematic business model that dragged the company down following the bursting of the dot-com bubble.

Becoming an Internet giant was not easy. In the 1980s and early '90s, the firm didn't have a local pool of technology workers to draw from. AOL had to reach out to financiers in New York and California and lawyers in Boston. For those reasons, Case urged his associates to move AOL to Silicon Valley.

"The concern I had at the time was that . . . Washington, D.C., was not a center in terms of technology or entrepreneurship," Case said. "It was more difficult to get people to leave large, stable companies to join a fledging start-up, because that wasn't the culture."

But then-AOL chief executive James V. Kimsey, an Arlington native, vetoed a move, and the company slowly built its team, luring some of the nation's brightest young technology and media talent. On Fridays, employees would take a break around 6 p.m. for a beer bash -- and then go back to work late into the night.

The trick to AOL's fast growth was its vision for turning the Internet into an accessible place for non-techies. When it did that, and its trademark expression "You've Got Mail" became commonplace, AOL took off. It didn't matter where it was located -- it was the center of attention.

As it grew to 600 employees, AOL uprooted from Tysons Corner to a largely undeveloped area near Dulles Airport and established a 154-acre headquarters in 1996.

"It was the beginnings of development of the whole area," said Warren Amason, a senior vice president at Grubb & Ellis, which brokered the deal. Later, Grubb & Ellis brokered the deal to bring telecom giant WorldCom to Dulles.

"The fact that AOL was there validated the idea," Amason said. "I don't think [WorldCom] would have made the decision to go there if it hadn't been for AOL's presence."

The rising value of AOL stock enriched its employees. By one count, AOL had more than a thousand millionaires on staff at once. Case and other senior executives collected nearly $1.5 billion by selling stock from 1996 to 2001. On one occasion, Case gave leather jackets to the staff to celebrate a milestone in the service's growth.

With their new wealth, AOL and its employees gave millions of dollars to local charities. AOL was once the region's 16th-largest giver, with cash expenditures in one year of $1.3 million and $7.6 million worth of goods.

AOL's booming stock price also enabled the company to make high-profile acquisitions. Yet those purchases didn't always benefit the region.

For example, AOL bought Netscape, the maker of the first Web browser, for $4.2 billion. But Netscape's home, and that of several other technology companies bought by AOL, remained in California.

AOL's technology incubator, Greenhouse, has funded 30 or so companies, but only one -- financial information firm Motley Fool -- is based in the area.

Learning to Downsize

In September of last year, AOL announced that it would move to New York to be at the center of advertising world, which the company regarded as key to its future. At the time, Loudoun County officials were assured that the move would cost fewer than 100 jobs.

A month later, AOL said it was dismissing 750 employees at Dulles. Morale fell as employees waited for word on their fate. "Everyone shuts down, sits and waits. It stifles activity. It stifles creativity. Everyone is worried for their jobs," said Will Kern, a senior product manager who left AOL during the recent layoffs to join a local start-up.

The layoffs were not only demoralizing but reflected broader problems. Over the past few years, a new crop of Web companies has been emerging, taking advantage of the spread of broadband. They've included brand names such as Google, YouTube and Facebook. And they've all been on the West Coast.

To most outsiders, AOL was no longer seen as an Internet leader.

"If a student or venture capitalist put together a list of the 20 companies they want to think about as companies to look at or learn from, AOL would not be on the list," said Haim Mendelson, professor of electronic business and commerce at Stanford University who has studied the online giant.

Many former employees blamed bureaucracy inherited from Time Warner for stunting innovation. New ideas had to pass through a cumbersome internal review board, which stymied online mapping, voice technology and other projects.

AOL couldn't lure people with the promise of riches: Its stock was in the dumps, and in 2005 the company had stopped giving stock options to all employees. Senior executives looked around the region for talent, but found mostly engineers familiar with business software programming and government contracting, not cutting-edge Web applications. Dozens of creative, technical, sales and operating AOL employees decamped to Silicon Valley, New York and Boston, in search of more promising opportunities.

"If you worked at AOL after 2002, what would you have learned at AOL that you couldn't have learned at other places?" said Mark Walsh, an early AOL executive who is an active local investor. "What you learned was how to downsize."

Employees who had stuck with AOL through the ups and downs no longer marveled at the number of BMWs and Porches that filled the Dulles parking lot late into the night, symbolizing the company's success and the drive of its employees. Now they spoke of the "parking lot index," a measure of how few cars remained by early evening.

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