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    A Conversation With

    Go to the extended version of the interview:
  • Part I
  • Part II
  • Part III
  • Stephen M. Case, CEO
    Of America Online

    On Dec. 9, 1997, America Online Inc. Chairman and Chief Executive Stephen M. Case sat down to talk with editors and reporters of The Washington Post about his company's turbulent year, plans for the future and the competition. Here is an edited transcript of that conversation.

    Steve Case Q. Tell us about your strategy for AOL. What do you see the company doing now and, more interesting, where do you see it five years from now?

    A. Well, the strategy actually has remained remarkably constant for more than a decade ... therefore our view of the world that's emerging and our role in it has remained pretty constant. Even though the strategy's pretty constant, the execution of it varies dramatically depending on the situation, technology, competitors, consumer preferences – lots of different things. So we're always kind of trying to navigate complex, chaotic, ever-changing waters, but in terms of what we're trying to accomplish it's pretty much the same.

    We've always believed – even in the days when people thought it a bit bizarre – that we were headed toward a more connected society and that people relied on interactive services in a provincial way and it would become the next big thing. A hundred years ago, it was about telecommunications, and in that case people didn't understand why they needed telephones in their houses and now they wouldn't know what to do without them. Fifty years ago, television kind of came on the scene and had a pretty pervasive impact on everyday life. ... But five years ago when we took the company public it was still an evangelical sale. Most of the roadshow was not 'Here's the business model.' It was more, 'Okay, here's what it is. We have [this] thing called the computer connection, a thing called a modem where you put software on it, and you access a thing called e-mail, and so forth.' So we had 200,000 customers, I think it was 187,000 customers, who were on and about $30 million in revenue, so we were really just another company going public. I think our market capital when we went public was about $70 million. ...

    It's really only been in the past couple years that I think we've become a more credible industry and more relevant as a company, and I think a lot of it had to with growth and awareness of the medium and in particular the growth of AOL itself.

    We're really just sort of scratching the surface. But it's now big enough and important enough in terms of the lives of the people who are using it to be more credible, and that's really what's getting people's attention. And both good and bad things have galvanized it.

    In terms of bad things that have been widely publicized, we've had a lot of problems handling the demand, particularly in the unlimited pricing. And it's, you know, signals and other kinds of problems that we've had. Which is obviously a problem, something we've spent hundreds of millions of dollars and the better part of the year addressing. I think we've done a pretty good job.

    But it's also, I think, indicative of the fact that we as a medium haven't really arrived. Because the level of passion that people felt about not being to connect to AOL quickly and reliably was somewhat staggering, at least to me personally, considering it was only a few years ago I had trouble explaining even to my parents what I was doing. And if AOL five years ago had been inaccessible for a weekend, nobody would have known or cared. We were like a little hobby people played with. Suddenly, now we were more part of the everyday life ... if we weren't there, there were big problems. They were counting on an e-mail. ...

    Q. We see very rapid growth at your company, but your destination is less clear.

    A. Well, I think where we'd like to end up is clear. What you want to call it is a bit unclear. So I come to this debate over semantics and a desire to sort of box things, pigeonhole things as being sort of like this or sort of like that, which makes it easier to understand. What we're trying to be is a global leader in interactive service – the concept of interactive service is really a concept that embraces media and communication in a pretty central way – and commerce too.

    And the way I think is better to look at is [that] we want a company that helps build, and plays a central role in building, this new interactive medium. If we're successful, we believe the AOL brand will stand for the way lots of people connect to this interesting new interactive world. And some people may choose to focus more on one aspect of it or another aspect of it. But we really want to be their gateway into this exciting future.

    So we have some aspects of our business [that] are similar to communications, some are similar to media, particularly the business model. It's increasingly focused on advertising and transaction kind of revenue.

    Q. What are your plans for CompuServe and how does it fit into your national plan?

    A. Well, it helps. Our plan for CompuServe – first of all [is to] close the deal. My guess is sometime in January. ... So that's the first thing. We have some internal planning efforts to try to make sure when the deal actually closes. ...

    But our plan is to really run it as a separate brand. We think it targets a somewhat different market – a little bit more technologically sophisticated, tending to be a little bit more small-business oriented. You have 20 million people who are spending half a billion dollars a year on CompuServe. Our instinct is to continue to serve them with a product they're paying for and to improve the product over time, but do it in an evolutionary kind of way.

    Q. Can you talk about your flat-rate pricing arrangement and how that's working? And do you foresee changing that at any time, or raising the rate or going back to a rate based on usage?

    A. I think it's working well, and we have no plans to change it. The difficulty we've had is more in the context of it working too well, in the sense that the demand for it exceeded our expectations significantly. Therefore, in the January, February, March [of 1997] time frame, it was a crisis because of the quality problems. But that really related to existing customers using AOL more than we thought, and new customers, even with limited marketing, bought things at AOL more than we thought. The consumers clearly love it. There's no question about it.

    Q. So consumers would be paying more if they were paying by the hour?

    A. Oh yeah. A year ago, before we went to that, [flat-rate pricing], I think our average bill was similar. ... The question in the early part of the year was, 'Can we have the demand?' Then it shifted to, 'Can you make money and is it sustainable?' I think we've demonstrated in the past couple of quarters that we can make money, and we are making money. And a lot of that is the growth we're seeing in advertising and commerce.

    There's just no question in my mind that the advertising and commerce revenues are going to be huge. And we're already seeing pretty meaningful upticks in that whole class. A few years ago, the concept of other revenue [supplementing user fees] didn't even exist. It was zero. And in the last quarter, it was at the annualized rate of a quarter of a million dollars or so.

    Q. What is your churn at the 10 million customer level?

    A. We don't release churn. We do release the marketing costs each quarter and we do release the net averages each quarter. We've seen the marketing costs as a percentage of revenue go down substantially over the past year.

    Q. I just now keep getting [disks] in the mail all the time, so I wonder why. I have ... 23 floppies and 2 CDs from AOL.

    A. Well, don't you have any friends you can give them to?

    Q. It just doesn't makes sense that you keep sending this stuff.

    A. Well, it does make sense. Maybe we're stupid, but it does make sense. There are probably better ways to distribute software in the long run. For example, in the last few years, we've been successful in getting AOL built into just about every computer – built into Windows 95, built into Macintosh – as well as in partnering with everybody. So the need to mail out disks has diminished somewhat. But we do track you through these programs. ... And the economics of it works terrifically well. So there is a method to the madness.

    Q. Has the churn rate itself gone down?

    A. Well, we think of it as a retention rate. We're much more positive. And it is going up.

    Q. In the one-pricing strategy, whether you're gaining more customers, your margins are shrinking. So your growth is really coming from advertising and other ancillary revenues, rather than the actual signing of customers?

    A. We lose money on signing up the customers where there's some marketing costs associated with giving them a free month. It doesn't much matter whether you make a little bit or lose a little bit – as you well know, because you lose a ton on every copy [of The Washington Post]. Generally speaking, the newspapers get 80 percent of revenue from advertising and, therefore, obviously are selling the product at well, well, well below cost. I'm now just selling slightly above cost, which is pretty good.

    Q. So you want to be like a newspaper?

    A. I'm not sure we have to be at that model. But I think there's opportunity on the advertising commerce side that should enable us to continue to maintain an affordable price for the masses that is competitive with alternatives.

    Q. Do you reward your employees with options? Is that a big part of their compensation?

    A. Yeah.

    Q. How many millionaires?

    A. We have a bunch.

    Q. What do you see in the future for your local online businesses to individual cities? Have you replicated that around the country?

    A. Yes. We're in over a dozen cities in a major way with local staffs and in a couple dozen cities in a more modest way. We're doing listings and things. No, I think it's very important, this notion of a connected society and changing how people get information and communicate, whatever. A lot of what happens you will know at local levels, so it's inconceivable that we wouldn't have a local strategy.

    Q. The single biggest complaint we hear about AOL these days is e-mail: slow delivery, messages getting lost. Is the infrastructure set up for the rapid growth we've been seeing?

    A. Well, I think obviously, I couldn't say it's perfect, because we've had problems. But I would say that overall, I think we've done pretty well, even though I'm embarrassed by some of the problems given that in the last couple of years, e-mail – more broadly, overall users – but e-mail in particular has just gone through the roof. We presently, every day, deliver 80 million e-mails. That's a lot of e-mails.

    We're the ones that have such huge capacity; demand's far greater than anybody else on the market. But the partners we work with, the software companies, server companies, communications companies, we're the ones to find the problems in their products and then work with them to fix it.

    So some of it, I think, goes with the territory, but ... I'm not rationalizing away the mistakes.

    Q. Are you satisfied with the current state of affairs?

    A. I'm probably never going to be satisfied with anything we do. I think there's always the possibility of doing better. And I'd say we're doing better than we were a year ago, in terms of delivery and quality of service, but nowhere near what we should be doing.

    Q. In the future, do you see AOL as being also usable in a mobile environment?

    A. Sure.

    Q. Could you talk us through that? What are you doing right now?

    A. Well, I think our view is that as people move more into this connected interactive society, whatever you want to call it, they'll want to be able to connect to AOL all the time, no matter where they are. So it will be a multiple location, multiple device, multiple access. ... Five years ago when we were going public, we were talking about this notion. [But] the devices haven't really happened yet. There are some that are coming out that will do a better job of integrating small little [screens] and wireless communications.

    Q. Can you talk about an issue that has come up a lot in terms of trust and online services – kids and pornography? How do you deal with that, first of all, internally? And second, what do you do with your server so that even just from a business standpoint people with kids will continue to buy it?

    A. It's a big deal. We take it very seriously. I mean, you can't not take something like these incidents seriously. We recognize that we're basically a city with 10 million residents, and when you have a city with 10 million residents anywhere, New York, Washington, there might be some activities and behavior that's illegal or inappropriate. And to an extent that goes with the territory. But any one of these incidents is a huge problem. And so what we're doing is saying, 'Look, take a step back here. What can we do to make it a safer environment?'

    And that's been a lot of the focus today, in the past year or so, and much of that came to fruition [with an Internet summit at the White House] where we basically announced a series of programs with AOL. One is substantially improving what we call parental controls. They allow parents quite a bit of flexibility, depending on the age of their child, to block some things or everything.

    © Copyright 1998 The Washington Post

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