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On Dec. 9, 1997, America Online chairman and Chief Executive Steve Case sat down to talk with editors and reporters of The Washington Post about his company's turbulent year, plans for the future and competition. Here is an edited transcript of that conversation:
Q. Tell me about your strategy for AOL. What do you see the company doing now and, more interesting to me, where you see it five years from now. What kind of company it'll be, where its revenues will come from, what share subscriber fees will be, what share advertising revenues will be. Where it is now and where it's going?
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 a telephone in their house 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.
We felt this was sort of the next big thing and in the long run it was not just the tens of thousands of people connected to these services. In 1985 when we started the company [we thought] that someday the majority, maybe even everybody, would be connected to these services. And it fundamentally changed the way people got information and communicated with others and bought products and learned things and became more interactive with the medium.
So that's all sort of a beacon, if you will, that we were headed toward. And when we started more than a decade ago, it was a bit of an uphill battle because the pieces of the puzzle were not yet there, yet alone assembled in a consumer-friendly kind of fashion, so we had to kind of build a lot of things. What we started was a fairly rudimentary launchup first in the fall of 1985 for a company called Q-Link and then, you know, had 50,000 customers a year or two later, which we thought was pretty good, and we said, Let's do that again, and we did a similar kind of thing with Apple called Apple Link and then a similar thing with ... IBM, and the first five years in the company's existence was bootstrapping its way into relevance by partnering with companies that provide new capital and distribution.
And then it was only really in the early part of this decade that we started kind of fending for ourselves. We wanted to see America Online as our own brand, sort of private label brand, and started adding features, content, context, community and commerce and so forth to make it a more engaging service.
But five years ago when we took the company public, it was still an evangelical sale. Most of the road show was not, "Here's the business model." It was more, "Okay, here's what it is. We have the 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. Three years ago, I believe, we had 1 million customers. So we've basically added 9 million customers over the past three years. Pretty significant when you compare it to other franchises. ... So it's been a pretty significant base, and a few weeks ago we passed 10 million customers, and to think a lot of people won't get it. Well, that's an interesting size audience. But still what's interesting is that we've only really scratched the surface in terms of potential of this medium. And we go back to the sort of the founding principles a decade ago. It's really still just getting interesting, because the fact is, yesterday it's 10 million customers and a couple billion dollars in revenue and a market capping out at probably more than $10 billion range.
So [there has been] a lot of progress versus a few years ago, five years ago. Only 20 percent of households in this country subscribe to anything in the genre. And around the world, the percentage is even lower. So we're not yet a connected society. We're not yet fundamentally changing the way people get information, communicating with people, etc., etc. 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 where 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 [able] 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 email. ...
Then I got some evidence that even though it's only 20 percent penetration, among the 20 percent it is starting to have an impact on their lives. It is something that they appreciate having and resent not having. Which, while frustrating in some respects, is actually encouraging in other respects. But also, [it is] early enough still in the evolution of the industry and of the medium of the company that we have an opportunity which I think is somewhat unique to have a real influence in where this all leads. So it's not like television, telephone industry something, where you're pretty much established and people just operate within certain pre-set guidelines and whether it's good or bad or indifferent, it's just the way that particular industry works. We have an opportunity to shape the industry and that's really where we're focusing more and more attention.
An example of that was the Internet summit that we participated along with some other companies and a lot of regulatory bodies and the White House and so forth [recently]. The focus specifically on one critical issue is making the Internet safe for kids. But more broadly was the beginning of an effort to try to build a meeting proactively, preemptively that we can all be proud of, that really does have a successful business. Ten million people really love the service but also have a positive impact on society as opposed to being indifferent or negative.
I think, unfortunately, of the example of television. You know, the conventional wisdom is that television on balance is at best neutral in terms of the positive impact on society. There are some people who point to some of the things, but there are an awful lot of people focused on the vast wasteland of the channels. ... My hope is when the history books are written on this interactive medium, it will not be perfect in every respect but on balance people will say it's unquestionably something that had a significant positive impact on society.
So it's an interesting period we're in now where we can look back over the past decade, past five years ... to look at and see that we've made a lot of progress. We've made a lot of mistakes. It hasn't been a smooth line, but we've done the best we could in a pretty chaotic world. We've emerged an a industry with more substance and credibility and as a company as well, but we're still looking at a huge, huge opportunity both from a business standpoint. It's not inconceivable that we would have tens of millions of customers in the long run, globally.
Q. I think that's part of people's confusion looking at your company as we see very rapid growth and all the amazing things we just talked about. But it's what the destination is that's 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 it is, 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 ... some aspects of our business are similar to communications, some are similar to media, particularly the business model. It's increasingly focused on advertising and transaction kind of revenue. ... [Recently] we launched Electra, which is a women's site. Things like that. Well I think that what we're doing is somewhat a grander context, which is not just media, it's not just communication, it's not just technology. It really is kind of the melting pot of all of those. And what we're creating is something that learns from the past but is really more focused on building for the future.
Q. There are plenty of programs now that are pretty robust for communicating directly across the Internet by phone. You've got a customer base that a cut-rate, long-distance start-up would envy and you could conceivably offer the software as part of the package. ... So what keeps you from taking that step?
A. Well, a number of things. Not the least of which is that technology, while interesting, is not yet ready for prime time. There's two different roles that exist. One is the world of the [technologically] sophisticated ... and they are quite enamored as sort of a bragging right aspect for not having to wait. I download the new Netscape browser that went online at 6 a.m. this morning. I had it by 6:15. And then there's the rest of the world, which happens to be the other 99 percent, that doesn't really care about technology. The technologies they like the most are the ones that are most invisible, and they just want the stuff to work. The journey is not the reward for them. ... What sort of sounds good if you're a sophisticated user, you can make it work. But are a million people going to do it? No. Eventually, I think it will evolve as everything does, but certainly not now.
And there's also some focus kind of issues. I guess any company if they care enough and they have good people and resources can do anything. Whether they can do it doesn't necessarily mean they should do it. ... And maybe years from now how long, who knows? but now we are partners with a company called Tel-Save that's been working with us.
Tel-Save offers a very consumer-centric next-generation voice offering that most consumers think is long-distance wars are boring. What [consumers] really want is an inexpensive service that works all the time that's easy to sign up for and easy to use, easy to pay for. And what we try to do with Tel-Save is re-architect the delivery of long-distance services for a mass consumer audience by using AOL as a platform to educate people about long distance.
It's basically a better long-distance service at a lower rate. We think that there is an opportunity to do things like that in the world and our bias would be the partner of companies were possible as opposed to try to do everything ourselves.
Q. What about an overseas market? How many of your ten million are now outside the continental United States and how many could be in five years?
A. Well, for the first ten years we were in business, we focused in the United States because for most of those years, we had grandiose visions but limited resources. ... And we were competing with Prodigy, which IBM and Sears were spending a billion dollars on ... and CompuServe was demanding major presence in the market with a distant little company. It was only a couple of years ago that we started looking more broadly in large payable international division, and we launched our first services in Europe not quite two years ago Germany, France, the UK.
More recently, about six months ago, we launched in Japan. A month or two ago, we announced that we were going to [in 1998] launch in Australia. ... [We've passed] our one million customers outside the United States. So it's not quite 10 percent of our members. It went from zero to a million in two years, and it took us nine years, I think, to go from zero to a million in the United States.
So I think that shows our promise and the strategy we've taken there has been [to do it] a little slower, but do it right. We decided that we didn't want to export AOL. We recognize, for example, that even the name "America Online" probably wouldn't sell that well in France. So we needed to learn something from our friends at Disney in that respect. What we really need is to create a localized offering. We decided to use AOL as a global brand name, not America Online, and launch any country with a localized partner, local management team, localized software interface looks completely different, localized content with different partners, localized pricing depending on market conditions, telecommunications costs, whatever.
So there's a highly localized approach. So really AOL France, AOL Germany, AOL UK all look different, work differently, price differently, manage differently, which means that it takes longer to launch it because of the customization of product, content, everything. But we think it's more appropriate and, therefore, likely to be successful. So, we essentially launched about once a year we go to a new area and throw our hat in the ring. In terms of five years from now, it's hard to say.
Q. Isn't it tougher overseas, though, when local calls are metered by the minute?
A. Yes. Especially in other respects in various countries, which is probably why this localized approach is helpful. Each country has a different telecommunications policy, which generally are in various states of the discussion about or to some extent the implementation of its deregulatory policy. And some are more developed than others, and, as a result, some have markets that have multiple competitors prices; [while in other countries] it's pretty much dominated by a monopoly phone company.
So it is easier in some markets, cheaper in some markets. Our belief is that the deregulatory momentum for telecommunications globally is an irreversible force, so it's only a matter of time in each of these countries that some [competition will come] and maybe in two years, some five, some ten years.
But it doesn't mean anything in our commitment to those markets, because we believe there is an inevitability to having lower costs in communications services, multiple wire, wireless, narrow band. ...
So we're starting to see in this country what we'll see in about every developed country within the next decade. So it does put some limitations on our ability to grow rapidly because some cases, the raw cost of communications, which is our major cost, is much higher in some countries than in other countries. Germany is more expensive than the UK, for example. Well then, we have to price it accordingly, and that may limit us in the early stages of having broad-based consumer appeal.
Q. But there's a certain level of competition that needs to exist before you go into that country.
A. There needs to be an atmosphere that we believe, broadly defined, is enticing. And there's lots of different things that we consider in overall population. PC penetration, modem penetration, telecommunications costs, government policy. There are some countries that are not wild about the notion of the Internet and are trying to limit seriously the free flow of information. There are lots of different things that we look at.
Because as I said, we're in this-take-it-easy, take-it-slow strategy. We're essentially going to go into one region every year, maybe two. You might as well pick the ones that are at the most favorable overall atmosphere as opposed to the ones that are going to be difficult.
Q. What are your plans for CompuServe and how does it fit into your national plan?
A. Well, it helps. Our plans for CompuServe first of all [is to] close the deal. My guess is some time in January. ... So that's the first thing. We have some internal planning efforts to try to make sure when the deal actually closes. Some of the information they can't share with us until it's finalized, so we have some insight, but not perfect insight. So we'll have to close the deal and make sure we have perfect insight.
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, tend to be a little bit more small-business oriented. You have two and a half 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. But in terms of international, it was a key driving force in terms of our decision. ... About half of their business is outside of the United States, and particularly in Europe, it's very strong, and it really jump-started our efforts. It almost doubled, for example, our size in Germany. So it really was a key driver that in some of these emerging markets we went from being sort of the new kid on the block to being a somewhat more substantive force.
Interview continued, Part II