The rise and fall of AOL

At its peak around the year 2000, America Online had 34 million subscribers. And believe it or not, over half of the CDs produced on planet Earth that year had their logo on the front of them. Everyone heard the phrase "You've Got Mail" at least once a day, and you couldn't escape this company. You've got mail. The stock market valued it at $226 billion. But just a decade later, the whole thing sold for 98% less than that. Just a handful of billions of dollars. This video is about the rise and fall of AOL, and it's a wild story of greed, ambition, and hubris.

Oh, and by the way, thanks to Babbel for sponsoring this video.

More on them later. The story actually starts back in 1983 with a guy who is literally a European count named William von Meister, and he started a company called Control Video Corporation with the idea of allowing people to rent Atari 2600 video games via dial-up modem. That idea flopped for technology and other reasons, but they did happen to recruit a young marketing intern, a guy named Steve Case. Control Video went bust in 1985, but Steve Case and a few other associates took it from the ashes of that and started a new company called Quantum Computer Services. Back in the 1980s, only about 500,000 people were on the internet, a small number compared to where we are today. And Steve Case and the other guys thought that Count von Meister was actually on to something. Bringing the internet and the power of connectivity to the masses was going to be a huge business. In 1989, they rebranded Quantum to America Online, showing their, well, overall ambitions and their desire to bring the internet to everybody. Steve had a vision of millions of normal Americans dialing in for things like games, connectivity, community, and the news. So the group iterated over the next coming years, trying to figure out how to make getting on the internet as easy as turning on your television. They created user interfaces that were dead simple for things like games, news, and all that kind of stuff. But despite the product being seemingly ready, they hadn't figured out how to educate America about it yet. So in 1993, Steve went out and hired a lady named Jan Brandt, put her in charge of marketing and told her, do whatever it takes to go grow our user base. The first thing she did was roll out free trials as a standard part of the product. The idea being that you give somebody a risk-free way to try the product and then you have them as a subscriber once they get hooked, and they stay around for a long time. Recurring revenue like this is a great way to build a valuable business because you can predict when you have a large cohort of users how much revenue is going to come in not only this month but next month and potentially for years in the future. But the next thing that Jan did was the genius move. And you see, up until this point, AOL had basically waited for customers to ask them for disks so they could install America Online on their computers. But they changed that. Brant had a radical idea. Why don't we just start sending them to everybody, whether they ask for them or not? In 1993, Steve authorized Jan a quarter million dollars to run a campaign around sending out these discs, and the results were astounding. They sent them out to people that didn't want them, and nearly 10% of the people signed up for the service. And in some places, it was over 18%. And these are numbers that are 5, 6, 7, or even 8 times more effective than your typical direct mail campaign. This is a pattern that you see smart entrepreneurs do over and over again. They run experiments to see what possibly work, identify opportunities, and then they go all in around those. So that's what they did. They started to upgrade from floppy disks and went all in on CDs and started to carpet bomb America with them. If you were alive in the '90s, you saw what happened next, which was America Online CDs were suddenly everywhere. They were in magazines, they were in your mail, they were in the back of airplane seats, they were in cereal boxes. If there was a place that could fit a CD-ROM, and get it out to a consumer, America Online figured out how to put one there. At its height, America Online was signing up a new subscriber every 6 seconds. In 1996, America Online made a fateful and interesting move, which was facing competition. They decided to go all in and try to hook people to spend as much time as possible on their service. So for the rock bottom price of $19.95 a month, they gave every customer unlimited access, whereas before they were charging by the hour. It worked, albeit too well. So badly that eventually customers would joke that you would pay AOL to get a busy signal because they had that many people trying to get online. They invested the money to fix their service and get ready for the scale. And by 1997, it worked. If you were going online in the United States, there was a 50% chance you were doing it via America Online. They had 50% market share. Astoundingly, AOL subscribers accounted for 40% of the hours Americans spent online. On the internet at that moment. In 1997, they had 10 million subscribers. In 1999, they had 17 million subscribers, and they had well over 20 million subscribers by the year 2000. They could afford all this growth because Steve eventually revealed the math of their subscriber, you know, acquisition. The typical one who came on board would stay for 25 months and spend over $350 in high-margin internet access with AOL, and each of those customers, in typical, would cost them about 10% of the future revenue, or about $35. As the 1990s came to a close, AOL seemed on top of the world. In fact, they entered the public lexicon, and even a movie was made about the phrase "You've Got Mail," uh, starring Tom Hanks. Yeah, terrific. AOL Instant Messenger, commonly called AIM, was the place to be. It had over 90% market share by some measures. They even bought the ICQ messaging system from an Israeli startup to bolster the market dominance of AOL and AIM. They used all this revenue and money to go buy other stuff as well. They bought the Netscape internet browser, they brought MapQuest, which was a precursor to today's Google Maps and Apple Maps. Uh, and all this with the design of making AOL the one-stop shop where you could go get everything from news to maps to sports scores to chats to games. It was designed to have it all in one. You'd have a walled garden with unique content for AOL, including the ubiquitous email. Uh, and then you'd have access to the broader internet as well. And it worked brilliantly. In 1999, AOL's revenue was $4.8 billion with over $1 billion in profit. Then at this moment, when it seemed like everything couldn't go wrong, they made a fateful decision that would change everything.

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So back to our story. In 1999, the dot-com boom was in full bloom. Basically, the stock market was at all-time highs and it was valuing AOL at $226 billion, a quarter of a trillion dollars. AOL was a company built on ambition, and one of the things they wanted to avoid was becoming what we referred to as a dumb pipe, which meant that you would be competing in a world of, well, basically commodity internet access providers. As the content on the internet itself got better, the proprietary content that AOL was producing, well, it could potentially stop being a strategic advantage for them that brought them new subscribers. Their solution was to own even more compelling content, basically turning this red ocean of competing on price into a blue ocean one where they would own unique media properties that would keep people coming. So in January 2000, AOL announced they were acquiring Time Warner for $165 billion in stock, bringing along with it things like HBO, CNN, and a host of other media properties and content that was, well, totally unique and compelling. The new company would be called AOL Time Warner and be valued at $360 billion at the time the deal closed. The move couldn't have come at a worse time. In March 2000, the NASDAQ peaked, and as the dot-com bubble burst, tech stocks over the next 9 months went down over 50%. Online advertising, a significant growth channel for AOL, it basically dried up overnight. Many of these startups that had been fueled by stock market capital and venture capital, well, they were spending their entire budget on AOL ads, and that just stopped. While the stock market and the economy itself was cratering, inside, things were even worse at the new AOL Time Warner. You had a stodgy kind of old school media company in the likes of Time Warner, and you had AOL, which was this fast moving, break anything tech startup. By 2002, it was clear that the marriage was a disaster. And the new AOL Time Warner took a nearly $99 billion write-down in one year alone, which was the largest corporate loss in history. To be fair, this was mostly a non-cash charge, uh, where they wrote down the goodwill from the merger, saying the businesses weren't worth what they thought they were. Uh, but it was a very explicit and total admission by the company that the merger was a failure. The value of the combined company went down over 90% in 2 years, from $226 billion to just $20 billion. Then things got even worse as technology transitioned against the company. You see, in 2000, only 3% of United States households had broadband faster than dial-up. But AOL's leadership, they didn't really see it as a threat, and they didn't transition aggressively to a new world that was coming. By the mid-2000s, high-speed internet was growing at 40% year over year, which meant that the dial-up business for AOL, it was going away fast. In 2003, visionary Steve Case resigned from the company, another admission that things hadn't turned out the right way, and in stepped a different parade of executives trying to turn around the ailing giant. They thrashed about trying all kinds of different strategies, but never sticking to one. In one vein, in one couple years, trying to be the next Yahoo and owning a portal of internet services, to another one where they were going all in and becoming a walled garden just of stuff that was only available inside of AOL. By 2005, Steve Case was long gone. Other notable investors like Ted Turner had exited. And lost a lot of money, and the public and everybody involved just a few years later was by now seeing that the whole thing was a huge failure. The strategic idea of combining unique content plus distribution was a sound one that looked good on pitch decks, but in reality was something that was just gonna not happen. It was totally impractical and not gonna happen in the timeline that these guys wanted to have it happen when the deal was done back in 2000. Steve Case said of the whole thing, vision without execution is hallucination. And yeah, that was what happened. And over the coming years, broadband kept rolling out. The massive amount of money that had happened during the dot-com boom meant that a lot of high-speed internet was rolled out to people's homes. Why would you pay $23 or $25 a month on top of regular internet access to get mediocre content from AOL when the internet was getting better and better each and every day? The unique selling proposition for AOL and any compelling reason to buy the service at all— well, it had eroded as quickly as new technology had entered the picture. In a stunning collapse from 2002 to 2007, AOL subscriber base went from about 26 million to just over 10 million, nearly a 70% collapse. So I talked about this thrashing of different executives. Well, in 2006, they did something even crazier. They decided to give away AOL for free. Basically, anybody could get an AOL.com email address, use any of the services for free. Even stunningly, like, accelerating the decline of the business. In 2008, the Time Warner leadership and stockholders had seen enough. They decided to pull the ripcord on AOL and spin it out as its own business. The once mighty AOL emerged as a standalone company at 1/100th the value that it was valued at its peak, a paltry $3.5 billion. They didn't give up. In 2009, they recruited for the new company longtime Google executive, a man named Tim Armstrong, to come in. With the vision of turning AOL into a media and digital advertising powerhouse. He took the cash they had and went on an absolute buying spree, buying all kinds of stuff. Social network Bebo, he bought that for $850 million. It was a failure. They bought the Huffington Post for $350 million. They bought other niche publications like TechCrunch, all with the idea of owning some really interesting properties and selling ads on them. After some painful restructuring and some stabilization, by 2014, it turned into a pretty good business. They were doing $626 million in Q3 of 2014 alone, with $271 million of that coming from advertising. And incredibly, showing the long tail of technology and humanity is really long. Even as late as the mid-2010s, they had over 2 million people paying monthly for AOL for dial-up. In 2021, Verizon too admitted defeat with this strategy and sold off what was left of AOL to a private equity fund. In 2021 for just over $5 billion. And so ended, sadly, the wild ride of once giant AOL that had changed America, well, in some crazy and good ways. In the end, vision is a lot of what gets you there. You want to choose the right game to play and the right goal to go after. But if you have a great vision like Steve and these guys did, but in the end you can't execute on it, doesn't matter at all how good your idea was. And I think that's the big takeaway from this story. All right, let me know what you think about the rise and fall of AOL. It's such a wild story, I had to tell it. So Thanks for being here. Let me know in the comments below. I try to read them all. See ya, bye.