The Decline and Fall of AOL
It occurred to her that offering 50 hours free sounded stronger. She upped that to 500 hours free and even 700 hours free—which is the same thing as one month free, but sounds better (just as “Buy one, get one free” sounds like a better offer than “50 percent off” or “half price,” even though they are all the same thing).
When asked what made AOL different from its competitors, Brandt unhesitatingly replied, “Prodigy and CompuServe thought they were selling software; we sold a service.”
The Ultimate Online Business Model
Amid the dot-com crash, America Online thrived. Brandt was thoroughly grounded in the old rules of direct marketing, which she applied to the new medium. And AOL itself was unique. Its revenue came from automatically hitting 22 million credit cards for $23.90 a month, or $6.3 billion a year.
Where the upstart, pure-play dot-com companies were burning through suckered investors’ millions—nay, hundreds of millions—AOL was hugely profitable.
AOL manufactured nothing, bought nothing, sold nothing, warehoused nothing, shipped nothing and took back no returns. The entire product—or service—was processed electricity.
On top of that, AOL had no bad debt since its $525 million a month was the result of automatically hitting credit cards. If a member’s credit card was maxed out, service was cut off and no e-mails showed up in the in-box. That got the member’s attention. Attrition was minimal.
As icing on the cake, at the time AOL had cornered 47 percent of all advertising on the Web. But it was the huge subscription revenue engine that drove it.
The proverbial cash cow was a cash elephant.
Gosh, it was beautiful!
Wall Street Disagrees
When I wrote “Priceline.com: A Layman’s Guide to Manipulating the Media,” I saw how the Wall Street analysts touted priceline.com stock to the skies. Despite huge and continuing losses, despite the fact that 71 out of every 100 bidders for airline tickets were being turned away empty-handed and disgruntled at the time wasted, the analysts cried, “Buy! Buy! Buy!” The business model as conceived by Jay Walker was unworkable. I realized then that financial analysts do not have a clue how business works—how you acquire customers (share of market) and exploit those customers (share of wallet) to achieve profitable lifetime value.