The Decline and Fall of AOL
The Magic of the Two-line Address
When I was growing up on Long Island, the mailman frequently would deliver an envelope addressed as follows:
Mr. Alden Hatch
Cedarhurst, New York
The letter could come from anywhere in the world and in just two lines—six words—reach my father out of more than 2 billion people on the planet. This never ceased to amaze me.
Every son hopes to outdo the father. So when I became a member of AOL, I had a one-line address: email@example.com.
Think of it! In this horrendously complex world with 6.5 billion people, I am reachable with one line—17 characters and a dot—from anyplace on earth and outer space (if an astronaut cared to e-mail me) instantly, 24/7.
How AOL could screw up this incredible brand I find as amazing as my one-line address.
The Genius of Janice Brandt
In 1993, Internet access was essentially a three-horse race. The text-heavy CompuServe was owned by the tax accounting people H&R Block and had about a million members. So did the cartoon-oriented Prodigy, a joint venture among CBS, Sears and IBM. The longshot was America Online (AOL), with its elegant Graphical User Interface (GUI), chat rooms and exclusive community-building techniques, that had been taken public the prior year by founder Steve Case; he had just under 250,000 members and was doing about $40 million a year in revenue. One advantage Case had over the competition: The name, America Online, says what the service is; Prodigy and CompuServe could be just about anything.
Enter Jan Brandt, a direct marketing wizard with a solid grounding in continuity marketing that helped take AOL to more than 22 million members. She did it working hundred-hour weeks in which she mounted between 2,000 and 3,000 marketing tests a year. Her strategy was so wildly successful that it enabled AOL to acquire the vast Time Warner empire as well as its early rival, CompuServe. In my opinion, Janice Brandt is one of the most influential women in American business—right up there with Martha Stewart and Oprah—and she did it in just seven years by putting her personal life on hold.
I don’t think to this day that Steve Case understands what Jan Brandt accomplished for him. My bet is that he assumed AOL was so good that it would have sold itself, with or without Brandt.
How She Did It
In those early days AOL’s competition—Prodigy and CompuServe—charged for the software as well as per-hour usage. Brandt used the Gillette model, which gives away the razor and sells the blades. She blitzed the country with diskettes—and later CD-ROMs—with free software and sold the service.
“I started blasting out mailings as fast as I could,” Brandt told me in an interview for Target Marketing magazine. “We mailed so much I had to roll out based on two campaigns prior, which meant we were flying somewhat blind all along.” At the same time, she lived in perpetual terror that she only had a limited window—that the others would do copycat mailings and flood the marketplace with diskettes. It turned out she had three years of being alone in the marketplace mailing floppies.
Why did the others not follow suit? For starters, where most marketing managers love to blab to the press how smart they are, Brandt maintained stony silence during those days. She made no speeches, took part in no industry panels and granted no interviews to the press. “I did not believe going public would benefit AOL in any way,” she said. At the same time, the buzz at industry gatherings was that Brandt and AOL were nuts—totally off-the-wall—sending out hugely expensive mailings that broke all the rules of direct marketing. “Yes,” she admitted to outsiders, “we really are stupid.” Brandt, her marketing department and Steve Case remained mum and quietly continued to eat Prodigy’s and CompuServe’s lunch. In Brandt’s immortal words: “It’s not the cost, stupid!”
It’s the response!
Coming out of the continuity world, Brandt understood the effect of strong up-front offers and the power of the word “FREE.” For a while she offered one-month free, which was immediately aped by CompuServe.
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.
Wall Street started noticing that AOL was not signing up members with the same momentum and began to cool.
With 22 million subscribers, AOL had creamed the market; all the obvious people had bought. New members were costing more and more to acquire and the growth was incremental.
To me at the time, it was obvious what needed to be done. AOL had a huge, loyal, captive audience of 22 million people. Any direct marketer with half a brain could figure out how to delight the membership by making wonderful exclusive offers and raking in money.
Happy members would tell non-members about these great offers and the buzz would generate more members that wanted in on the action.
Steve Case Took His Eye Off the Ball
The late guru Dick Benson always cautioned his clients not to ignore their core business. “Who’s looking after Mama?” was the question he would ask if a marketer started getting too involved in some cockamamie new scheme.
Steve Case and Gerry Levin of Time Warner fell in love with the idea of the largest merger in corporate history. In January 2000 they made a joint announcement. Levin crowed to Ray Suarez on the “News Hour with Jim Lehrer”:
You have all the obvious statistics here. When you look at the 22 million subscribers to AOL and CompuServe, the 135 million additional registered users for AOL, the 120 million readers of the more than 30 magazines of Time Inc., the 35 million subscriptions to HBO, its pay television services, the 20 million homes patched with digital cable. For TNT and TBS, our entertainment networks, they’re received by 75 million homes. And probably, very significantly, and you’ll hear from them shortly, CNN is really accessible to a billion people around the world. And, in fact, I view us and our combined company as the trustees for a remarkable heritage.
With deep humility Steve Case said, “This merger will launch the next Internet revolution.”
I remember watching these guys in disbelief. They were talking content, synergy, big numbers—gibberish. They were talking about themselves to themselves and to their investors.
What about me?
“The prospect doesn’t give a damn about you, your company or your product,” said Seattle guru Bob Hacker. “All that matter is, ‘What’s in it for me?’ “
“Always listen to WIIFM,” is the old rule: “What’s In It For Me?”
As I listened to these two puffed-up popinjays, I could not grasp WIIFM.
Not one of its 19,000 employees—nor its myriad ad agencies—could explain the benefits of the AOL Time Warner merger to me, a subscriber to Time and to AOL.
I mean, talk to me about the elegance of the one-line address, Internet access, great for the kids, ease of use, vast array of services for one low monthly cost …
The merger was a catastrophe. Investors took a $100 billion loss in 2002.
Things got worse. In 2005 AOL settled fraud charges with the SEC for overstating its advertising revenues. The penalty: $300 million. That same year, the head of AOL human resources pleaded guilty for $100,000 wire fraud. And six executives were indicted for conspiracy.
As computer users became more and more sophisticated, they realized they could get Internet access for free rather that pay AOL $200+ a year. Yahoo! and Google were eating AOL’s lunch.
AOL has tanked. Now down to 18+ million members and huge marketing costs, it is keeping unhappy members by making the quitting process so difficult and unpleasant that it’s easier to keep paying them money. AOL paid $1.25 million in fines to settle a fight with New York Attorney General Eliot Spitzer over its policy of continuing to bill members who had quit. But it ignored the consent agreement and allowed retention specialists to wreak havoc on the membership.
If you have not heard Vincent Ferrari’s attempt to unsubscribe to AOL, I urge you to give a listen—a textbook example of stupid customer service. You will be appalled ( http://media.putfile.com/AOL-Cancellation/).
For a printed transcript of the exchange: http://tinyurl.com/osp9r/
Despite my glorious one-line address I have not been happy with AOL and am moving slowly to firstname.lastname@example.org, which is free, faster and treats me better. I tried to set up a system whereby all mail that comes into AOL is forwarded to my Yahoo! account. My plan was to get all my mail at Yahoo! and gradually phase out AOL. AOL refused. I am a captive.
Yet another screwing of a subscriber by a bloated bureaucracy of bungling bastards.
AOL has gone from a glittering jewel of a pure-play Internet masterpiece to the Abu Ghraib of Internet Service Providers.
The idea that people will stand for this kind of abuse from AOL because it’s free is preposterous.
My bet: AOL is toast.