America Online

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The company that eventually became America Online emerged in 1985 from the ashes of a start-up gaming company called Control Video, whose GameLink service downloaded computer games to Atari game consoles. Its failure left a young marketing executive, Steve Case, the brother of Control Video's largest backer, looking for work.

Mr. Case adapted some GameLink ideas into a bulletin board service called Q-Link, for Commodore 64 users, founding Quantum Computer Services to market it. He also created a graphical user interface for Q-Link, giving his bulletin board the point-and-click attributes of Apple Computer's then-new Macintosh. A few years later, Apple asked him to rework Q-Link for its users, naming the service America Online.

AOL was launched amid bigger online services such as CompuServe from H&R Block, Prodigy from IBM Corp. and Sears, Roebuck & Co., and GEnie from General Electric. But it had the GUI that Mr. Case had created, and a key ally in Apple.

It also had Mr. Case, a native of Hawaii and a Williams College graduate who had made marketing his life. His key insight was the need for alliances.

Going public

When AOL went public in 1992, it had only 150,000 subscribers, a fraction of the number claimed by rivals Prodigy and CompuServe. But the next year, Prodigy, with 2.5 million subscribers, dropped its flat-fee structure in favor of hourly rates. AOL cut prices and ran ads urging Prodigy members to switch to AOL. It also introduced new software whose interface looked more like that of Microsoft's Windows, which had exploded in popularity.

AOL then forged alliances with media companies such as Time-Warner, ABC and The New York Times. For a small share of the revenue from these companies' content, AOL offered direct marketing access to its customers. By the end of 1994, it had 1.5 million members. In 1995, it launched its first TV commercials, 15-second spots from TBWA Chiat/Day, New York.

AOL had offered its members access to Internet rivals for years. But with the rise of the World Wide Web, it also faced new competition from Microsoft Corp., AT&T Corp., MCI Communications Corp. and thousands of small Internet service providers offering the same flat rates as AOL. While AOL kept growing rapidly, it suffered from technical bottlenecks (the service was once down for 19 hours because of a software problem), accounting controversies and a growing number of lawsuits involving, among other things, its monitoring of online discussions and use of its network by children to access Internet pornography.

Yet by 1997, AOL had 7 million subscribers and had become the first online service to reach $1 billion in revenue. It lengthened its lead over CompuServe and Prodigy. The company's advertising budget increased rapidly during the mid-1990s, and by 1996 its total spending on marketing reached $333 million, $100 million of which went into TV to build the AOL brand. TBWA Chiat/Day created a series of TV commercials set to the theme music of the popular 1960s cartoon "The Jetsons."

At the end of the year, the company introduced an unlimited-use pricing plan at $19.95 a month. AOL emerged the clear leader in what remained a highly competitive and challenging market.

In September 1997, Mr. Case traded ANS Communications, his Internet-access business, to Worldcom Inc. in exchange for CompuServe, his last major rival in the online services market, plus $175 million. At a stroke, Mr. Case shed his technical troubles and, with the addition of CompuServe's 2.6 million subscribers, emerged from the deal serving 54% of the online services market.

A new business model

Exploiting these advantages required a new business model. Instead of sharing revenue with content providers, AOL charged media companies for access to its members. AOL also charged rent—including multimillion-dollar upfront fees&mdashto merchants that wanted prime space in its online mall. In November 1998, AOL acquired Netscape Communications Corp. for $4.2 billion and entered into a related three-year alliance with Sun Microsystems, a move that undercut the widely held notion that Microsoft would have the Internet to itself.

For fiscal year 2000, America Online had net income of $1.2 billion on sales of $6.8 billion. It had become the first company based on the Internet to join the Fortune 500, which ranks companies by sales. In January 2000, AOL announced that it would acquire Time-Warner for AOL stock worth $160 billion, creating the world's largest media company.

Mr. Case became chairman and AOL shareholders acquired 55% of the new company. AOL acquired some of the greatest content in the world—CNN news programs, Time-Life magazines, Warner Music and the Warner Bros. movie studio—and also picked up Time-Warner Cable, the U.S.' No. 2 cable TV network.

The U.S. Federal Trade Commission approved the $111 billion merger in December 2000. AOL Time Warner was the No. 8 U.S. advertiser that year, spending $1.77 billion, according to Advertising Age. By 2002, it had moved up to become the No. 2 advertiser with U.S. ad spending of $2.9 billion, trailing only General Motors Corp.

In early 2004, press reports suggested that Time Warner was looking to reposition, restructure or sell AOL, though officially the company had not stated its intentions.

AOL CEO Jonathan Miller was committed to growing the company’s broadband customer base, even in the face of huge erosion of narrowband customers. The company was also trying to target customers with a range of price points including a greater focus on sister services such as Netscape.

A Securities & Exchange Commission investigation of AOL’s advertising deals was due to wrap up sometime in 2004.

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