THE CUTTING EDGE: FOCUS ON TECHNOLOGY : AOL Struggles to Stand Out in Cyber-Crowd : Internet: The Web’s changing landscape holds potent risks as other online companies are catching up to the pioneer.
America Online became the behemoth of cyberspace with a four-legged strategy that now seems obvious: Give the masses an easy link to the Internet, give them something to do there, let them meet a few other human beings and then charge a low enough price so they won’t leave.
It’s only taken 14 years, but the rest of the online world is catching up, leaving AOL to figure out how to survive in a world where its pioneering strategies in ease of use, content and pricing are no longer that special. In some cases, they are now lagging well behind the cutting edge.
What AOL is facing is a process that has been repeated in virtually every part of computing--the gradual “commoditization” of services or products and the transformation of the industry into a buyer’s market.
In a larger sense, the process marks a turning point in the development of cyberspace--a shift in the landscape that could bring new alliances, cheaper prices for consumers and broader methods of communication. It also holds potent risks that could fracture AOL’s valuable franchise.
“It’s the natural course of events,” said Hal R. Varian, dean of the UC Berkeley School of Information Management and Systems and a specialist in the information economy. “There is no company that can provide everything to the consumer. Early on, AOL was doing it all, but the Internet has changed all that.”
AOL Chief Operating Officer Bob Pittman said the tumult in the industry is nothing new for the company, which has spent most of its history in a state of revolution anyway.
While he conceded that pieces of cyberspace are being turned into commodities, he added that one of the most precious pieces--AOL’s brand name--is immune.
“Why do I drink Coke?” he asked. “The whole essence is that we have made a mass market brand. We raised the price last year, but we still added more subscribers than ever before. People buy because of brand.”
But how far a brand name will carry AOL into the future is uncertain when so many other companies are beginning to learn how to duplicate AOL’s winning model and sometimes beat AOL at its own game.
The vast collection of news and information that once made AOL a gem in the morass of cyberspace has been picked apart by Web portals such as Yahoo and Excite. The bundled deals computer makers such as Dell and Compaq have struck with Internet access providers make connecting to the Web just as easy as AOL.
And as for price, AOL’s standard fee of $21.95 per month is beginning to look pricey compared with free access from such companies as AltaVista and NetZero. Rumors abound that Microsoft will attack soon with its own low-cost access plan.
“AOL has to fight on so many fronts now that it’s having a hard time keeping up,” said Michael West, president of the Internet and e-commerce consulting firm, MWest.com. “It just has never had to fight on so many levels until recently.”
One area where AOL maintains a dominant position is its vaunted “community” of 18 million members, a huge chunk of cyberspace that sticks with the online service because that is where their friends are using the company’s chat rooms and chat networks, such as Instant Messenger, to stay in touch.
But even this area, as the latest controversy over Microsoft’s attempt to tap into AOL’s private instant messaging network, has shown how easy it has become to take something unique and make it common.
While AOL has tried to protect its hold on its members by making sure that Microsoft’s version of instant messaging will not be able to work with AOL’s, some observers say it’s ultimately a losing battle.
Eventually, said Jakob Nielsen, co-founder of the Web consulting firm Nielsen Norman Group, AOL’s own users will demand to be able to connect so they can exchange messages with other services. It is just the nature of communications that people want to talk with everyone else, he said.
“AOL’s last advantage is being hollowed out even as we speak,” Nielsen said.
For all the grim news, Andrea Williams, a research analyst with E-Offering, said it is not necessarily bad news for AOL since the commoditization of cyberspace is affecting all companies. The only difference is that AOL is the biggest of the bunch with the most to lose.
“There are big changes and they are going to affect AOL, but there have been major threats to AOL every 18 months,” she said. “Somehow, through it all, AOL has survived and even thrived.”
It brings to the competition a war chest of funds to buy what it can’t beat or duplicate. And despite the turmoil in the industry, the company continues to grow at a quick pace, adding 5 million new members in just the last year, for example.
But what has begun to worry analysts are the first few signs that the company is not setting the pace as it was before. For that matter, no one is sure exactly who is setting the pace.
One area that can still command a premium price is high-speed Internet access, which will bring video, music and other next-generation entertainment into the home. In May, AT&T; and MediaOne Group struck a deal to create a giant cable group covering 62% of the nation’s homes.
The deal has been disconcerting to AOL investors who are worried that the company may be locked out of the cable market.
AOL has agreements with Ameritech, Hughes Electronics, Bell Atlantic and SBC Communications to bring high-speed connections via satellite and a telephone-based technology known as DSL, or digital subscriber line.
Which will be the winning strategy?
“The reality is that high-speed access is many years away,” Williams said. “But it has been a drag on AOL’s stock price. If AOL is locked out of cable, it could lose a direct relationship with its customers.”
Change is a constant in cyberspace, but Nielsen said the process has become much sharper because of the wave of free or cheap personal computers and Web appliances building force.
With hardware, software and access all becoming commodities that can be sold by any number of companies, cyberspace has become a wide-open battleground, with a greatly expanded number of combatants.
Abhishek Gami, an analyst with investment bank William Blair & Co., said that added to the mix is the capital that has poured into technology companies, allowing them to start what he called the first wave of wild “kamikaze” attacks on cyberspace.
Because no one is sure what package of services and products will be the winning combination, everyone is essentially trying everything, he said.
There are free computers with access that has to be bought for three years, full-price computers with free access, free access coupled with discounted long-distance phone service and even one case, he recalled, of a mortgage company giving away free Internet access if you get a loan from it.
“People are saying, ‘We have no idea what will work, but let’s try,’ ” he said. “If you make it work, you’ll be incredibly wealthy. If you can’t, you’re just one out of 100 that didn’t make it.”
Companies have found ingenious ways to cut the price of Internet access. Freeserve, despite launching only last September, is now Britain’s largest service provider with 1.3 million subscribers.
Freeserve, which has surpassed AOL in Britain, was able to offer free Internet access by taking advantage of Britain’s high-cost telephone system, which charges users for every local call. Under a deal with local phone companies, Free-serve gets a piece of every local call made to its Internet service.
AOL initially dismissed the free access movement, but two weeks ago AOL Europe, a joint venture with German media conglomerate Bertelsmann, announced that it too would offer free Internet access in Britain through a service called Netscape Online.
While Freeserve’s model will not work in the United States, where local calls are free, it raises the question of what other unusual alliances are out there that could shake the online world.
There are so many potential pieces that could be mixed and matched that the possibilities are endless.
“Just wait for the consumer marketing people to jump in,” Gami said. “What if you buy a new Chrysler and they throw in lifetime Internet access? It’s an entirely different sales channel.”
Pittman of AOL downplayed pitfalls of dropping prices, saying that cheap or free access only appeals to a limited group, according to the company’s surveys.
But the company has been busy covering all its bases. It recently repositioned the CompuServe online service, which it bought in early 1998, as its low-cost brand with a $9.95 plan for 20 hours a month.
CompuServe is only one of several companies that AOL has acquired in the last year and a half in an effort to broaden its base of subscribers. ICQ (the maker of a popular Internet instant messenger that is separate from AOL’s), Winamp (the maker of an MP3 digital music player) and Netscape are among the purchases AOL has made--and largely kept separate from the AOL online service.
Pittman said executives joked among themselves last year that they wanted to find any hot Internet property that was “not AOL.com.”
In many ways, AOL’s purchases mark the maturing of the company beyond its packaged online access and its recognition that AOL cannot do it all by itself in the broader realm of the Internet.
“For consumers, we don’t even want them to know that those companies are connected with AOL,” he said. “We’ve got to keep growing. No one brand serves 100% of the marketplace.”
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AOL’s Stumbling Stock
After a sharp runup since 1998, AOL shares have hit a downdraft.
Weekly closes and latest:
1999, Friday: $96.81
Source: Bridge Information Systems
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Online With AOL
America Online has grown to be the leading online service prodiver. But AOL’s mix of news and information has been widely copied, and analysts wonder if AOL can keep its position as the dominant brand now that compeition is heating up.
Avg. minutes online daily
Fiscal quarters
4th quater fiscall 1999: 52 minutes
Subscribers
2nd quarter 1999: 17,619,000
Source: America Online
