The Fribble: AOL: Wired or Tired? by Jim Surowiecki

Rogue Missives

ROGUE ARCHIVES

Wednesday, December 11, 1996

AOL: Wired or Tired?
One of the pitfalls of print magazine journalism is the lag between the time a story is written and the time that story actually makes it onto the newsstands. Information that seemed cutting-edge three months ago may easily be either irrelevant or outdated today. And so readers are left to wonder how the story would have been different had the writer known then what everyone knows now.
The December issue of WIRED provides a useful illustration of this with its typically long and detailed story on America Online. Writer Frank Rose, author of a book on William Morris called THE AGENCY, produced a piece that gives us a useful summary of AOL's history, that once more sets up Ted Leonsis and Steve Case as the Mutt-and-Jeff odd couple of cyberspace, and that attempts to situate AOL's future planning in the context of other media companies' expansion from distribution platforms to providers of brand-name content.
Rose also spends some time on AOL's financial situation, concentrating on its potential vulnerability to cut-rate competitors and the flow of former AOL users to cheaper ISPs. But his analysis of AOL's fundamentals ends up sounding like the product of another era, because the story was written before AOL introduced its new flat-rate pricing scheme that allows members to spend as much time as they want on the service for $19.95 a month.
The implications for Rose's story are interesting, because although the heart of the piece is about AOL's identity in relation to the Internet -- specifically, whether what Rose terms "the suburban mall" approach to the online world can really last in the face of the growing accessibility of the Web -- most of Rose has to say about AOL as a company depends on his analysis of its reliance on high-priced subscriptions. With that variable changed, everything else alters as well.
Still, in some respects what Rose doesn't get to say as a result of not knowing about the new flat-rate plan makes what he does say all the more interesting, and in fact sheds new light on exactly what the future of AOL may look like. On the downside, Rose quotes a Yankelovich Partners survey that suggests that the migration of Americans to the Net has slowed considerably. While online services and Internet usage doubled between mid-1994 and mid-1995, growth was only 50 percent between mid-1995 and mid-1996. And while six months ago almost half of households connected to the Net used a proprietary service, today that same number use an ISP, while just 35 percent are on something like AOL.
On the other hand, the sheer number of subscribers AOL has been losing every year -- even as it is been adding more -- suggests that many of those now using ISPs were once AOL members. And that in turn suggests that AOL's new pricing, which brings it in line with most ISPs, coupled with improved access to the Web, could help it keep more of those it's bringing in.
Rose suggests at various points that price competition could sink AOL, especially since the company is dependent on new subscribers to pay for the costs it incurred bringing on old ones. Here again the time lag hurts Rose, since his story went to press before AOL changed its accounting practices and stopped treating new subscriber costs as an investment. As a result, AOL's losses are out in the open, and investors no longer have to worry about them coming back as a nasty surprise. But Rose is right, of course, that AOL needs its new subscribers to pay for the costs of acquisition and marketing, especially if the $300 million marketing plan AOL apparently has planned for this next year works.
Given the fact that for most of its history AOL has derived two-thirds of its revenue from just one-third of its customers, the flat-rate plan may seem to qualify as an embrace of suicide. If you get rid of what Rose calls "[c]hat fiends with three-figure monthly bills," don't you kill your most important source of income, especially since 90 percent of AOL's revenue comes from subscribers' fees?
Perhaps. But of course AOL has already had a 20-hours-for-$19.95 plan in effect since the spring, so it has cushioned itself to some extent against the impact of the new plan on heavy users. More interestingly, Rose writes that the average user is on AOL just 13 minutes a day, or 6 1/2 hours a month, which works out to an average bill of about $14.50. If all those users migrate to the new plan, as seems likely given Americans' curious infatuation with the idea of convenience, then AOL will be making more, not less, from them. To be sure, users will most likely spend more time on the system, but bandwidth remains pretty cheap.
It's not even clear, in fact, where Rose gets the estimate of 13 minutes. Is that number a median or a mean? In other words, did AOL just divide the number of hours spent on the system by the number of users, or did it figure out how much time the median user actually spends on the system? If, as seems likely, it was the former, then 13 minutes exaggerates the amount of time most people spend, since the heavy users would skew the mean toward them. And that, in turn, suggests that AOL may not be losing as much revenue under the new plan as one might anticipate, even before the impact of the plan in bringing in new subscribers is taken into account.
It also doesn't take into account advertising either, of course, and certainly a crucial part of AOL's transition toward a less fee-driven revenue structure is the growth of advertising. While AOL doesn't want to recapitulate the errors Prodigy made early in its existence, saturating its screens with advertisements, it is evolving into a realm that resembles television -- or, for that matter, magazines -- more than it once did. And Rose's discussion of advertising is perhaps the most interesting part of his piece. Leonsis expresses his joy over the AmEx area's blissful fusion of consumer services, advertising, and content, while AOL's advertising veep Myer Berlow argues that ads have to "provide value," since people have to "invite you in" in order to peruse your material.
The most interesting comment on advertising, though, comes from Case, who emerges from Rose's article much as he has emerged from every other piece on AOL: as a controlled, focused thinker with a clear vision for the company whom the writer never really got a handle on. Reflecting on the difference between today and 1993 when it comes to commercialism, the CEO makes a convincing case, so to speak, that online users are no longer as troubled by advertising as they once were. "[T]here's been rapid commercialization of the Web," he tells Rose, "and there are far more ads on it in far more intrusive ways than anything on AOL."
It is, in fact, this strangely dialectical relationship between the Web and AOL that haunts Rose's article, and that probably haunts Case and Leonsis as well. Even if, as Case says in a rather eerie echo of AOL's new ad campaign, America Online is "the Internet and more," then America Online's future is yoked to that of the Web. At the same time, though, AOL wants to position itself as more than a gateway, more even than a way of simplifying and clarifying the chaos that is the Internet. And to do that AOL needs to set itself off against the Net even as it tries to position itself within it.
So ad veep Berlow talks about trying to convince companies that they don't need their own Web sites and that AOL offers all the things -- better usage numbers, easier access to users, "more consistent traffic" -- that advertisers want. And Leonsis insists that 380,000 different Web sites are not going to be a real source of revenue. He adds that, to AOL's users, "we are the Web."
At the same time, though, you have Case explaining the acceptance of ads on AOL in terms of the acceptance of ads on the Web, and Case insisting that any rigid distinction between AOL and the Net is a false one. And you have AOL veep Katherine Borsecnik talking about "get[ting] the rest of the world online." AOL is and is not the Net. It needs to be close enough to it to catch the buzz and far enough away to moderate it, to allow it to promise the sense of control and easy access that are the hallmarks of the mall.
What's left unstated in all this is whether flat-rate pricing might transform not only AOL's revenue streams but also AOL itself. Will AOL become more free-wheeling as people spend more time there? Will the nature of the content change, since people will have more time to read? Or is the real competition for AOL not cost at all but rather all the other demands on people's time? Six months from now, we will find out that the average user on AOL is still spending just 13 minutes a day online?
In this respect, Rose is almost certainly right to point to the importance of content, and to begin his piece with a short riff on The Motley Fool itself. After all, if Leonsis is right and AOL's real foe is Seinfeld, then AOL has to make sure what it's giving its users is as good as Seinfeld, or as interesting as the best magazine, in addition to providing the community that has been so crucial to its continued growth.
-- Jim Surowiecki (Surowiecki)

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ROGUE ARCHIVES

Wednesday, December 11, 1996
AOL: Wired or Tired? One of the pitfalls of print magazine journalism is the lag between the time a story is written and the time that story actually makes it onto the newsstands. Information that seemed cutting-edge three months ago may easily be either irrelevant or outdated today. And so readers are left to wonder how the story would have been different had the writer known then what everyone knows now. The December issue of WIRED provides a useful illustration of this with its typically long and detailed story on America Online. Writer Frank Rose, author of a book on William Morris called THE AGENCY, produced a piece that gives us a useful summary of AOL's history, that once more sets up Ted Leonsis and Steve Case as the Mutt-and-Jeff odd couple of cyberspace, and that attempts to situate AOL's future planning in the context of other media companies' expansion from distribution platforms to providers of brand-name content. Rose also spends some time on AOL's financial situation, concentrating on its potential vulnerability to cut-rate competitors and the flow of former AOL users to cheaper ISPs. But his analysis of AOL's fundamentals ends up sounding like the product of another era, because the story was written before AOL introduced its new flat-rate pricing scheme that allows members to spend as much time as they want on the service for $19.95 a month. The implications for Rose's story are interesting, because although the heart of the piece is about AOL's identity in relation to the Internet -- specifically, whether what Rose terms "the suburban mall" approach to the online world can really last in the face of the growing accessibility of the Web -- most of Rose has to say about AOL as a company depends on his analysis of its reliance on high-priced subscriptions. With that variable changed, everything else alters as well. Still, in some respects what Rose doesn't get to say as a result of not knowing about the new flat-rate plan makes what he does say all the more interesting, and in fact sheds new light on exactly what the future of AOL may look like. On the downside, Rose quotes a Yankelovich Partners survey that suggests that the migration of Americans to the Net has slowed considerably. While online services and Internet usage doubled between mid-1994 and mid-1995, growth was only 50 percent between mid-1995 and mid-1996. And while six months ago almost half of households connected to the Net used a proprietary service, today that same number use an ISP, while just 35 percent are on something like AOL. On the other hand, the sheer number of subscribers AOL has been losing every year -- even as it is been adding more -- suggests that many of those now using ISPs were once AOL members. And that in turn suggests that AOL's new pricing, which brings it in line with most ISPs, coupled with improved access to the Web, could help it keep more of those it's bringing in. Rose suggests at various points that price competition could sink AOL, especially since the company is dependent on new subscribers to pay for the costs it incurred bringing on old ones. Here again the time lag hurts Rose, since his story went to press before AOL changed its accounting practices and stopped treating new subscriber costs as an investment. As a result, AOL's losses are out in the open, and investors no longer have to worry about them coming back as a nasty surprise. But Rose is right, of course, that AOL needs its new subscribers to pay for the costs of acquisition and marketing, especially if the $300 million marketing plan AOL apparently has planned for this next year works. Given the fact that for most of its history AOL has derived two-thirds of its revenue from just one-third of its customers, the flat-rate plan may seem to qualify as an embrace of suicide. If you get rid of what Rose calls "[c]hat fiends with three-figure monthly bills," don't you kill your most important source of income, especially since 90 percent of AOL's revenue comes from subscribers' fees? Perhaps. But of course AOL has already had a 20-hours-for-$19.95 plan in effect since the spring, so it has cushioned itself to some extent against the impact of the new plan on heavy users. More interestingly, Rose writes that the average user is on AOL just 13 minutes a day, or 6 1/2 hours a month, which works out to an average bill of about $14.50. If all those users migrate to the new plan, as seems likely given Americans' curious infatuation with the idea of convenience, then AOL will be making more, not less, from them. To be sure, users will most likely spend more time on the system, but bandwidth remains pretty cheap. It's not even clear, in fact, where Rose gets the estimate of 13 minutes. Is that number a median or a mean? In other words, did AOL just divide the number of hours spent on the system by the number of users, or did it figure out how much time the median user actually spends on the system? If, as seems likely, it was the former, then 13 minutes exaggerates the amount of time most people spend, since the heavy users would skew the mean toward them. And that, in turn, suggests that AOL may not be losing as much revenue under the new plan as one might anticipate, even before the impact of the plan in bringing in new subscribers is taken into account. It also doesn't take into account advertising either, of course, and certainly a crucial part of AOL's transition toward a less fee-driven revenue structure is the growth of advertising. While AOL doesn't want to recapitulate the errors Prodigy made early in its existence, saturating its screens with advertisements, it is evolving into a realm that resembles television -- or, for that matter, magazines -- more than it once did. And Rose's discussion of advertising is perhaps the most interesting part of his piece. Leonsis expresses his joy over the AmEx area's blissful fusion of consumer services, advertising, and content, while AOL's advertising veep Myer Berlow argues that ads have to "provide value," since people have to "invite you in" in order to peruse your material. The most interesting comment on advertising, though, comes from Case, who emerges from Rose's article much as he has emerged from every other piece on AOL: as a controlled, focused thinker with a clear vision for the company whom the writer never really got a handle on. Reflecting on the difference between today and 1993 when it comes to commercialism, the CEO makes a convincing case, so to speak, that online users are no longer as troubled by advertising as they once were. "[T]here's been rapid commercialization of the Web," he tells Rose, "and there are far more ads on it in far more intrusive ways than anything on AOL." It is, in fact, this strangely dialectical relationship between the Web and AOL that haunts Rose's article, and that probably haunts Case and Leonsis as well. Even if, as Case says in a rather eerie echo of AOL's new ad campaign, America Online is "the Internet and more," then America Online's future is yoked to that of the Web. At the same time, though, AOL wants to position itself as more than a gateway, more even than a way of simplifying and clarifying the chaos that is the Internet. And to do that AOL needs to set itself off against the Net even as it tries to position itself within it. So ad veep Berlow talks about trying to convince companies that they don't need their own Web sites and that AOL offers all the things -- better usage numbers, easier access to users, "more consistent traffic" -- that advertisers want. And Leonsis insists that 380,000 different Web sites are not going to be a real source of revenue. He adds that, to AOL's users, "we are the Web." At the same time, though, you have Case explaining the acceptance of ads on AOL in terms of the acceptance of ads on the Web, and Case insisting that any rigid distinction between AOL and the Net is a false one. And you have AOL veep Katherine Borsecnik talking about "get[ting] the rest of the world online." AOL is and is not the Net. It needs to be close enough to it to catch the buzz and far enough away to moderate it, to allow it to promise the sense of control and easy access that are the hallmarks of the mall. What's left unstated in all this is whether flat-rate pricing might transform not only AOL's revenue streams but also AOL itself. Will AOL become more free-wheeling as people spend more time there? Will the nature of the content change, since people will have more time to read? Or is the real competition for AOL not cost at all but rather all the other demands on people's time? Six months from now, we will find out that the average user on AOL is still spending just 13 minutes a day online? In this respect, Rose is almost certainly right to point to the importance of content, and to begin his piece with a short riff on The Motley Fool itself. After all, if Leonsis is right and AOL's real foe is Seinfeld, then AOL has to make sure what it's giving its users is as good as Seinfeld, or as interesting as the best magazine, in addition to providing the community that has been so crucial to its continued growth. -- Jim Surowiecki (Surowiecki)