I highly recommend reading Saul Hansell's piece in last Friday's NY Times, recapping the ridiculously optimistic quotes senior executives at AOL and Time Warner have made over the years (and be sure to peruse readers' consistently vitriolic comments). For anyone who's watched AOL's rise and fall, the quotes are a stroll down memory lane. But while the picture that emerges is that hubris cursed AOL and contributed mightily to its downfall, in reality it was broadband, and AOL's colossal mismanagement in transitioning to it, that crushed the company.
The chart below shows that AOL's dial-up subscribers topped out in Q3 '02 at 26.7 million, and have been in a free-fall ever since, sitting at just 6.3 million at the end of Q1 '09, a drop-off of 20.4 million or 76%. Where did those 20.4 million dial-up subs go, along with tens of millions of other dial-up and new Internet users? To broadband Internet access, supplied by cable companies and telcos. These companies have grown their U.S. broadband subs from 15.2 million in Q3 '02 to 69.2 million in Q1 '09, an astonishing increase of 54 million subscribers in just 7 years.
Cable and telco broadband providers have feasted on the carcasses of AOL and other dial-up services like MSN and Earthlink. But, here's what's both incredible and really sad: had AOL management been less arrogant and more strategic in its approach to broadband, it's quite possible that things could have turned out quite differently.
Back in the mid-to-late '90s, I had a front-row seat at AOL's initial reactions to broadband. In that period I was VP Business Development at Continental Cablevision, then the 3rd largest cable operator in the U.S. with over 5 million video subscribers. We were one of the pioneers in testing and rolling out "high-speed" Internet service. While we thought our speedy and always-on broadband connections were a better mousetrap vs. dial-up, we were very concerned about our lack of online content, video-centric branding and ability to effectively market this exciting new service.
In the pre-@Home days, I pushed to explore how we could partner with AOL to help us get our service off to a faster start. A deal with AOL would have had significant advantages to them as well. AOL at the time had a huge capex burden building out more modem banks to keep up with its swelling subscriber ranks. Even still, there was already plenty of AOL subscriber frustration with the slowness of the AOL network, and often you couldn't even get connected on your first or second tries. At least in our geographic footprint we could unburden them of their network build-out, offer better-quality connections and allow them to focus on content and brand-building. As the 3rd largest cable operator, we also offered them a valuable proof-point that they could use to build industry-wide relationships.
After much preparation and scheduling, we met with one of AOL's most senior executives. After articulating our broadband vision and opportunity to work together, he arrogantly dismissed us as if we were precocious children. To him the opportunity we were describing was far too small, and to illustrate his point he asserted that AOL would have 10 million subscribers before we had our first 100,000 (a prediction that was probably correct!).
Needless to say, no meaningful deal with us - or any other cable operator - every materialized. AOL went on to flounder around with various incarnations of AOL Broadband, none of which ever got any traction. AOL continued to grow its subscribers for a number of years and capitalized on its reach by extracting hundreds of millions of dollars from VC-backed startups eager for access to its massive captive audience (some of those deals would later come under scrutiny, as would AOL's accounting treatment for its subscriber business). AOL then bought Time Warner, and the rest as we know is history.
But what if things had gone differently? What if that AOL executive and others had seen the handwriting on the wall - that broadband would eventually render dial-up obsolete - and decided that AOL needed to figure out how to transition to it, instead of dismissing it? Had that happened, it could have forged partnerships throughout the cable and telco industries that would have let it focus on content and services in an open, broadband environment. In fact, I think it's quite possible that AOL could have pre-empted @Home and the RoadRunner venture that Continental eventually joined from getting traction (why start over when AOL, the 800 pound gorilla is in your corner?).
Instead AOL fell victim to its own arrogance and limited strategic vision. Broadband went on to become the single most powerful enabler of the Internet as we know it today (e.g. billions of spontaneous Google searches, Tweets, Amazon purchases, and more recently video views). AOL is now a crippled mish-mash of mostly second-rate properties, on its umpteenth management team, led by new CEO Tim Armstrong.
In retrospect, those fateful decisions AOL made about broadband 10-15 years ago set the stage for the company's eventual demise.
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