Meet the new AOL

Meet the new AOL
By Margie Wylie and Rose Aguilar
Staff Writers, CNET NEWS.COM

Ted Leonsis must have a busy hatmaker.

Not only is this former technology writer and former president of Redgate Communications now the president of America Online, but he's also the president of 2Market, a CD-ROM-based home shopping service. In his copious spare time, he has also served as mayor of Orchid, Florida. With AOL's 19-hour outage, slumping stock, and slumping membership, Ted's political skills are being put to good use. The seldom-seen AOL exec--CEO Steve Case usually does the talking--is on a cross-country tour. In this election year, the fast-talking Leonsis is out stumping for the incumbent. New and improved, as any candidate should be, today's AOL will feel your pain. We caught up with Leonsis in San Francisco's Justin Herman Plaza, where he talked about AOL's marketing push, its chances against ISPs, and the role that pricing will play in the company reaching the 10-million member mark at the close of the century.

NEWS.COM: What is the "new" AOL?
Leonsis: The new AOL is new capabilities: better browser; faster access; more original content; some real exclusives, like our Buddy List technology that lets you communicate in an instant fashion to people all over the world through your computer; our hyperlinking technology; and much better packaging of how we integrate the Web to America Online. So what we're seeing is the relaunch of the service. This is the first part of a major marketing program and it will include network broadcast television, new Web site design, new packaging, and a lot of different kinds of venue-oriented marketing like concert sponsorships and sporting venue sponsorships. I flew up from L.A. on United Airlines and they gave me peanuts, a Coke, and an AOL disk! So I know we've become mainstream.

NEXT: The new AOL

The new AOL

I've noticed that your marketing has gone down. I haven't been getting a disk every other week.
No, what we announced back in the April-May time frame was that we would be launching this new software and that seasonally, the summer is the worst time to kick it off. So we said we would start in the late August-September time frame and really kick it off the end of September and early October. Trust me: Shortage of disks and name awareness of AOL won't be an issue come 30 days!

What marketing campaigns are in the works?
A major new advertising campaign--
60-second and multiple 30-second brand-oriented advertising that really reaches out to the 89 percent of America that's not on the Web, not online--that says, "Now it's the time. Come experience the magic and see what you can do." Secondly, you're going to see a whole new season of programming. I've long believed that AOL has the opportunity to become the fifth network, like ABC, NBC, CBS, and Fox, but I think AOL will be a network where we buy content from third parties like CNET. We're going to launch a new fall season. We'll be canceling shows, and bringing in new shows. What I'm most proud of is all the original new content. Every medium that develops goes through the phase of showing reruns and then taking steps to original content. I remember the days of Nickelodeon where "Nick at Nite" used to show "Gilligan's Island" and "The Donna Reed Show" or on HBO, when it just showed movies. Now they show movies with their own programming, like "The Larry Sanders Show" and "Dream On." That's what I see happening for AOL.

Who are you targeting today? Are you targeting first-time users to the Internet?
I was watching the Democratic and Republican conventions and they were talking about a "big tent." AOL is a big tent in that when you look around, we've got the gay and lesbian community represented by Planet Out and Digital Queers here; we've got Christianity Today; we've got Net Noir, the first Afrocentric programming environment; and we have literally in San Francisco alone more than 250,000 paying customers. Finally, it reaches out to really mainstream America. We believe we're at that critical mass. For example, today America Online is larger than USA Today, Wall Street Journal, New York Times, Washington Post and the San Francisco Examiner combined. If we were a cable company we would be in third place behind TCI and Time Warner. Last night, I'm pleased to say that more people between 9 and 10 p.m. logged onto America Online than watched "The Larry King Show." So, we've become like a cable channel to mainstream America.

NEXT: AOL vs. ISPs

AOL vs. ISPs

How do you plan to keep subscribers from jumping from AOL to an ISP once you get these new subscribers in and they use up their free hours?
Well, I think three things. We see ourselves not really as an ISP, but as a connected, bundled solution for the 89 percent of the people not online. But, the new AOL has all of the best features of the new IE browser. In fact, our Windows 95 client, which will be shipping, has the integrated IE browser. You can [also] download Netscape. So we have the biggest network, the best support, the most content, and we've just introduced our 20/20 Plan. For most people in prime time, which is where all our usage is, 20 hours a month of usage is unlimited, as opposed to an ISP which is perhaps doing daytime connection. We're a nighttime medium, we're not just a connectivity solution.

Do you plan to stay ahead of the game and ahead of the ISPs by focusing on proprietary software such as the AOL Net Phones?
Well, I think how you have to look at it is that these are not religious issues for AOL. We want to be best of the breed, so today we're going to continue to invent things that maximize the narrowband experience. There's a myth, I believe, out there that bandwidth will be available as a footprint all over the country. We're not seeing that. The majority of people that are getting online in their house are getting online at 14.4 kbps.

So if you design things like CNET in a wonderful HTML, Java, and Shockwave experience, millions and millions and millions of people at home can't see them or have a pleasant experience. So our challenge is to maximize for a narrowband, mass consumer market, and integrate the best things in the marketplace. We have deals with Netscape and Microsoft; we have deals with Macromedia. So we're going to reach out to the community, and it won't be religious. People say, "You're proprietary." I go, "Well, we're Winsock-compliant; that's open. We have both the Microsoft and the Netscape browser; that's open. We have the world's biggest high-speed network. You can come to us over TCP/IP connections. We represent about 35 percent of all Internet traffic. We are the world's largest ISP."

It seems that we're trying to make this war AOL vs. the Internet, and we don't see it that way. Ever since the Internet was commercialized via the Web, all we've done is grow and be successful because we've really used the best things of the Web, but we have to remember the sweet spot of the market is at home at lower bandwidth. And we won't ever lose site of that. We want to be very, very targeted at the consumer mainstream.

A lot of content on AOL can also be found on the Internet. How do you plan to keep subscribers?
Well, that's not necessarily true. The first thing is that I believe that programming is the art. What I mean by that is you can watch "Seinfeld" on NBC and you can watch "Seinfeld" on Fox. "Seinfeld" is the number-two show on NBC, even though it has been in syndication for two years. So just right there, there's an example of content that's found in two places. It's the programming and it's the community. What I see today that's lonely about the Web is that the whole Web metaphor is page-oriented and it's based on the concept of people-to-content, where AOL's model is people-to-content-to-people. So what we do is we program a channel that has content that's programmed, not aggregated. So there are 200, 300, 400,000 Web sites we're going to program the best of. Two, we're going to build community around it. Still today, with chat and message boards and IMs and Buddy Lists that let you find people online and our member directory, we can bring that sense of community around the content, which is really good not only for members, but for advertisers. We've sold more advertising the last 45 days than every public Internet company, including CNET, combined. We've sold almost $40 million in advertising in the last 30 days. The reason for that is not only do we have the mass size, but people. Hits are not a good metaphor. It's how many people came in and how much time they spent. It's like going through television and saying that you went from channel 4 to channel 7 and channel 5 got a hit because you went through. We're more concerned with people coming in, spending time in a community of interest, and being accounted for that way.

So I think our model is working: We've gone from $100 million to $350 million to $1 billion in sales, and we'll do $2 billion in sales this year. We went from 1 million members to 3 million members to 6.2 million members and we'll get to 10 million by the end of June.

Why should I join AOL as opposed to, say, Netcom or AT&T? What if I don't like to chat and I want to spend a lot of time online?
Well, I think the industry is breaking itself along three quadrants. The first is access. You judge an access provider by how many POPs it has and how many sites will it serve, so that you have a local access call as opposed to having to dial a number and then paying long distance.

The second segment is brands. You guys have become a brand. CNET has become a brand. You're packaging things up, you're trying to make a network.

The third is content, so let's look at those.

We have the world's biggest network. We have the most reliable network, we have the highest speed network, and we have the most people answering the phones. We have 3,100 people answering customer support. Most ISPs have no support. We have a one-disk install. You get registered, you're up. I looked at one of the telephone company's packages the other day: It was four disks! It was their disk, it was Netscape's disks, it was Eudora software, and it was like a personal publishing package. Mainstream America is not going to use that. You could charge $5 a month; they won't be able to figure out how to do it.

So while we will be the largest company, there will be pockets and segments that will find different solutions, but for the mainstream, our network is the best one out there. You look at the programming side, we have the most customers. Because we have the most customers, we can invest in innovative features like Buddy Lists, chat, and virtual places.

NEXT: Pricing and Profitability

Pricing and Profitability

Explain the 20/20 plan.
Today every ISP in the country combined equals about 1.5 million people. Since the middle of July we've had 1 million people sign up for our 20/20 Plan. So what we're trying to be ($19.95 a month for 20 hours) is very expensive when some people think $9.95 for 5 free hours is too high. So what we're trying to do is cut a wide swath through the marketplace for the first-time user, but also for the sophisticated customers.

Will AOL ever follow an unlimited pricing plan?
You probably won't see AOL--as the leader--do anything that's "me too." What we will do is be clever and use our buying power. We have the most members and the most revenues. You can expect us to create new programs and new price points that would be fairly well-serving for members, and also shake up the industry.

I recently spoke with executives that said AOL is currently working on 40 different pricing plans, one of which might mean cheaper fees during off-peak hours or a dollar-an-hour type of program.
We're a consumer marketing company and all we do is test. We test pricing, we test offers, and we test lists. Frankly, the main reason that we haven't gone to a $19.95 pricing point is that consumers have told us that's not what they're looking for. The best example I can tell you is we have 6 million paying customers; all the ISPs combined have 1 million.

What do you mean, "That's not what customers want?"
Twenty bucks is too expensive. See, what you're doing is different. You work at CNET, you live in San Francisco, you're living on the Net, and you use more than 20 hours. Most of our customers use less than seven hours a month. So if you go to $19.95 unlimited and you use only seven hours you're paying a lot of money for your usage.

Most of your customers pay $10 a month?
$9.95 a month, sure.

What's the percentage?
Well, I think less than half the customers go over the $9.95 a month. So people always look at us like we don't know what we're doing, and I kind of say, "Excuse me, we have more people on it." We're the size of the city of Houston right now. That's how you could look at it. So to be specific, we always test price. We launched our 20/20 Plan and you can probably expect more testing, more marketing. We will be very reactive to customers, but we want to lead the industry, not follow it. These kinds of programs that reach out to the other 89 percent that aren't online and don't live in San Francisco or aren't living on the Net, this is all new to them. that's really a sweet spot in the market right now.

If half of your users spend $10 a month, where does your money come from?
Of course we're making money from subscribers, but in any subscription-based business you'll find there's a curve. There's a group that are marginally profitable, there's a group that's marginally unprofitable, and then there's the group that you make the money on. So what we're trying to do is make money obviously on all of the clusters, but open new revenues streams: advertising, transactions, and merchandising. That's where branding comes in like this. We're very fortunate in that we've got a brand that's both needed and loved. Usually brands are needed. TCI is a brand and a cable company; it's needed. Nike or MTV is a brand; they're loved. Coca-Cola is a brand that's loved. We've always looked at ourselves as being a brand that's loved. The people will decide, not the industry pundits. But we went down for 19 hours and the world seemed to stop. But then it dawned on us that we've become a utility. We will do close to a billion hours of usage this year. More people get more interactive services from AOL than all the other services combined. So the brand management is becoming more and more important for us, especially as we move from being an online service, ISP, and of low value to this interactive services media company. But I think where AOL will move to is the lifestyle brand category. That's where we think we can be.

Lifestyle?
Lifestyle brand. The best examples I can give is we will sell about $200 million this year of AOL merchandise and derivative products such as books, hats, T-shirts and the like, and alternative revenues such as advertising and the like. So if you're a brand, people will wear AOL T-shirts and hats. The other day someone was talking to me about brands and I said "Well, look around. Do you see people wearing Microsoft T-shirts? Yes, if you work for Microsoft." But you see people wearing AOL sweatshirts and hats along the lines of an MTV.