Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 18, 1994 TAG: 9409200001
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: By SANDRA SUGAWARA THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Long
The company has signed on former Apple Computer chairman John Sculley as a consultant to expand overseas and seems to have removed the threat that its largest investor, Microsoft Corp. co-founder Paul Allen, would try to wrest control of the business.
AOL, which has become a fixture in the Washington area's burgeoning high-tech community, has grown so rapidly - tripling its base since last summer - that it has made up most of the ground separating it from the on-line leaders, Prodigy and CompuServe.
Because the three services differ in the way they count customers, it's not possible to make exact comparisons. But most analysts rank CompuServe as the largest on-line service, with Prodigy second and AOL a close third. The two front-runners are adding new households, but not at the pace of AOL, said Gene DeRose, an on-line analyst with Jupiter Communications in New York.
Now chief executive Steve Case sees AOL's becoming the Microsoft of the fledgling interactive networks. ``Certainly our goal would be ... that 10 years from now, when people look at the interactive industry, they will see America Online as the leader of that industry, much as Microsoft now leads software,'' he said. ``That's the path we're heading down.''
On-line services such as AOL mainly deliver text. Subscribers use personal computers and modems to access information sent over telephone lines from central AOL computers. The increasing numbers of people with computers and modems have helped the on-line industry to add an average of 22,000 new customers a week, according to Information & Interactive Services Report.
Subscribers can communicate with each other by typing messages. They can call up magazine and newspaper articles on their computers. America Online subscribers also can tap into the Internet, which gives them access to libraries and resource centers across the world.
Advances in technology are expected to bring more pizzazz to interactive networks - photos, movies, music and voice - enabling them to be the conduits for shopping, entertainment, commerce and communications. These improvements should help boost the interactive market from 5 million households, about 5 percent of the nation's homes, to tens of millions.
The possibilities have attracted the interest of some of the more powerful telecommunications, media, cable and software companies. The problem Case faces is that Microsoft itself - and AT&T Corp. and Rupert Murdoch's News Corp., among others - also wants to be the Microsoft of the interactive industry.
Will AOL be up to the challenge? Will its hunger, drive and market savvy offset the financial might of the telecommunications giants and enable it to wear the Microsoft mantle?
``Not a chance,'' said Rick Martin, Chicago-based director of research for Swiss Bank Corp., who expects America Online to get gobbled up by a larger company in the next few years. ``If I were Steve Case, I would hold off the vultures as long as I could to build up the subscriber base'' and get as much money as possible for shareholders.
Indeed, Microsoft officials approached America Online more than a year ago about acquiring the company. Case and a Microsoft spokeswoman confirmed the discussions but declined to disclose details.
Time Warner Inc., whose Time magazine is available on America Online, also is rumored to be interested in the company, analysts said. A Time Warner spokesman declined to comment. Case would only say that, in the course of discussions with partners, ``a number have expressed interest in talking to us about some equity stake. A lot of companies have expressed interest in a lot of things.''
America Online also caught the eye of Allen, a billionaire from his Microsoft days, who obtained 24.9 percent of AOL. After the company rebuffed his attempt to get a seat on its board and adopted a ``poison-pill'' provision to make a takeover prohibitively expensive, Allen retreated and recently began unloading his shares.
Case co-founded the company in 1985 with AOL's 55-year-old Chairman James V. Kimsey. Back then, Kimsey was the seasoned entrepreneur, having previously founded four successful restaurants. Venture capitalists provided much of the capital for the company, which was called Quantum Computer Services Inc. until 1991, when the catchier name was adopted. The on-line service was launched in 1989.
Case, 35, is serious and intense but is no techno-genius. Analysts say he is a marketing master, applying lessons learned at PepsiCo Inc. and Procter & Gamble Co.
America Online's success has been ``total marketing savvy,'' DeRose said. Case, he quipped, ``has convinced the world that America Online is the cool, hip service, even though Alexander Haig is on its board of directors.''
Its marketing skill explains the company's focus on making its system easy to use - a factor that analysts believe has been key to its success in attracting customers.
For now, Case said, independence has served America Online well and enabled it to grow quickly. Analysts also say it has given the company freedom to take risks. Deals such as its agreement with Apple Computer might have raised eyebrows in more conservative boardrooms, for example.
Under that agreement, AOL agreed to help Apple develop its own on-line service. Some skeptics questioned the deal, saying AOL would be creating a competitor.
But these days, the move looks pretty smart, analysts said. AOL will receive a royalty, based on usage, so the more successful the Apple service is, the more money America Online gets. The minimum amount will be $15 million over the next five years. In return, Apple has rights to purchase up to 6.5 percent of America Online's stock.
The Apple arrangement also brought other benefits, Case said. Apple executives wanted their system to be international - accessible to Japanese and other non-English-speaking customers. The development work, paid for by Apple, enabled AOL's team to figure out how to do that.
America Online now has the know-how to expand overseas itself, Case said. Sculley, the former Apple and PepsiCo executive, was brought in to help launch services in Japan and Europe.
And although it doesn't have a deep-pockets parent, AOL is not without important partners. Tribune Co. owns 8.5 percent of the company, and Sprint Corp. has rights to 5.9 percent. The Sprint alliance provides AOL with discounts on its telecommunication costs, the largest expense for an on-line company.
So far, Case can point to the numbers to back up his approach. Revenue for fiscal 1994, which ended June 30, jumped 161 percent to $104.4 million from $40 million in 1993. Profit also increased, although not as fast, to $6.2 million from $4.2 million.
by CNB