Now, AOL Everywhere
 

        The Newest Giant Takes On Phones, TV and Microsoft

        By SAUL HANSELL

            DULLES, Va. -- Over the last year, the walls of
            America Online's rapidly expanding headquarters
        here have been dotted with plaques. They declare that
        the company's mission is "to build a global medium as
        central to people's lives as the telephone or television .
        . . and even more valuable."

        But wait. Aren't
        telephones
        everywhere? And
        don't Americans
        watch seven hours of
        TV each day? How
        can Stephen M. Case,
        America Online's
        chairman, dare to
        think that his company
        -- which just a few
        years ago lurched
        from one crisis to the
        next and was largely a
        chat service for
        lonely teen-agers -- belongs in the same league?

        The answer is that America Online, confounding the
        skeptics, has emerged over the last two years as the
        biggest, most powerful company on the Internet.

        Indeed, an astounding 39 percent of the time Americans
        spend online is spent using services the company
        controls, 10 times the share of its nearest competitor,
        Microsoft. AOL expects to hit $5 billion in sales this
        year, more than the next 20 Internet companies
        combined and roughly the size of NBC's. And the
        company's market value of $110 billion is bigger than
        that of any other media concern in the world.

        So now Case, who has been talking for years about
        taking on television, has a plan to realize the ambitions
        of his most audacious rhetoric -- for AOL to leap off
        the computer and be everywhere, all the time.

        The plan has these parts:

        The company will try to roughly double the number of
        subscribers, now 17 million, to its flagship America
        Online service over the next five years or so. And it
        will aim to add several times as many users overseas
        and through its other brands, like Compuserve, ICQ and
        Netscape.

        It will develop new services to lure users to stay online
        as long as three hours a day -- the current average is 55
        minutes -- and, in the process, make advertising
        revenues as important to the company as subscriber
        fees.

        And it will set out to subsume all other media by
        delivering its service on television screens, cellular
        telephones and myriad other devices, in addition to
        computers.

        "Our goal is to establish AOL as a more important part
        of tens of millions of people's everyday life," Case said
        a few weeks ago, nibbling jelly beans in his office.
        "And to do that, we have to move beyond the P.C. in the
        den."

                              If America Online performs
                              as planned, fending off
                              media giants and the rapidly
                              growing army of
                              well-financed Internet
                              start-ups, Case may be able
                              to fulfill yet another
                              ambition: for AOL to be the
                              most valuable company in
                              the world. That would mean
                              achieving a market value
                              surpassing that of its
                              longtime rival, Microsoft,
                              now worth some $400
                              billion, or almost four times
        its current value.

        Outlandish? That depends on how you look at it.
        America Online's estimated $378 million in earnings
        for 1999 are barely 6 percent of Microsoft's, so the
        company has a long way to go by traditional measures.
        But for an Internet stock, it remains cheap. After a 300
        percent run up over the last year, it is selling for about
        31 times revenue, far less than the 150 times for Yahoo.
        America Online closed Friday at $115 1/4.

        Overtaking Microsoft is an especially fitting goal,
        because much of Case's plan resembles the playbook of
        none other than Bill Gates, Microsoft's chairman.

        And just as Microsoft has come to dominate the
        operating systems for personal computers, AOL,
        Microsoft and many other companies are fighting to
        control a new and crucial form of operating system, in
        essence for daily life. As people wire their families,
        their finances, their jobs -- even their household
        appliances -- into one vast network, whoever ties it all
        together will have much say in how the electronic
        future unfolds -- and possibly capture much of the
        profit.

        "Windows is the past," Case says flatly. "In the future,
        AOL is the next Microsoft."

        Like Microsoft as well, AOL has adopted a "fast
        follower" strategy. It can afford to invest in the sort of
        long-term projects that smaller companies cannot. But
        to avoid becoming too bureaucratic and introverted, it
        hopes to buy some of the most creative start-ups.
        Indeed, its $4.2 billion acquisition of Netscape
        Communications last year was meant to inject Silicon
        Valley culture into AOL and to create a home base from
        which to acquire more West Coast start-ups, which
        might balk at moving to Virginia.

        "America Online has a grand vision and a size that lets
        them achieve it like no one else," said Edward A.
        Bennett, the former head of Prodigy, whose online
        service AOL vanquished. "Because they have so many
        customers, they can sell more products and services to
        them. And they get the pick of the content and services
        because everyone else out there who is smaller comes
        to them for exposure to their audience."

        Microsoft certainly isn't ceding any
        ground. It is spending billions of
        dollars to insure that Windows is
        widely used in Internet-linked
        devices ranging from cable
        television boxes to cellular phones.
        And a big part of its antitrust fight
        with the Government is over its
        desire to funnel Windows users to
        its Internet browser and the services
        that flow from it.

        Case's big plans also come up
        against the ambitions of AT&T, the
        nation's largest long-distance,
        wireless telephone and cable
        television company. With its direct
        control over connections to millions
        of homes, AT&T would love to
        drive traffic to its own online
        services, especially Excite@home, a consortium of
        cable companies developing a high-speed Internet
        service.

        Of course, the World Wide Web may defy any big
        company's efforts to dominate it; most Goliaths meet
        their Davids. But so far, America Online has grown
        stronger from every challenge.

        "I was the one who two years ago said, 'Bye-bye,
        AOL,' " said Halsey Minor, the chairman of Cnet, a
        technology news and shoping Web site that just decided
        to pay $14.5 million to America Online for promotion
        on its computing channel. "What they have done is
        extraordinary. They have created a great business."

        Going Where the Users Are

            o understand how Steve Case turned America
            Online from laughable to extraordinary, follow a
        typical suburban teen-ager after school. You'll see that
        e-mail and chat rooms are as important to his social
        system as cruising the mall and talking on the phone. If
        his parents want to cancel AOL in favor of another
        service, he may howl, because all his friends are on
        AOL.

        But most parents don't want to cancel AOL anyhow.
        For the many adults who are unsure of their
        technological sea legs, America Online has positioned
        itself as the great life vest of cyberspace.

        "I don't know one
        engineer in Silicon
        Valley who uses
        AOL," said Milo
        Medin, the chief
        technical officer and
        founder of
        Excite@home.

        But, he conceded
        grudgingly, "every
        one of them has told
        20 not-technical
        people that AOL is
        the best way to get on
        the Internet."

        Such endorsements can hardly be credited to Case's
        discipline as a day-to-day manager. Distant and
        taciturn, he has often allowed his subordinates to
        wander off on uncoordinated pursuits. The company has
        flip-flopped on numerous important issues and
        strategies and nearly collapsed in early 1997, when its
        phone lines were swamped.

        But America Online prevailed, in large part because
        Case didn't waver on two central ideas: first, that the
        most important use of an online service is
        communicating with people, and, second, that it is
        better to be easy to use than to have the most
        sophisticated technology.

        Moreover, Case's detachment -- along with AOL's
        intergalactic stock price -- has allowed America
        Online to recruit what is generally regarded as the
        deepest bench of top-quality executives in any Internet
        business.

        Most important is Robert W. Pittman, the president and
        chief operating officer, who gave the company
        much-needed management discipline and a flair for
        marketing. There is the flamboyant Theodore J.
        Leonsis, once the company's No. 2 executive, who is
        now running the ICQ chat service and a few other
        youth-minded brands.

        There is also Miles R. Gilburne, the head of corporate
        development, who concocted some of the world's most
        complex acquisition deals. And on the rise is Barry M.
        Schuler, who now runs most of the programming
        services and is spearheading the company's forays into
        the world of electronic devices beyond the PC.

        "The company is finally all marching in the same
        direction," said Jonathan E. Sacks, now the head of the
        America Online flagship service. "It's not like this is a
        cult, but the management has done a good job in
        rallying everybody around a single and powerful
        vision. Finally, the company has become comfortable in
        its own skin."

        Many Buyers, Many Brands

            o listen to Bob Pittman is to hear parables about
            business -- especially about the importance of a
        well-promoted brand. He draws from his experience as
        a disk jockey, as a founder of MTV and as the head of
        the Six Flags theme parks and, later, the Century 21 real
        estate system.

        Consider his explanation for structuring America
        Online to offer a series of products, each with a
        separate brand, rather than unifying all of its services
        under a single banner.

        "The last time I did this was at MTV," he explained in
        his Mississippi drawl. "We started VH1. Then we took
        Nickelodeon and reformed it as a channel for older
        kids. It was no longer spinach, but pizza."

        In his vision, the America Online service will remain
        the mass-market brand. But there will be others for
        more specialized audiences: Compuserve, repositioned
        as a budget brand; ICQ, a chat service for college types
        too cool to use AOL; Netscape's Netcenter Web site,
        for business users. Coming next is a Netscape-brand
        online service filled with the latest Web technology, to
        follow Netcenter users home.

        Besides drawing
        more customers, the
        company hopes the
        multibrand strategy
        will help fight off
        competitors, like
        Freeserve, which is
        offering free Internet
        access in Britain or
        Free-PC, giving away
        both access and a
        computer in the
        United States.

        Instead of cutting
        prices on the flagship
        brand's service, the
        company can use other brands, notably Compuserve, to
        match competitors' deals.

        Last week, it announced a plan to provide free
        computers with three-year Compuserve subscriptions.

        "We can use our core infrastructure, bought and paid
        for by AOL, to create new brands with a real cost
        advantage," Pittman said.

        Cable television is also on Pittman's mind as he
        considers America Online's bottom line. The company
        takes in, for each subscriber, $19.44 a month in
        subscription fees and $4.50 a month in advertising. He
        hopes that those numbers will eventually be about equal
        -- and that both will grow as AOL lures users to spend
        more time and money online. Indeed, Pittman looks at
        broadband access and services like the company's
        planned interactive television service as the equivalent
        of premium cable channels like HBO.

        "If you really love AOL, would you pay $10 a month
        for AOLTV and five bucks a month to get your AOL
        e-mail on your Palm Pilot?" Pittman asked. "I am loath
        to predict the future, but people pay 50 or 60 bucks a
        month for cable. I think people see us as comparable,
        so we have a lot of headroom to deliver value."

        The Well Connected Life

            ehind Barry Schuler's
            desk is a blue and red
        box older than many of
        AOL's employees. It is an
        IMSAI 8080, one of the very
        first personal computers, and
        it is a signal that in a
        company devoted to the
        technological novice,
        Schuler is a true bit-head.
        He recently put wireless
        networks in his houses in
        Virginia and San Mateo,
        Calif., enabling his laptop to
        automatically collect his
        e-mail whenever he walks
        in.

        Schuler joined AOL in 1995,
        when the company bought
        his firm, called Medior,
        which designed games and
        CD-ROM's Until a recent
        promotion, his job was to
        run the AOL service, and he
        used his designer's eye to
        help give it a cleaner, more
        consistent look.

        The latest version of the
        software, called 5.0, is to be
        introduced this fall. Instead
        of simplicity, its focus is the
        addition of new features
        intended to keep users
        online.

        One feature inspiring high
        hopes here is called You've
        Got Pictures, a joint effort
        with Kodak to let people
        send snapshots by e-mail.
        Another is My Calendar,
        which lets users keep their
        appointment books online. But why bother, when a
        hand-held electronic organizer -- or a paper calendar --
        may be simpler? As always, the answer is
        communication. The service will let a group arrange
        the soccer carpool by bringing together all the drivers'
        schedules.

        Each of these offerings is meant to weave the details of
        everyday life into AOL's services, so that users will not
        switch to other providers but instead will be exposed
        to more advertising and more opportunities to buy
        products inside AOL. The photo service sells reprints
        on mugs; the calendar service hawks movie tickets from
        Moviephone, recently acquired by the company.

        "The whole game is about building the online habit,"
        Schuler said.

        That is also where electronic appliances figure in
        America Online's plans.

        AOL is jockeying with many competitors for position in
        an ever more wired world that is connecting the
        Internet to the microprocessors in everything from
        microwave ovens to cell phones.

        Many other companies are focusing on helping users
        stay abreast of information tidbits: stock quotes, say, or
        news headlines. But building on its heritage as the
        online community's favorite place to chat, AOL is
        focusing on communication, building on its existing
        "buddy list" system, which now shows users which of
        their friends are online and available for instant
        messaging.

        Say you want to crow about that great play in the
        N.B.A. finals. With one mouse click, you will be able
        to track down a fellow fan, whether he's working on his
        computer, watching television or sitting in the stadium
        with his cell phone. All this will take a while. But AOL
        users will be able to check their e-mail on their Palm
        Pilots by the end of this year.

        The most ambitious of the planned services is AOLTV,
        the company's version of a concept -- interactive
        television -- that has largely flopped in other
        incarnations. Since paying $425 million for the
        business in 1997, for example, Microsoft has sold just
        800,000 subscriptions to its Web TV service, which is
        marketed mainly as a way for people who don't have
        computers to get onto the Internet.

        By contrast, starting next year, AOLTV will be sold
        mainly as a $10-a-month add-on for AOL subscribers.
        It will allow Web surfing, but the focus will be on
        services tied to watching television, like an elaborate
        program guide and live chat rooms that can be
        superimposed on the screen during popular shows.

        "People are already writing e-mail, sending instant
        messages, watching television and talking on the phone
        at the same time," said Anne M. Borsch, the head of the
        AOL Devices unit. "We're just making it easier for
        them to do it all in one place."

        Getting Ahead of Broadband

            ow that it's clear that the company won't be done
            in by the Web, the biggest worry for AOL
        investors is broadband, the new generation of
        high-speed online connections.

        So far, America Online is locked out of offering
        broadband access through cable television systems,
        which are generally seen as the most promising of
        several broadband technologies.

        The company's responses to questions about its
        broadband strategy are contradictory. Pittman spent a
        good deal of a recent meeting with Wall Street analysts
        arguing that the threat from broadband is overblown.
        America Online's research, he said, shows that demand
        for high-speed service, especially at the current price
        of $40 to $50 a month, is modest.

        "Broadband doesn't sell itself," Pittman said in an
        interview. "There is a small group that says 'Yeah, it's
        faster.' " But high speeds don't make a difference to the
        activities that AOL members use most, he added,
        saying, "Your e-mail doesn't get any better with
        broadband."

        Even so, America Online is hardly staying on the
        sidelines. It is about to introduce its own AOL Plus
        broadband service, to be marketed initially to
        telephone customers of Bell Atlantic and SBC
        Communications. And AOL's $1.5 billion investment
        last month in Hughes Electronics means that Hughes
        will offer AOL Plus and AOLTV over its Direct TV
        satellite system.

        The new 5.0 software will have special audio and
        video features for users on fast connections. The
        company has also hired a former television executive to
        develop broadband programming. And it has begun an
        extensive lobbying campaign in Washington, pressing
        regulators to force cable companies to open their
        systems to AOL.

        America Online's hot-and-cold rhetoric about
        broadband makes sense when seen as part of an
        elaborate game of chicken in which it is negotiating the
        price and terms for gaining access to cable systems.

        Excite@home, which has contracts granting it exclusive
        control over high-speed cable services at AT&T and
        20 other cable companies until at least 2002, argues
        that it has the momentum to be a powerful rival to AOL
        -- even though it now has only 500,000 subscribers.

        "More than half our new customers are ex-AOL users,"
        said Tom Jermoluk, Excite@home's chief executive.

        Ultimately, though, America Online is betting the cable
        companies need it more than it needs them.

        Pittman argues that if anyone can sell broadband, it is
        America Online, because the most likely prospective
        buyers are its 17 million members. "We realize that
        we're one of the few who can write the big check," he
        said.

        Isn't that a little close to the sort of
        offer-you-can't-refuse tactics that got Microsoft in hot
        water?

        Not to worry, says Case, raising the bar slightly higher
        on his hyperbolic ambitions -- and throwing a dig at
        Gates and company.

        "Hopefully, we will establish AOL as the most
        valuable and the most respected company," he said.
        "We won't settle for just one of them."