Episode Transcript
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Speaker 1 (00:04):
Get in touch with technology with tech Stuff from how
stuff Works dot com. Hey there, and welcome to tech Stuff.
I'm your host, Jonathan Strickland. I'm an executive producer with
how Stuff Works in I heart radio and I love
all things tech. And in our last episode, I traced
a O L America Online from its birth out of
(00:26):
a company that created a service for Atari twenty hundred
owners in order for them to download games, up to
the point where this company bought up its longtime competitor,
Compuse Serve. Today, we're going to continue this story and
look at how a O L got involved in a
merger that is frequently listed as one of the worst
(00:47):
business deals in tech history. Sometimes it's called the worst
merger of all time. But that was not the Compuse
Serve deal. Before we get into all of that, I'm
going to backtrack just a touch. The company Serve deal
started in nineteen nine seven and it was complete by
early nine But another thing that happened in nineteen seven
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was really important to A O L. And that was
the launch of a I m AIM or a O
L instant Messenger. AIM would become an incredibly popular messaging
app for several years, though the company would eventually sunset
the service in twenty seventeen. A o L had already
baked in a messenger feature into the A o L desktop,
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but it was part of the overall A o L
user interface, who had to be in A o L
to use this. In May seven, the company released AIM
as a standalone download, at least for machines running on
the Windows operating system. The AIM product competed with other
messenger services like I c Q, which A L would
(01:57):
acquire in and then eventually sell off again in T
and MSN Messenger. The lead developers for AIM were Barry Appleman,
Eric Bosco, and Jerry Harris. But here's the thing. They
weren't supposed to build an instant messaging app. Aim was
never supposed to be. They were doing it without the
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company's knowledge, let alone permission. Appleman and Bosco had been
hired as programmers who specialized in the Unix operating system.
Harris had joined a o L after the company had
acquired the web browser company that Harris was working for.
So Appleman had already transformed a o L a few
years earlier by adding the Buddy List, which is a
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feature that just tells users if their friends happened to
be online the same time that they are online. Because
this was back in the day when you were only
online when you were dialing up. You didn't have this
sort of permanent online status. Broadband was not really a
thing yet before the Buddy List, you would have to
use a search tool with the exact screen names of
(03:03):
your friends to find out if they were online or not.
So that's what a lot of people were doing. They
would go to the search tool, they would put in
the handle for their friend and see if that person
was online. But as I mentioned in the last episode,
Steve Case had really positioned a o L to be
an online community. He was stressing that part of America
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online business and their feature set, saying that that was
the most important application of a o L over all others.
This contrasted a o L with other services that were
more focused on things like online shopping, for example. So
people were encouraged to make communities online. They were eager
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to see if their friends were online at the same time,
and so a L service was getting hit by tons
of search requests and that was often enough just to
bog down or even crash servers. Just people looking to
see if they're friends happen to be online at the
same time. So Appleman thought, what if we just made
a tool that would give people this information that they're
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searching for by default. That way, they don't even have
to ask for it, they don't have to send requests,
will just tell them whether or not their friends are online.
This would become a very important component of AIM as well,
the buddy list that tells you who is online and
who is available to chat. We see this on lots
of online services today. For example, I once in a
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blue moon get a chance to play games on Xbox
or on Steam, and both of those have buddy list
features that tell you who happens to be online at
that time. But this was a new thing back in
the early nineties. Now, the developers had determined that Aim
should exist as a standalone service so that it didn't
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limit its adoption. That way, it wouldn't just be a
o l users that could get hold of Aim. But
the team quickly ran into it challenge. They had no
resources because again it wasn't a sanctioned project. But a
service has to run on hardware somewhere. It's not something
that can just exist in the air. So Appleman called
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in a favor with a coworker who was getting ready
to ship some old servers to HP. They had bought
these servers. The servers were now kind of obsolete, and
so the a o L was going to ship the
servers back and get a small amount of money in return.
So instead of shipping back the servers, his coworker friend
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quote unquote lost the servers and they actually went to
Appleman and his team, and so that team was able
to work on developing the messaging app. When they had
a finished app, they decided to show it off to
their bosses. They thought, well, we've got it all ready
to go. Now we just have to convince our bosses
that this was a good idea from the get go.
A OL management was not thrilled about this. In fact,
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there was a real danger at first that the whole
team might get fired because of their work on this project.
They had built the product without telling anyone, They had
allocated a server without permission, and they intended to release
the app for free, and that really stuck in the
craw of a lot of the leaders over at a
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O L. A o L was a subscription based business plan.
The way all L made money in those days was
that they would convince customers to subscribe to A O
L service, and then the customers would use the A
o L interface to dial in and get online. That
was the way A O L made money Primarily. They
also did some advertising stuff, but that was minor compared
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to the subscription service. So to give away stuff for
free seemed antithetical to A O l's business plan, But
ultimately the leadership at A O L was convinced to
give it a try halfheartedly, so they launched AIM in May.
Released by the way, launching in fact would be really generous.
(07:00):
What the leadership actually agreed to do was make AIM
available on a file Transfer Protocol or FTP service. Now
this FTP service wasn't actually positioned as a public facing service.
It wasn't meant to be something that the average person
would use to get access to files. But Internet geeks
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in the know were aware of it, and in fact,
we're always keeping an eye on the FTP service because
as things would be added to the service, it gave
them an idea of what was coming down the road
for A O L in general, So it's kind of
a way of getting insider information but from the outside
so a well initially just made AIM available through this
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and didn't promote it in any way, So AIM came
out with no support and no fanfare. Even so, on
that first evening there were nine hundred simultaneous connections on AIM. Now, people,
that's incredibly small when we think about the Internet. But
when you think about the Internet in the days when
folks still weren't really sure what the Internet was, most
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people were using dial up to access it, and no
one was advertising the fact that this messenger service even existed,
it's pretty phenomenal. Now the programmers had built in some
clever features and AIM that made it awfully hard for
i T administrators to block it, and as more people
discovered the app, i T departments looked for ways that
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they could block it because they were worried that employees
or students or or whatever would waste time chatting with
each other instead of doing what they're supposed to do.
But if they tried to block off the port the
Internet port through which AIM was communicating, it would automatically
start to scan the other ports on the machine it
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was installed on until it found one it could communicate through.
So if you blocked one port. It would just say,
all right, well that's that doors closed. Let me look
and see if any other doors are open. So does
some ad and AIM was essentially corporate backed malware because
there was no easy way to shut it down, and
people were downloading it and using it to chat with
each other, and it got wildly popular. Now I might
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as well stick with AIM for right now, before getting
back to a o L at large. A o L
would go on to buy Morabilous, which operated the I
c Q chat app. AIM would power Apple's first eye
Chat app, although that would change in later versions of
eye Chat, and Microsoft, in an effort to take some
of the steam out of a o l's engine, built
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a version of MSN Messenger that could communicate with AIM users,
so you could use MSN Messenger and send chats to
people who are using AIM and they could talk back
to you. This actually made the AIM team really angry
because it meant that people would be able to communicate
with AIM users without actually downloading AIM themselves, and so
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began a back and forth or in which ao L
would block Microsoft's chat app and Microsoft would engineer a
new version of MSN Messenger that would get around this block,
and that happened more than twenty times back and forth
until the A o L team sent a threat to Microsoft.
They essentially said, if you insist on making the ms
(10:21):
N messenger app compatible with AIM, we will use that
connection to infect your servers with malware. The threat commenced
Microsoft to back down. Also, yikes, that's like some sort
of nerd gangster stuff right there. This is a nice
computed database, he guy. Here'd be a real shame with
someone that I don't know infected it with viruses. I
(10:46):
apologize for the terrible accent. AIM always existed a little
outside of a o L because it was a standalone
app that wasn't in the walled garden of the A
o L experience. It was seen by A o L
executives as being a bit risky. Over on the A
o L side, the company could curate the customer experience.
The stuff that they would see before they would connect
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to the Internet at large was completely under the control
of the company, so they could censor it. They could
make sure that there was no objectionable material showing up
in front of people, right they would just make sure
that it was all company approved content. But AIM was
outside of this garden, and you couldn't control what other
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users might say or share. AIM kept in adding features
like file sharing, voice support, stuff like that. Many of
them would be copied into later tools like Skype, but
over time AIM began to lose influence. Other tools were
popping up. Some would allow users to communicate through multiple
chat services using a single client. Some were connected to
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the blossoming social networking sites, and that was where allowed
the chat was moving to. AIM became less relevant over
the years, starting in two thousand two, a o L
began to scale back the AIM team. This happened each
year from two thousand two to two thousand five. Then
in two thousand twelve, the only team members who were
kept on were support staff, who just made sure that
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the service wasn't going to collapse on itself. By then,
AIM had less than one per cent of the market
share of customers for internet messaging services. On December fifteen, seventeen,
A O L or rather OATH but we haven't gotten
to the part where ao L becomes OATH. That will
be in the next episode anyway, they announced that a
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O L Instant Messenger had been discontinued. Further, there are
no announced plans for any sort of replacement. The messaging app,
which had at one time been the most dominant of
its kind online, just didn't have enough people using it
to justify the expense of maintaining it. Now, when I
(12:55):
come back, I'll switch over to A O L and
what was in store for the company at large. But
first let's take a quick break and thank our sponsor.
In November, A O L announced it was buying Netscape
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Communications Corporation, which was the company that created the Netscape
Navigator web browser. Netscape Navigator is a fascinating story all
on its own, and I'll have to do a full
birth to death episode on it in the future, but
here are some high points. Mark and Dreason, who while
at college had worked on an early web browser called
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n c s A Mosaic, saw the potential in a
web browser for the average person. He partnered with Jim
Clark of Silicon Graphics to start a new company ultimately
called Netscape Communications Corporation and bring this vision to life.
The first version of this browser was called Mosaic, but
after some threats of legal unpleasantness, they would change it
(14:00):
to Netscape Navigator. Now, this all started in nine by
it had become the dominant web browser, largely because there
wasn't very much competition. If I'm being totally honest. Netscape
became a publicly traded company in nineteen and had a
company valuation of almost three billion dollars, a very early
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start up Unicorn. By things were different because Microsoft started
to really go after the web browser market with its
own web browser, Internet Explorer. Then there's all the different
stuff about Microsoft incorporating Internet Explorer into Windows and uh
and then also downplaying the ability to use other browsers
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on Windows based machines. We won't get into all that,
but in ninety eight, Netscape announced it would release the
source code that the company had used to build Netscape Communicator,
which was a suite of programs beyond just the web browser.
This in turn would become the action that would bring
Mozilla into being, and Mozilla would eventually produce the Firefox
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web browser. Well. By the time a O. L announced
intention of acquiring Netscape, Internet Explorer had already caught up
and taken the lead in the web browser market share.
But it wasn't like Netscape was down for the count
it had been the dominant player. It was now number
two there was every reason to think the company could
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come back with a new version of its browser and
went back. Some folks so would go back and forth
between Netscape and Internet Explorer, so it was definitely still
an attractive company. When A o L made its proposal,
which was for four point two billion dollars, a princely
some this deal would end up being a not so
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good one for either party, though it's not the very
bad deal that I referred to in the episode title.
Anyone who has been through a merger or an acquisition
knows there's always an adjustment as different departments hash things out,
cultures attempt to merge. There's some consolidation, maybe people are
let go as as redundant departments are are put together.
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The effect on Netscape was that it slowed down the
browser development process, and that was already running behind before
A o L purchased the company, and just a minute
took even longer for Netscape to come out with the
next version of its browser. Netscape six did not come
out until April two thousand and Netscape seven followed two
years later in two thousand two. By two thousand three,
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A o L had shut down most of Netscape laying
off nearly all the employees. The decision from the top
was to shift and focus on Mozilla's Firefox code as
the base for web browsers. A o L would outsourced
Netscape browser releases to a Canadian company called Mercurial Communications.
That company produced nets eight Browser eight and Netscape Browser
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eight point one in two thousand five and two thousand seven.
A o L did put together an internal development team
for one last push to make the old browser relevant
again in a world that had little interest in it,
and they released the AOL developed Netscape Navigator nine. But
that wasn't enough either, and a o L finally shut
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down Navigator for good and for certain in February two eight.
So that was definitely not a great business deal. The
four point two billion dollars was not money well spent.
And I'm sure when I do a full episode on
Netscape Navigator, I'll dig much deeper into that story. Let's
get back to a O L. It made another purchase
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around the same time as it bought Netscape. In A
O L bought the company movie Phone. That's the telephone
service that provides movie information to people who call in,
including information like screening times and also gives them the
opportunity to purchase tickets at certain theaters. The deal was
done in A O L stock and it was valued
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at three d eight million dollars, which again princely some
A O L would hold onto movie Phone for nearly
twenty years. The company or the new company that is,
the one that holds A O L, sold movie Phone
to the beleaguered company movie Pass back in the spring
of So how much did movie Pass pay to get
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this property that A O L had purchased for three
eight million dollars in stocks? Well, the agreement was for
a million dollars in cash and two point five five
million shares of the parent company for movie Pass, which
is called Helios and Matheson Analytics. Those shares were worth
about eight million dollars at the time of the announcement.
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Oh and they also agreed to another two point five
five million shares at the exercise price of five dollars
fifty cents per share. That would add another fourteen million
dollars on top of the deal if the share price
were to actually reach that level, which puts the whole
deal at around twenty three million dollars, or so twenty
four million that's not great. A O L was buying
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movie Phone for three and selling it for twenty four.
It might not have been the most profitable deal ever.
And movie Pass, just in case you're curious, has continued
its trend of changing pricing and services throughout the year
in an effort to win customers and become semi stable.
I'm amazed it hasn't collapsed in on itself yet. I've
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already talked about movie Past this year, so I won't
go back over it. But holy cow. A O L
then invested nearly a billion dollars in Gateway PC after
announcing that the company had outperformed all of its earning projections.
Al had, that is and all made a one point
one billion dollar deal with the map Quest. Do you
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remember map Quest? Al L owns it. Also in A
O L make a one point five billion dollar investment
in a company called Hughes Electronics, which is another fascinating
company and it traces its history back to the eccentric
bazillionaire Howard Hughes. Huge Electronics owned Direct TV at that time,
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and as part of this agreement, the company would market
an American online product called a O L TV, which
was an interactive television service. A O LL in turn
agreed to market the Hughes Electronics services Direct TV and
Direct PC, which was a high speed satellite based internet
access service. These days, that same service is called Hugh's Net,
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and the internet and TV businesses are separate entities. A
T and T now owns the direct TV business. And
now we get to the very bad business deal, the
one that so many people have held up as being
one of the worst in business history, particularly for companies
in the tech industry. In two thousand, America Online had
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the opportunity to merge with Time Warner, which in itself
was the product of a merger between the company's Time
Incorporated and Warner Communications. Now, one day I'm going to
have to do a series of episodes to explain how
all of that came to pass, But here's a super
short background on both big companies. Time Incorporated was known
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for being the owner and publisher of more than one
hundred different magazines, with the flagship, of course, being Time,
and others including stuff like Entertainment Weekly, Fortune, Sports Illustrated,
and Southern Living. Warner Communications was a holding company, and
they had a really super complicated history of its own.
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It grew out of the Warner Brothers motion Picture Studio
and their various businesses UH that included movie theaters and
a production and distribution business in the motion picture industry. Eventually,
Jack Warner of the Warner Brothers was the only warn remaining,
and in nineteen sixty six he decided he was going
to get out of the business, so he sold his
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shares of the company to another company called Seven Arts
Production Limited. That company also bought another media company, Atlantic Records.
Then you had a guy named Stephen Ross who had
built a conglomerate of businesses. He comes in, he acquires
the Warner Brothers Seven Arts conglomerate, and now the whole
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mess Steven Ross's other businesses and Warner Brothers and Seven
Arts all becomes known as Kinney National Services. But then
there's a big scandal involving one of the businesses. It
was actually a parking business and it was all about
price fixing, and that led to Ross selling off most
of the companies in the conglomerate. The remaining businesses that
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he kept were the media ones. It became Warner Communications.
This was in ninete Time Incorporated and Warner Munications merged
in nineteen eighty nine, and that's where we get Time Warner,
which at the time was the largest entertainment conglomerate in
the world. In this new company, Time Warner had acquired
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Turner Broadcasting System for nine point six billion dollars, and
then in two thousand, America Online and Time Warner looked
to merge together. A O L was essentially buying Time
Warner for a hundred sixty five billion dollars. So that's
how the transaction would look on paper, that A O L.
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The company was buying Time Warner for a hundred sixty
five billion dollars. A O L's founder, Steve Case took
the role of chairman of the board, and the new
company would be A O L. Time Warner. The association
wouldn't quite last a full decade, but it would really
make an impression in its short time in the spotlight.
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I'll talk a little bit more about this troubled relationship
between A L and Time Warner, but first let's take
a quick break to thank our sponsor. In hindsight, we
can look at the messy span of time from two
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thousand to two thousand nine when A O L. Time
Warner was a thing, and we can say what were
they thinking? But that's what the benefit of knowing how
things played out. Let's rewind the clock a little bit
and think about what things were like leading into this
enormous merger. First Time Warner was already a media giant.
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It had its hooks set deep in the worlds of
print with Time Incorporated, and films with Warner Communications, and
television with Turner Broadcasting. America. Online was a dominant player
in the online space, yet another way for companies to
reach out to customers that would be another form of
mass media. This was before the com crash, so it
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was a time when everyone was absolutely certain that the
Internet was going to be the twenty first century equivalent
of the Gold Rush in California. If you could get
on the Internet and if you could stake your claim,
whether it was an online store or some web enabled
service or something else, it was like a license to
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print money. The details weren't all worked out. No one
was really sure how the money was going to roll in,
let alone how much money there would be, but it
was a foregone conclusion that the future of wealth was online.
So a o L being a huge company that was
seeing massive profits and had recently expanded by purchasing the
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former leading web browser company, seemed like the perfect compliment
to the established old media represented by Time Warner. On
top of that, Time Warner had already attempted to establish
an online presence before merging with a o L. Time
Warner executives also recognized that the future would be online,
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even though they weren't really sure what that future would
look like. But it seemed pretty certain that the Internet
was going to play an incredibly important part in that future.
But making something that works online isn't always easy, particularly
when you're coming from the point of view of established media.
What works for television and for film and print won't
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necessarily work for online, and the preconceptions you bring to
the table could get in the way. So merging with
a O L would give Time Warner not just an
online presence, but one designed by a leader in the space.
For some people, he will meant the Internet. That was
what they thought of it. Some people called a O
L Internet for dummies, but a lot of people just thought, all,
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that's how you get on the Internet. So on the surface,
all of this seemed incredibly attractive. Other companies were worried
that this merger was going to mean there was going
to be a new giant media company and soon it
was going to become a monopoly, and it would either
run you out of business or was going to gobble
you up and acquire you. That's something that a lot
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of folks are saying right now about Disney, not to
mention some other pretty big companies like A T and T.
But this all came from a high level conceptual mindset.
When it came to actually bringing the two major companies together,
things fell apart pretty quickly. The corporate cultures were drastically different.
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Time Warner executives saw ao L executives as being impetuous, brash,
and arrogant. A o L executives viewed their Time Warner
counterparts as being stuffy and conservative and risk averse to
the point of complacency. And this mismatch in perspectives meant
there were very few instances of people actually working together
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across company lines. They were frequently feeling like they were
at cross purposes working against each other. Making things even
worse was the general economy. Now, As I said, the
deal happened before the dot com bubble burst, but then
that bubble did burst. And I've talked about the dot
com bubble so many times, and I'm sure some of
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you probably could pause the podcast right now and give
an overview in my voice about the dot com bubble
bursting and be pretty much on track for what I'm
about to say. But essentially, you had an intense era
of a few years in which investors were speculating wildly
on the performance of various Internet connected businesses. Many of
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those businesses, flush with cash from investors, realized that they
didn't know how to make any money. They failed to
become profitable. Some of them failed to even develop a
coherent business plan. Companies achieved a market value that didn't
reflect their real value, and eventually there were are reckoning.
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The house of cards grew too heavy and it crumbled
as investors lost confidence that they would ever see long
term returns and they began to try and retrieve their
investments and pull out of the market. This led to
an overall economic recession and a o L time Warner
was hit just like everyone else. Then they lost a
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whole lot of value because of it. In the wake
of that economic stumble, Al had to write off forty
five point five billion dollars in the fourth quarter of
two thousand two, and that led to the loss of
another forty four point nine billion dollars. In all, it
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was a nearly nine nine billion dollar loss. When the
dust had settled, Steve Case stepped down as chairman of
the board, though he remained a member of the board
of directors. Ted Turner, who had founded Turner Broadcasting, resigned
as a vice chairman of the board. One development that
people at a O L and Time Warner perhaps should
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have realized before talking about a merger was the general
trend toward broadband service. Because a O L was a
dial up service, you would connect your phone to a modem,
and your modem connected to your computer, and you would
actually dial up to connect to a L servers. Well,
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broadband was slowly gaining traction, and this would allow and
always on connection. You wouldn't have to dial up. You
just would turn on your computer and then away you go.
Like most technologies, however, it was really expensive when it debuted,
in fact, prohibitively expensive for most people, and it was
also very limited in its accessibility. Not very many people
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had access to it. But as years went by and
more companies invested in building out the infrastructure, the accessibility improved,
prices began to come down. The number of households in
the United States with broadband connections jumped fifty percent from
two thousand to two thousand one. That is increased by
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That's great growth, but it doesn't necessarily tell you anything
about numbers, because if you have four customers in two
thousand and six customers in two thousand one, that's an
increase of fift But by two thousand three, the FCC
estimated that just under of American households were subscribed to
broadband services, and A o L's main business was quickly changing.
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Its dial up service was still making money, but it
was becoming less important. It was generating less revenue year
over year, and that's typically a number you want to
see increase, not go down. In two thousand four, the
A o L unit of the company held what was
referred to as a strategic off site meeting. Now in reality,
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it was a meeting to talk about why options were
open to the company as things were getting, you know,
pretty grim. The company was losing customers to broadband. Companies
like Microsoft and Yahoo were presenting challenges to A O
L's curated portal design to the Internet. There was no
consensus on the right course of action. Some people like
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Ted Leonsis, who was vice chairman of a O L,
and Mike Kelly, who was the president of the Media
Networks Group, advocated that A o L should launch an
online portal similar to that of Yahoo that would entail
putting the curated A o L content as well as
the stuff created specifically for A O L up online
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for free. Joe RiPP, who was another vice chairman, opposed
that idea. He said it would alienate the remaining A
o L dial up customers if they learned that other
people were just finding the exact same A o L
content online for free, whereas they were paying for it
on a month to month basis, that was going to
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really upset them. Jonathan Miller, who was chief of a
O L at that point, had everyone take a lunch,
and on return he said the company was definitely going
to pursue this portal strategy. The once premium content would
now be free for users, with revenue coming from advertising.
In two thousand five, Steve Case would resign his position
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as a director of Time Warner and stepped down as
a member of the board. That meant that at that point,
none of a O L's founders were still with the company,
and any real capacity they had all left at this point,
and that seems like a good stopping point for this
part of our story. In our next episode, we'll pick
back up. We'll continue talk about how that AOL Time
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Warner relationship came to an end and what A O
L Has been up to in the years since. In
the meantime, if you have any suggestions for future episodes
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this and thousands of other topics. Because it how stuff
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