AOL and the Very Bad Business Deal


Lows is my new go-to destination where I can explore the latest innovative craftsman products, including their new v. Twenty power tool battery platform craftsman's v twenty cordless power to a lineup features a high capacity lithium battery that's part of craftsman's interchangeable battery system. So it works with all the tools in their twenty lineup giving you the Runtime you need and the power you deserve lows. The new home of craftsman for the latest craftsmen product updates. Visit lows dot com slash tech stuff. Get in touch with technology with tech stuff from how stuff works dot com. Hey there in welcome to tech stuff. I'm your host Jonathan Strickland. I'm an executive producer with how stuff works in heart radio. And I love all things tech. And in our last episode, I traced AOL America Online from its birth out of a company that created a service for Atari twenty six hundred owners in order for them to download games up to the point where this company bought up its longtime competitor CompuServe today, we're going to continue this story and look at how AL got involved in a merger that is frequently listed as one of the worst business deals in tech history. Sometimes it's called the worst merger of all time. But that was not the CompuServe deal before we get into all of that. I'm going to backtrack just a touch the CompuServe deal. Started in nineteen ninety seven and it was complete by early nineteen ninety eight. But another thing that happened in nineteen Ninety-seven was really important to AOL. And that was the launch of a m aim or AOL instant messenger. Aim would become an incredibly popular messaging app for several years though. The company would eventually sunset the service in twenty seventeen AOL had already baked in a messenger feature into the ALL desktop, but it was part of the overall AOL user interface. You had to be in a L to use this in may nineteen Ninety-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 icy cue, which would acquire in nineteen ninety eight and then eventually sell off again in twenty ten and MSN messenger. The lead developers for aim were berry Applemans, Eric Bosko 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 company's knowledge. Let alone permission Applemans and Bosco had been hired as programmers who specialized in the Unix operating system Harris had joined AOL after the company had acquired the web browser company that Harris was working for. So apple men had already transformed AOL a few years earlier by adding the buddy list, which is a 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 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, sir. Search tool they'd 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 AOL to be an online community. He was stressing that part of America Online's business and their feature set saying that that was the most important application of ALL over all others. This contrast at AOL 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 to see if their friends were online at the same time. And so 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 their friends happened to be online the same time. So Applemans thought what if we just made a tool that would give people this information? They're searching for by default that we don't even have to ask for it. They don't have to send requests we'll 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 chat. We see this on lots of online services today. For example. I once in a 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 limit. It's a Dopp Shen that way it wouldn't just be users that could get hold of aim, but the team quickly ran into a 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 apple men called in a favor with a co worker 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 AL was going to ship the servers back and get a small amount of money in return. So instead of shipping back the servers, his co worker friend quote unquote, lost the servers, and they actually went to apple men and his team. And so that team was able to work on developing the messaging app when they had finished up they decided to show it off to their bosses. They thought well, we've got it already to go. Now just have to convince her bosses that. This was a good idea from the get-go. Ehlo management was not thrilled about this. In fact, 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 AOL AOL was a subscription based business plan the way ale made money in those days was that they would convince customers to subscribe to AOL service. And then the customers would use the AL interface to dial in and get online that was the way made money primarily they also did some advertising stuff, but that was minor compared to the subscription service. So to give away stuff for free seemed antithetical to AOL's business plan. But ultimately, the leadership at AOL was convinced to give it a try. Halfheartedly? So they launched aim in may nineteen ninety seven released by the way launching in fact, would be really really generous while 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 gigs 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 AOL in general. So it was kind of a way of getting insider information, but from the outside, so hey will initially just made aim available through this and didn't promote it in any way. So aim came out with no support and no fanfare, even so on that. I eve Ning there were nine hundred simultaneous connections on aim nine hundred 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 people 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 in aim that made it awfully hard for IT administrators to block it then as more people discovered the app IT departments look for ways that they could block it because they're 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 was installed on until it found. 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 to some admins aim was essentially corporate backed mal wear because there was no easy way to shut it down. And people were downloaded using it to chat with each other. And then got wildly popular now might as well stick with aimed for right now before getting back to AOL at large ale would go onto by miraculous, which operated the icy cute chat app. Aim would power apples. I I chat app, although that would change in later versions of idiot and Microsoft in an effort to take some of the steam out of AOL's engine built 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 can 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 began a back and forth war in which AOL would block Microsoft's chat app and Microsoft would engineer new version of MSN messenger. That would get around this block, and that happened more than twenty times back and forth until the AL team sent a threat to Microsoft. They essentially said if you insist on making the MS N messenger app compatible with aim we will use that connection to infect your servers. With malware the threat convinced Microsoft back down also. Yikes. That's like some sort of nerd gangster stuff right there. This is a nice computer database. He gut he it'd be a real shame of someone. I don't know infected with viruses. Apologize for the terrible. Accent aim always existed a little outside of ALL because it was a standalone app that wasn't in the walled garden of the AOL experience. It was seen by AOL executives as being a bit risky over on the AOL side, the company could curate the customer experience the stuff that they would see before they would connect to the internet at large was completely under the control of the company. So they could censor it. They can 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 users might say or share and 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 and began to lose influence other tools were. Coming up. Some would allow users to communicate through multiple chat services using a single client. Some were connected to the blossoming social networking sites. And that was where LA the chat was moving to aim became less relevant over the years starting in two thousand and two AOL began to scale back the aim team this happened each year from two thousand 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 the service wasn't going to collapse on it self by then aim had less than one percent of the market share of customers for internet messaging services now in December fifteenth two thousand seventeen AOL or rather oath, but we haven't gotten to the part where AOL becomes oath. That'll be in the next episode. Anyway, they announced that AOL instant messenger had been discontinued further. There are no announced plans for any sort of replacement the messaging app, which. I 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 come back, I'll switch over to AOL, and what was in store for the company at large. But first, let's take a quick break. And thank our sponsor. I want to thank today's sponsor Caserta by lutron. Smart lighting control brought to you by lutron pioneers. In smart, home technology with Caserta, you can schedule your lights to come on at dusk. So your family always comes back to a well lit home. And one of the wonderful things about Caserta is that it's not like other smart lighting systems. You might think you have to replace all the light bulbs in your house. And that's not the case Caserta by lutron makes regular bulbs smart by replacing the switch not the bulb. And here's why that's great. The average home has about forty five light bulbs, but only about twenty switches, so it's not nearly so much work. And it's not as expensive either. All you need is a screwdriver and about fifteen minutes. Now, I've done this in my house. I've replaced a switch. It was way easier than I even -ticipant it'd and before I knew it. I had the smart light. System working in my house. So get smart lighting, the smart way with Caserta by lutron searched for Caserta, that's C A S E A Caserta by lutron. Welcome home to peace of mind. In November nineteen ninety eight AOL announced it was buying Netscape 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's some highpoints market-driven who while it college had worked on an early web browser called NC SA mosaic saw the potential and 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 to Netscape Navigator. Now this all started in nineteen ninety four by nineteen ninety five 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 ninety five and had a company valuation of almost three billion dollars of very early startup unicorn by ninety nineteen Ninety-six 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 and then also downplaying the ability to use other browsers 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. Intern would become the action that would bring Mozilla into being and Mozilla would have inch. Produce the fire FOX web browser who by the time AOL 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 come back with a new version of its browser and went back some folks, so go back and forth between Netscape and Internet Explorer. So it was definitely still an attractive company when AOL made its proposal which was for four point two billion dollars a princely sum. This deal would end up being a not so 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, their some consolidation may be people are let go as as redundant departments. Are are put together the effect on that scape. Was that it slowed down the browser development process, and that was already running behind before AOL purchased the company and just 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 that scape. Seven followed two years later in two thousand two by two thousand three AOL had shut down most of Netscape laying off nearly all the employees the decision from the top was to shift and focus on Mozilla Firefox code as the base for web. Browsers AOL would outsource Netscape browser releases to a Canadian company called mercurial communications that company produced Netscape browser eight and Netscape browser eight point one in two thousand five and two thousand seven AOL did put together an. Ternal 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 AOL finally shut down navigator for good and for certain in February two thousand eight. So that was definitely not a great business deal. The four point two billion dollars was not money. Well, spent not sure when I do a full episode on Netscape Navigator, I'll dig much deeper into that story plus get back to ALL it made another purchase around the same time as it bought Netscape in nineteen ninety nine ALL 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 AOL stock and it was valued at three hundred eighty eight million dollars which again princely sum. Aol would hold onto movie phone for nearly twenty years the company or the new company that is the one that holds ALL sold movie phone to the beleaguered accompany movie pass back in the spring of twenty eighteen so how much did movie pass paid to get this property that AOL had purchased for three hundred eighty eight million dollars in stocks while 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 Helius and Matheson analytics those shares worth about eight million dollars at the time of the announcement. 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 fits the whole deal at around twenty three million dollars or so twenty four million. That's not great AOL was buying movie phone for three eighty eight and selling it for twenty four in. My 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 amazed. It hasn't collapsed in on it self yet. I've already talked about movie pass this year. So go back over it. But holy cow. Ael L than invested nearly a billion dollars in gateway PC after announcing that the company had outperformed all of its earnings projections. Aol had that is an ale made a one point one billion dollar deal with mapquest your remember mapquest AOL owns it. Also in nineteen ninety nine AOL would 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 buzzer. Nair? Howard Hughes Hughes Electronics owned direct TV at that time. And as part of this agreement the company would market an American online product called ALL TV which was an interactive television service AOL 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 Hughes net and the internet and TV businesses are separate entities. AT 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 the opportunity to merge with Time Warner which in itself was the product of a merger between the company's Time, inC, 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, inC, was known 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. Mourner communications was a holding company and had a really super complicated history of its own. It grew out of the one or brothers motion picture studio and their various businesses 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 Warner remaining and in nineteen sixty six he decided he was going to get out of the business. So he sold his 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 the whole mess. Stephen Ross is other businesses and Warner Brothers seven arts all becomes known as Kinney national services. But then. Then there's a big scandal involving one of the businesses actually a parking business as about price-fixing, and that led to Ross selling off most of the companies in the conglomerate the remaining businesses that he kept were the media wants it became Warner communications. This was in nineteen seventy one Time, inC, and Warner communications 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 nineteen ninety-five. This new company Time Warner had acquired Turner Broadcasting System for nine point six billion dollars. And then in two thousand America Online and Time Warner looked to merge together AOL was essentially buying Time Warner for one hundred sixty five billion dollars. So that's hell the transaction. Would look on paper that AOL the company was buying Time Warner for. For one hundred sixty five billion dollars AOL'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 full decade. But it would really make an impression in its short time in the spotlight. I'll talk a little bit more about this troubled relationship between AOL and Time Warner, but first let's take a quick break to thank our sponsor. Lows is my new go-to destination where I can explore the latest innovative craftsman products, including their new v. Twenty power tool battery platform craftsman's v twenty cordless power to lineup features a high capacity lithium battery that's part of craftsman's interchangeable battery system. 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So it was a time when everyone was absolutely certain that the internet was going to be the twenty first century acqu. Quivalent 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 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 former leading web browser company seemed like the perfect complement 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 AOL. Time Warner executives also recognized that the future would be online even though they weren't. Really sure why? 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 necessarily work for online, and the preconceptions you bring to the table could get in the way so merging with AOL would give Time Warner not just an online presence. But one designed by a leader in the space for some people halo meant the internet. That was what they thought of it some people called AOL internet for dummies. But a lot of people just thought AOL, that's how you get on the internet. So on the surface, all of the seemed incredibly attractive other companies were worried that this merger was going to mean, there is 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 it was going to gobble. Oh, you up and acquire you. That's something that love folks are saying right now about Disney not to mention some other pretty big companies like AT 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. Time Warner executives saw AOL executives as being impetuous, brash and arrogant, AOL 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 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 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 about to say. But essentially, you had an intense era of few years in which investors were speculating wildly on the performance of various internet connected businesses. Many of those businesses flush with cash from investors realize 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 was a reckoning 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 in pull out of the market. This led to an overall economic recession and AOL Time Warner was hit just like everyone else, then they lost a whole lot of value because of it in the wake of that economic stumble AOL had to write off forty five point five billion dollars in the fourth quarter of two thousand and two and that led to the loss of another forty four point nine billion dollars in all it was a nearly ninety 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 vice chairman of the board one big development that people at AOL and Time Warner perhaps should have realized before talking about a merger was the. General trend toward broadband service. Because ALL 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 AOL servers. Well, broadband was slowly gaining traction. And this would allow an 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 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 it increased by fifty percent. 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 fifty percent. But by two thousand. Three the FCC estimated that just under forty percent of American households were subscribed to broadband services and ails main business was quickly changing. 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 and two thousand four the AL unit of the company held what was referred to as a strategic offsite meeting. Now in reality. It was a meeting to talk about what 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 ails curated portal designed to the internet. There is no consensus on the right? Course of action some people like Ted Leonsis who was vice chairman of AOL and Mike Kelly who was the. President of the media networks group advocated that AOL should launch an online portal similar to that of Yahoo though it entail putting the curated AOL content as well as the stuff creeds specifically for AOL up online for free. Joe rip who was another vice-chairman opposed. That idea he said, it would alienate the remaining AOL dial up customers if they learned that other people were just finding the exact same AOL content online for free, whereas they were paying for it on a month to month basis that was going to really upset them. Jonathan Miller who is chief of AOL 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 as director of Time Warner and. Stepped down as a member of the board that meant that at that point. None of ails 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 will pick back up will continue talk about how that AOL Time Warner relationship came to an end, and what AOL has been up to in the years since in the meantime, if you have any suggestions for future episodes of tech stuff Wina, let me know the Mel addresses tech stuff at how stuff works dot com. Go to our website. That's tech stuff podcast dot com. You're going to find other ways to contact me. Their information about the show. You also see a link to our merchandise store that's over at t public dot com slash tech stuff. There are a lot of fun items up there on sale and go check those out every purchase. You make goes to help the shows we greatly. Appreciate it. And we'll talk to you again, really soon. For more on this and bathrooms of other topics. Visit how stuff works out com. Lows as my new go-to destination where I can explore the latest innovative craftsman products, including their new v. Twenty power tool battery platform craftsman's v twenty cordless power to a lineup features a high capacity lithium battery that's part of craftsman's interchangeable battery system. So it works with all the tools in their twenty lineup giving you the Runtime you need and the power you deserve lows. The new home of craftsman for the latest craftsmen product updates. Visit lows dot com slash tech stuff.

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