04/22/96 AMERICA ONLINE'S GLOBAL PUSH (int'l edition)

AMERICA ONLINE'S GLOBAL PUSH (int'l edition)

At age 37, Steven M. Case is already a folk hero in Corporate America. The boyish entrepreneur is the force behind America Online Inc., the world's most successful online service. With 5 million customers and 75,000 more joining each week, AOL has turned a computer network into a new medium for entertainment and news.
In just three years, it whizzed past rival CompuServe Inc. in the U.S. and outmaneuvered competitors as mighty as Microsoft Corp. While many experts have predicted his success couldn't last, Case's America Online just keeps growing. ``He's done a masterful job. Steve Case walks on water as far as I'm concerned,'' says Roger B. McNamee, a general partner with Integral Capital Partners, a venture-capital company.
Now for Act Two. While continuing to expand at home, Case is making a bid to spread his online revolution around the globe. His strategy: growth at any cost. His target: for AOL to hit 10 million subscribers in the U.S. by 1998 and to become the leading global consumer online service soon after that. Says AOL International President Jack Davies: ``We see international as a major opportunity.''
The timing is right. While online services were slow to develop outside the U.S. in the early '90s, the Internet revolution has induced millions of global citizens to wander through cyberspace. While techies can go straight to the Net, executives, professionals, and small-business owners are turning to the user-friendly online services as a pathway to the Net.
Case is launching his international campaign in Europe, where he has put together a 50-50 joint venture with German media leader Bertelsmann last year. Fledgling services are up and running in Germany, Britain, and France, and the partners aim to overtake European market leader CompuServe, with 700,000 subscribers, by 1998. Then, on to Asia. Case is on the lookout for a partner in Japan, where he hopes to launch an online service by yearend, and he may later move into Australia or India.
But it will take more than cloning the U.S. model to make AOL a winner outside America. For starters, Case needs to generate new content in local languages nearly from scratch. That will be expensive and tricky when most of the competition is playing on home turf and has a strong cultural advantage. ``Case won't have anything like the same success in Europe that he had in the U.S.,'' says Graham Taylor, vice-president at British market researcher Inteco. Adds Michael T. Dunn, executive vice-president of Asia Communications Group Ltd., owner of Asia Online: ``Asians want access to Asian content. America Online is American-centric.''
Then, of course, there's the Internet. Both at home and overseas, the Internet is the biggest cloud hanging over AOL. With the World Wide Web giving ``content providers'' a way to reach millions of consumers directly, analysts predicted AOL subscriptions would have slumped by now as consumers jumped to the Net. Still, in the U.S., rather than running from the Web, Case has embraced it. AOL now generates 30% of all Web traffic, according to Find/SVP, a market researcher, and AOL's Internet-only service, Global Network Navigator, is a hit.
But that may be harder to do internationally. Telecom operators such as France Telecom are offering deep-discount access to the Internet, potentially cutting into AOL's customer base. In Japan, 300 well-established Internet access companies already vie for the market. If AOL isn't in Japan by this summer, it will likely be too late, says Brad Bartz, president of the Internet Access Center, a Tokyo-based Internet-access provider.
Such doomsaying doesn't seem to bother Case. He has defied naysayers since 1993, when he launched his successful drive for the U.S. market. Doubters were sure that Case would flop in the face of competition from Microsoft and the Internet. Instead, AOL wields so much clout in the U.S. that the greatest forces in computers and communications, Microsoft and AT&T, have handed AOL lucrative deals aimed at boosting their Internet ambitions.
BIG PARTNERS. Case hopes his knack for dealmaking will give him an edge overseas. In Germany, he sealed the joint venture after five months of negotiations with Bertelsmann board member Thomas Middelhoff, who is in charge of multimedia business for the $14 billion giant. Bertelsmann chose AOL as partner over Microsoft and took a 5% stake in the company for $50 million. To further strengthen their hand, AOL and Bertelsmann are close to a deal to cooperate with Deutsche Telekom's service, T-Online, which has 1.1 million subscribers and is geared for business users. The two groups may take 20% stakes in each other.
Now, Middelhoff and Case, who talk every day, are putting together an aggressive marketing campaign for Europe. In Britain, they are granting schools throughout the country AOL connections for free. If all goes as planned, children and teens will begin badgering their parents to sign up for AOL at home. AOL is also sending out free signup software to targeted groups of computer users.
Just as in the U.S., AOL/Bertelsmann will offer AOL as an easy-to-use, affordable service with lots of local content. In addition to home shopping, music, film, and news in local languages, AOL will provide access to the Internet. Drawing on Bertelsmann's media experience, AOL is offering customized services for Britain, France, and Germany, but consumers can tap into all three services. Says Middelhoff: ``We are building up national services that linked together create a global offer.''
As Case wrestles with Europe, he has more than enough to occupy him back home. He is adding business-oriented services to generate daytime traffic on AOL in the U.S. He's still absorbing nine acquisitions made in the U.S.--many of which have yet to pay off (table). Meanwhile, AOL Senior Vice-President Theodore J. Leonsis is adding content, including a growing roster of online publications, such as BUSINESS WEEK (page 43). ``You have to ask at what price are they getting this growth?'' says David M. Simons, managing director of Digital Video Investments, an investment research firm. Indeed, to help fuel growth, Case uses aggressive accounting methods that defer marketing costs as capital expenses, hiking up AOL's earnings and keeping its stock price high.
At this point in the industry's development, Case thinks it's essential for AOL to get as big as possible. That's in contrast to a scenario that the techno-pundits are spinning. They talk of ``disaggregation,'' an inelegant mouthful that means that instead of getting a single package--content, network access, billing, and so on--from one supplier, consumers will shop around. They'll buy network access from the phone company and content a la carte--from Web sites or from services such as AOL. ``Disaggregation theory immediately blows up the model of proprietary online services,'' says John Petrillo, executive vice-president for strategy at AT&T.
HAPPY CAMPERS. True to form, Case has little use for the conventional wisdom--or for the ``visionaries'' who litter the high-tech landscape. There's nothing visionary about AOL, he submits. Its success results from paying better attention to what consumers want than to what technology-obsessed rivals do. ``The industry pundits were out of touch with consumers. That was a huge mistake,'' says Case, who worked for consumer products giant Procter & Gamble Co. after he finished college.
``The secret of Case is that he has figured out a way to make consumers like their computers,'' says Eric E. Schmidt, vice-president at Sun Microsystems Inc. ``Look at AOL's customer base--it's normal people.'' Indeed, AOL was so successful in dumbing down technology that rivals dismissed the service as the ``Kmart network.'' Says Schmidt: ``It was extremely arrogant of the high-tech industry to criticize that.''
And shortsighted. Now, the mass market is the Holy Grail that all online services seek. They have seen that AOL's relatively unintimidating slice of cyberspace is the place where the unwired millions of consumers may wind up. ``It's still the early days of this medium,'' says Case. Despite all the cyberhype, only 11% of U.S. households are plugged into the Internet or commercial online services. In Europe, only 20% of households have PCs, vs. 35% in the U.S.
As AOL and its rivals drag more of the population into cyberspace, Case figures the online market will start to approach critical mass. He likens it to cable TV, which really only became economically viable when it reached 20% or 30% of homes. An admirer of John C. Malone, chairman of Tele-Communications Inc., Case is on a Malone-like quest for market penetration. That's why he's punching AOL's accelerator now. Powerhouses in media, technology, and telecommunications are all grabbing slices of the new mass market, too. Companies from Microsoft to Walt Disney to Rupert Murdoch's News Corp. are looking to build online empires.
Case is confident the masses will prefer the comfort of AOL to the wilds of the Internet. Even via the easy-to-maneuver Web, he notes, the Net can be overwhelming. And surfing the Web from a home PC with a standard 14.4 kilobit-per-second modem can mean lengthy waits for images and text to appear. Reaching out to the mainstream market ``will require even greater degrees of simplicity,'' argues Case.
No wonder AOL is one of the hottest plays on Wall Street. Its shares are in the mid-50s, a thirtyfold leap from the March, 1992, public offering price of $1.84, adjusted for three splits and despite two secondary offerings. AOL carries a staggering $5 billion valuation--132 times estimated fiscal 1996 earnings of $38 million and five times estimated revenues of $1 billion. That gives Case a paper fortune of $165 million.
Case has never lacked for self-assurance. ``He's always been an independent thinker,'' says Daniel Case III, Steve's older brother and first business partner and now president and chief executive of San Francisco investment bank Hambrecht & Quist. The two grew up in Honolulu, along with an older sister, Carin, who now teaches preschool, and a younger brother, Jeff, now an insurance executive. Their father is a lawyer; their mother, a teacher. Both were born and raised on Oahu.
Dan and Steve, born 13 months apart, were a team from the start. When Steve was 6, they started a juice stand using limes from the backyard. They charged 2 cents a cup, but many people gave them a nickel and let them keep the change. ``We learned early the value of high margins,'' says Dan.
FIRST FORTUNE. A few years later, they formed Case Enterprises, a business Dan describes as an ``international mail-order company.'' They sold everything from seeds to greeting cards by mail and door-to-door. ``We made a fortune, tens of dollars,'' says Dan. Case Enterprises also became the Hawaiian distributor for a Swiss watchmaker. The brothers didn't sell one watch, but that didn't faze them.
Before long, they created an affiliate, Aloha Sales Agency, to sell ad circulars. The pair also shared a newspaper route. Why the entrepreneurial bent for a pair of comfortably middle-class kids? ``It was the challenge, the pursuit of the idea,'' recalls the younger Case.
At Williams College, Steve majored in political science--``the closest thing to marketing,'' he says. Upon graduation, Case joined Procter & Gamble, where he worked for two years, then jumped to PepsiCo's Pizza Hut unit. As manager of pizza development, Case spent months traveling in search of ideas for toppings. Nights on the road gave him time to indulge his interest in a new gizmo: the PC. He bought a Kaypro, paid $100 to subscribe to The Source, and spent hours on the early online service. ``I thought there was something magic in sitting in a hotel room and connecting to all of this,'' says Case.
Meanwhile, brother Dan was the family pioneer in high-tech. A Princeton grad and Rhodes scholar, he became an associate with Hambrecht & Quist. He was soon representing the firm on the board of Control Video, a gaming service for Atari computer owners.
Steve's turning point came in 1983. He joined Dan at the Consumer Electronics show in Las Vegas, where Dan introduced his brother to the founders of Control Video. They offered the younger Case a job as marketing assistant on the spot. He took it. Soon after, the company ran out of money. The board fired the management and installed as CEO Jim Kimsey, an entrepreneur who was working part-time at Control Video. Steve helped Kimsey bring in venture money, and in 1985, the company was reborn as Quantum Computer Services Inc., an online service for owners of Commodore computers.
TESTY BOARD. Almost from the start, Kimsey groomed Case for the top spot. The apprenticeship had its bumps, though. Case landed a deal with Apple Computer Inc. in 1987 by sheer persistence, practically camping out at its Cupertino (Calif.) headquarters for four months. ``I wore them down,'' he says. Then he signed up Tandy Corp., too. Case plowed much of the $5 million in fresh capital into overhead. But it was too much too fast, and Quantum had to retrench. ``Board members wanted him fired,'' Kimsey recalls. ``I said, `We have $5 million invested in this boy's education. Do you want to throw that out?'''
That education has apparently paid off. Case took over as CEO in 1992, a year after Quantum was renamed America Online and shortly after the initial public offering raised $66 million. Back then, revenue was $27 million and AOL trailed both CompuServe and Prodigy Services Co. The company had just 200 employees. Case laid out a growth-at-any-cost strategy in 1993 and never looked back. Today, AOL has 4,000 employees, and some 200 are being added every month.
Managing growth has become a key issue. AOL is still absorbing the people and facilities snapped up during its $100 million buying binge. In retrospect, it looks like some deals were hasty. ANS and GNN have brought a badly needed data network and Internet-access capabilities. But many of the software startups it acquired--including Navisoft, WAIS, and Medior--have languished. Booklink Technologies, a maker of browser software for which Case paid $41 million in 1994, looks like a loss, given that AOL plans to use browsers from Netscape Communications and Microsoft.
To keep things under control, Case in January hired a chief operating officer, William J. Razzouk, a former Federal Express Corp. executive. That'll lighten the load for Case, who friends say is a workaholic. But the move was not in time to save his 11-year marriage. Case recently notified directors that he has a ``personal relationship'' with Jean Villenueva, AOL's vice-president of corporate communications.
Now, with Razzouk minding the shop, Case is making head-turning deals. Anything to keep customers coming and the revenue flowing. Wherever he roams, Case is racing to make AOL the premier channel on what he sees as the new mass medium. He's also preparing for the day when the Web takes over--and customers cruise AOL from the Net and vice versa. The first step is the AT&T deal, which gives WorldNet customers access to AOL at a discount. Before long, the Web and commercial services such as AOL will be almost indistinguishable.
That's when a mass audience will pay off. Today, subscriber fees account for 90% of AOL's revenue. Partly because of Web competition, AOL must find new sources of revenue. Advertising could be a major one. Case plans to deliver advertisers the biggest online audience. They might log on via AOL's network or the Web. What's important: they'll be there by the millions.
The ability to provide millions of screens to advertisers worldwide could be a big plus for Case in international markets. But he'll have to offer the right programming--and signing on more global partners will be key. Only with many more crucial alliances like the venture with Bertelsmann will AOL have a shot at being the No.1 online service worldwide. Having led the masses into cyberspace in the U.S., he's confident the rest of the world will log on, too.
By Amy Cortese in New York and Gail Edmondson in Paris, with Amy Barrett in Vienna, Va., Steven V. Brull in Tokyo, and bureau reports