| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
AOL's Pittman: 'You Can't Be Tempted to Do Something Stupid' Can America Online do the Continental? The company has set its sights on a major European expansion. But a wave of new, free Internet service providers in Britain threatens to stymie AOL's growth there, and copycats are proliferating across Europe. Instead of charging users a monthly fee, these Euro-ISPs make money by charging customers for technical help, sharing local-phone call revenues with telcos, and advertising and E-commerce sales. Customers still have to pay high European local-phone call fees based on per-minute usage. On May 25, Business Week Correspondent Catherine Yang talked with AOL President Robert W. Pittman about this new challenge in Europe as well as AOL's overall global strategy. Pittman reveals that the company will launch a cheap, no-frills service in Britain sometime before Christmas to match the freebie onslaught. He also questions the economic viability of the free services. Here are edited excerpts of their conversation: Q: Why is it important for AOL strategically to have international operations? A: It's the same thing as why we're a multibrand company. We have an infrastructure that's bought and paid for by the AOL service that can give us enormous cost efficiencies while we're doing other services -- whether it's AOL services in other countries, CompuServe, or ICQ [AOL's Internet instant-messaging service]. Having that kind of infrastructure in place is one of the greatest assets behind our brand. You want to develop layers of growth engines that mature at different rates, that require different spending, so you can continue to have the potential for continuing earnings growth. When I was at MTV, the first profitable cable network ever, we could either take our earnings and put it in our pocket, or put some in our pocket and spend another part using the infrastructure bought and paid for by MTV. We took Nicklodeon, a loser network for young kids, and relaunched it for older kids. And we launched MTV International. By using the infrastructure, we knew we had a leg up on everybody else. We do it [AOL's international operations] all with local partners, because we can get the advantage of their local knowledge, local relationships, local culture with the advantage of our infrastructure. Long-term, that's an unbeatable combination. Q: When will earnings from international operations start kicking in significantly? A: It doesn't have to kick in for quite a while because U.S. earnings aren't slowing down for the foreseeable future. In the worse case, it will continue our earnings curve. In the best case, it will accelerate earnings. In the international arena, usually at the moment you start opening new countries, you stop profitability, but we're doing well in the U.S., so why not [open up more countries]? Q: What's the impact on AOL of so-called free ISPs in Britain? A: What kills you in business is when you lurch around because you can't put information in context. In the U.K., Dixon's Freeserve is the successful one. What is it telling us? It's telling us that in addition to the premium segment, there's also a value segment. The premium segment is more attractive to be in from a customer-loyalty and profitability standpoint. There's also a regulatory anomaly in the U.K. [the ability of ISPs to share the phone companies' local calling revenues enables such "free services" to survive in there]. Third, Dixon's counts for an enormous amount of computer sales in the U.K. It's a promotional tool to sell computers. They have another way to subsidize it. We're still watching it. If the regulatory anomaly doesn't go away, which is not certain, we'll end up doing some service that goes after that segment. It won't be an "AOL" service. We're not a technology company, or a software company, but a consumer services company. We study the consumer. When we hear something from the consumer, we think of how we can serve that need in an economically viable way. Freeserve has proven there's some demand [for lower priced service]. What we haven't figured out is if it is a sustainable business proposition. If it passes that hurdle, we'll do it. If there's an opportunity for someone to do a free service, we can have the best economic model for free service because we have the biggest scale. I could have the most successful Web site in world, selling $50 bills for a nickel, but it doesn't past the test. It's not sustainable. In the U.K., it can be sustainable because of the regulatory anamoly. You don't want to chase someone on something that's not sustainable, because it's not going to be here long-term. If you're in business to make money, you can't be tempted to do something stupid just because somebody else is. Q: When might you introduce a new service for the value segment? A: Right now, we're not pressured to. Now is the cold season for adding subscribers. We have plenty of time to do something. We should get something up by Christmas. That's not somebody competing head to head with us. If it's a premium service, that's a threat. It's like saying if Tiffany's is worried about Wal-Mart, if the New York Times is worried about Pennysaver in New York. It's a different market segment. Q: Analysts say these free ISPs will make it harder for AOL to grow because you're going after the same subscribers -- Internet novices. Is this a potential problem? A: This is an industry of lurches. Once something new starts, everything starts moving in that direction. The reality is nothing ever moves in that direction. In the history of American industry, that doesn't happen. TV didn't kill radio, cable didn't kill broadcasting. Hotmail and Juno didn't kill the ISPs. You've got to put stuff in context. Anytime anything new comes up, analysts think the whole world goes that way. That's in direct conflict with the research we've done. The people who buy price are not the people who buy quality. In the airline industry, some people get on first class, and some fly standby. It exists in every industry in the world. When I was at Six Flags, we gave value shoppers a buy-one-get-one-free coupon for them to use on Monday and Tuesday, and they would do it. Normal folks wouldn't. If I had a choice between two segments, I'd always go for the premium segment, not the value segment. Q: Is the rise of free ISPs the biggest challenge to hit AOL internationally? A: No. The biggest issue facing international is you don't have a free and open regulatory environment for telecom. But we're well-positioned. The biggest issue country-by-country is getting an open playing field. Q: What steps are you taking to push regulators to abandon metered local-phone rates for flat rates? A: It's less about us challenging and more about working with regulators, telling them that it's a different world out there. Phone calls aren't just for talking anymore. Every regulatory agency probably would like to do something consumer-friendly. It's just a matter of working it through. Remember, the Internet is newer to Europe than us. By definition, they're behind the U.S. Step one is education. It's not like they're big foes to it. Q: Is AOL satisfied with its performance internationally? A: AOL subscribers on a worldwide basis would be the second-largest Internet company. How can you be unhappy? It's far beyond what we expected. Worldwide, we have over 3 million subscribers. Q: What is the level of awareness of the AOL brand among Europeans? A: We have studies. AOL usually ranks No. 1 or No. 2 in brand awareness. In Germany, AOL is neck and neck with [Deutsche Telekom's] T-Online. In the U.K., AOL is way above everyone else. In France, AOL and [France Telecom's] Wanadoo are at the top, and then there's everyone else. Q: What's the value of an AOL subscriber vs. a Freeserve subscriber to E-commerce partners? A: The value is much more if you can get additional money out of them. No one has the same business model as AOL. Not only do we have more revenue, someone paying [to use AOL] is more valuable. Otherwise, Pennysaver Newspaper in New York would sell more ads than the New York Times. Advertisers understand you have a real relationship to the service. They really use it. Q: But Freeserve says it has 1.3 million active users? A: That may be 1.3 million active accounts. With AOL, we give you five screen names. If we have 1 million accounts, if people use three screen names, that's 3 million accounts. Q: What would your value-segment offering look like? Would it be stripped down to Internet access only? A: When we say we'll play in the value segment, that doesn't mean we'll do exactly Freeserve. But we're going after people interested in low value and willing to give up services and quality to get it. We can do more than anyone else can do, because we have the stuff to repurpose from AOL. It will be more like an ISP. If you compete in the value segment, you might keep the price lower by charging for chat, member services, for things that are free on AOL. Q: If your value-segment offering isn't going to be sold under the AOL brand name, what brand name will you use? A: That's a secret. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS AOL Abroad: ``I Claim This Land...Whoops!'' TABLE: Overseas, AOL Is the Avis of the Internet ONLINE ORIGINAL: AOL's Pittman: ``You Can't Be Tempted to Do Something Stupid'' INTERACT E-Mail to Business Week Online | |||
