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@Scavongelli | AOL: The Rise and Fall of the First Internet Empire
AOL: The Rise and Fall of the First Internet Empire

The world during the early 1980s was a very different place. There was no internet, and so most computers lived in isolation. The few computer networks that did exist at the time were available only to a select group of scientists and tech wizards. Starting an online service back then was an immense endeavor, but in 1983 Bill von Meister thought that he was up to the task. He created GameLine, a service that let you rent video games for your Atari 2600 console through a dial-up connection. The service was innovative for its time, but it was doomed from the start, for 1983 was the beginning of the great video game recession that nearly destroyed console gaming. The industry shrank by 97% in the span of just two years, and by 1985 Bill von Meister’s company was pretty much dead. He left the company and moved on, but his former marketing director, Steve Case, wasn’t ready to give up just yet. He and several of his now unemployed colleagues adapted the GameLine infrastructure for the Commodore 64, one of the most popular computers at the time. They rebranded the service as Quantum Link, and rapidly started expanding its functionality.

Pretty soon Quantum Link was no longer just a gaming network, but a proto-internet in itself. You could chat, send emails and files, and even read the news. Unlike the console market, which was on life support at this point, the computer market was doing great and so Quantum Link became very successful. So successful, in fact, that Steve Case got approached by Apple, who wanted a similar service for the Apple II. Steve was more than happy to oblige, and the end result was AppleLink, created in May 1988. Three months later, he unveiled PC Link, for the computers compatible with the IBM PC. PC Link took advantage of the rising wave of IBM-compatibles, and so it did great. The Apple deal, however, went sour after Apple couldn’t migrate their data from their previous servers. Luckily, the contract had a penalty clause worth $2.5 million, which Steve Case was more than happy to take. He used it to consolidate and rebrand his service, and thus, in October of 1989, America Online was born.

Steve saw the rising popularity of Microsoft and promptly released AOL versions for DOS in 1991 and for Windows in 1992. One year later, AOL finally started offering access to the public Internet. Dial-up Internet access became the bedrock of the company, and it fostered a generation of Internet users who grew up with the sound of this. By June 1993 AOL’s dial-up service had amassed 300,000 subscribers, making it the fourth largest in the US. Unlike the other providers, however, AOL’s user base was growing exponentially thanks to their extensive marketing campaigns. CompuServe and the other providers were trying to cater to a small audience of advanced tech users, whereas AOL focused on people unfamiliar with technology. They’d frequently partner up with rural news publications and services dedicated to the elderly. By September 1993 AOL had added another 50,000 subscribers, and then another 50,000 just one month later. By January 1994 they had over 600,000 subscribers. Their revenue doubled every 12 months and Steve Case was suddenly found with more money than he knew what to do with.

He decided to throw it at his marketing team, which was led by the legendary Jan Brandt, one of the most audacious marketing experts at the time. She figured out an ingenious way of promoting AOL. Instead of charging for both the software and the dial-up service, like CompuServe did, Brandt would offer AOL’s software for free, and she’d try to ram it down the throats of as many people as possible. To that end she began one of the most expensive marketing campaigns in history. At first she dumped a quarter of a million dollars on floppy disks, which she then mailed to every PC user whose address she could get her hands on. Floppy disks were already on their way out though, and soon she started buying CDs instead. For every new subscriber she’d buy $35 worth of new CDs and mail them out, which would bring in even more subscribers, and on and on and on until by the end of 1995, just two years into her campaign, she had overseen the addition of 4 million new subscribers.

At this point mail was no longer enough. She signed partnerships with magazines, retail stores and universities across the country to hand out AOL CDs. Pretty soon you would start to see them everywhere – on the cover of your favorite magazine, in the box of your morning cereal, even in your cafeteria menu. Jan Brandt had successfully created the real-life version of pop-up ads in a time before AdBlock. CompuServe and the other providers just couldn’t keep up. They made a last ditch effort to survive by switching from an hourly charge to a monthly subscription. AOL followed suit in December 1996 though, and that put the final nail in the coffin for CompuServe, which they absorbed one year later. The change to a monthly subscription, however, came with a dangerous side effect. AOL had already amassed 9 million subscribers by that point, and now suddenly all of them could be online for as long as they wanted. The result was an overload of epic proportions. AOL’s infrastructure could not maintain these levels of traffic and so it crashed frequently, leaving subscribers with the dreaded busy signal. AOL were installing as many as 30,000 new modems every month, but even that wasn’t enough.

To fix their traffic issues they ended up spending $700 million, most of which came from Jan Brandt’s marketing budget. Despite the end of the CD spam, however, AOL’s growth was relentless, and at 15.1 million subscribers it was now the internet provider to over half of all Americans. To expand their arsenal they bought ICQ, the most popular chat service at the time, in 1998, and one year later they snagged Netscape, the famous internet browser. The Netscape devs were a sneaky bunch, however, and they made their source code public just before getting sold.

At the turn of the new millennium, AOL were at their peak. They had 26 million subscribers and they looked unstoppable, but then they made a fatal mistake: they bought Time Warner for a record-breaking $164 billion. It was the most ambitious merger of its time, but it was doomed from the start. The goal was to create a tech-media hybrid, but the technology to virtualize all of Time Warner’s content just wasn’t there yet. Their corporate cultures were totally different and couldn’t mix, leaving the new organization in complete chaos. The end result was a $99 billion loss made just two years later, at which point AOL Time Warner shamefully dropped AOL from its name.

By this point AOL was getting desperate. Their dial up service was losing ground to cheaper and faster broadband providers, and they couldn’t stop bleeding subscribers, even after making cancellation an exceedingly long and painful process. Eventually they stopped trying to sign people up altogether, and they focused entirely on milking their shrinking audience through advertising. By 2007 AOL was down to 9 million subscribers and had fired 40% of its workforce. They shut down their online services one by one until they were spun off from Time Warner in 2009 with only 5 million subs remaining.

Advertising was AOL’s only way forward, and so they went with it. They acquired a bunch of content sites, most notably TechCrunch in 2010 and the Huffington Post in 2011. They didn’t stop bleeding money until 2013, when their dial-up subscriber count stabilized at just over 2 million. In the end, AOL got swallowed up by Verizon, who bought them for $4.4 billion in 2015. Another Internet remnant the Verizon folks are eager to buy is Yahoo, who they intend to merge with AOL into some sort of Frankenstein advertising monstrosity.

Credits: Business Casual, the author of the linked video which this story was transcribed from.

Chris Scavongelli

Startup nut • VR enthusiast • Data junkie

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