AOL and the Very Bad Business Deal

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 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 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, 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 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 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 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 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 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 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

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 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 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 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 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, 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 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

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. 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 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 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 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 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 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 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 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 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 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

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 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 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 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 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

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 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 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 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 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 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 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 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 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 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. 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, 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 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 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 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 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 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. 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 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 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 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, 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, 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 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 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. 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 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 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

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 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. 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.

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 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. 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 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

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 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, 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 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, 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 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. 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 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 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 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.

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

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 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 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, 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 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 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. 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, 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 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 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 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 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 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 of tech Stuff, why not let me know The email addresses tech Stuff at how stuff works dot com. Go to our website, it's tech Stuff podcast dot com. You're gonna find other ways to contact me there 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. You can go check those out. Every purchase you make goes to help the shows. We greatly appreciate it, and we'll talk to you again. Release soon for more on this and thousands of other topics. Because it how stuff works dot com