10/06/98

America Online.
So Advanced, It's Backwards?

by Nico Detourn (TMF Nico)

With all the attention it receives, it is easy to lose sight of what the Internet actually is. Of course, one reason for this is that the Internet, or online medium, isn't any single thing. How we view it will depend on how we approach it. Is our main interest in online content or connectivity? Is it online commerce that most intrigues us? Or is it the power of online communities that gets us going?

No matter how we approach the online phenomenon, America Online (NYSE: AOL) -- the company, the service, the stock, the floppy disks, the complex reputation -- stands as one of, if not the most, visible and distinguishing features in the online landscape. This is true no matter what our feelings are about the company, and we can no more look at the online industry and not see AOL than we can, say, look at Jupiter and not see that big red spot.

The online medium appears to reinvent itself every other Tuesday -- not surprising considering it is still a young industry. In this sense, it is worth remembering that few online companies are more dynamic or have greater seniority than AOL. And for all its many transformations, America Online's flagship AOL service remains a product of the "pre-Web" era -- the days when companies bearing such new wave names as Yahoo! (Nasdaq: YHOO), MindSpring (Nasdaq: MSPG), Netscape (Nasdaq: NSCP), go2net (Nasdaq: GNET), 24/7 Media (Nasdaq: TFSM), and whatever.com were hardly a glimmer in a venture capitalist's eye.

Back in those days, in addition to having developed and marketed a decisively superior product, AOL also benefited from the ultimately ineffective or just plain clueless competition offered by such well-connected names as Prodigy (IBM, Sears), GEnie (GE), and, of course, CompuServe (H&R Block).

And so by the dawn of the Web-era, which we can roughly locate in the 1994 - 95 timeframe, AOL had attained a mass and scale which gave it compelling forward momentum, while its original competitors in the field of "online services" either faded or floundered. Mass and scale also positioned AOL well-ahead of the those new-wavers who were busy fashioning the new Web-era in AOL's shadow.

Successfully straddling two eras, America Online's industry-leading position creates a frame of reference which can dominate our view of modern online services. In this way, AOL functions as a "center of gravity" for analysis of the online industry. Much day-to-day industry development is analyzed in AOL's light, or shadow. That, in turn, influences and, as is the nature of a gravitational field, can distort our view of where the medium is headed.

Mass. Scale. Bigger. Richer. Compared to its current competitors, America Online is far more advanced on many fronts, just as it was in previous contests with variously advantaged "prodigies." AOL's status as an industry power is hardly open to doubt. At the very least, some of AOL's momentum has been imparted to the industry itself. As a catalyst, AOL has helped raise the visibility and accelerate the growth of the online medium.

It can't be overlooked that America Online's success and momentum, its power, is ultimately derived from its flagship product. The AOL service, with its "seamless integration" of access (in which we'll include the interface) and content in one dad-friendly package, is the key to the AOL user-experience and has been critical to the company's success.

We should also not overlook that AOL's all-in-one package of "Content + Connection" is a byproduct of the pre-Web era: The alternatives to such a package, though less than ideal today, were practically non-existent when AOL was first groping its way through cyberspace.

Even more important is the way in which AOL's integrated package reflects a business model also rooted in the pre-Web era, at a far lower level of industry development. So while recognizing the model's clear strengths, it is nevertheless worth considering its longer term viability.

One reason for questioning the integrated model's future is that it has never been successfully replicated on anything approaching AOL's scale, though efforts have been made along those lines. This doesn't prove the model is no longer viable. However, its failure to gain traction beyond AOL does suggest the model's effectiveness had much to do with industry conditions at the time it was first set in motion, and the momentum it has subsequently accumulated. This is especially so in view of the continuing growth and enthusiastic embrace of the medium in its integrated form, i.e., AOL, and of its component parts, i.e., independent content aggregators/providers and access-only ISPs.

America Online's industry position has clearly been built on its masterful execution of the all-in-one Content + Connection model. It's adoption of that model followed naturally from the service's pre-Web origins. However, to the extent that that model offers limited advantage in today's far different context, AOL's advanced position might be less an indication of energized motion than of a relatively late-stage prior to an eventual petering out.

Put another way, is AOL moving forward on the strength of its superior integrated business model, or does AOL's model actually keep it tied to the premises of the pre-Web era? Is its forward motion today due more to the momentum provided by sheer size and mass, the origins of which are also found in that past era? How long might such a condition continue?

This raises a general but important question: Although content and connection are both essential to the online medium, what forms will their relationship take? How does AOL's "gravity" influence our answer to this question?

More specifically, is America Online trapped by the conditions of its own success -- the prime player in a modern industry due to a model still too rooted in the past, but also too successful, and risky, to simply abandon?

Does America Online's industry position point toward the online medium's future, or does it merely reflect AOL's beginning and past?

Is AOL so advanced, it's backwards?

Let us know what you think by posting a message on Nico's Internet message board.

Other Internet-related articles by TMF Nico:

7/28/98: Slippery When Online
6/29/98: Internet Stock Update