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Wednesday, 11 October, 2000, 09:45 GMT 10:45 UK
AOL: The internet company that grew up

America Online is the biggest, richest and most successful internet company in the world.

That is because it is one of the few internet companies that has actually figured out how to make money on the web - by charging individuals monthly subscriptions to sign up to their internet services, and by charging companies to advertise their services.

Its more than 24m subscribers pay it a monthly fee of about $20 (depending on the pricing plan) to access the internet, there are an additional 2.8m people subscribing to its Compuserve subsidiary, and 4.4m international members.

America Online
Headquarters: Dulles, Virginia
Founded 1985
Employees: 15,000
2000 revenue: $6.89bn
2000 profit: $1.2bn
Market value: $133bn
World's largest online service
Most popular e-commerce platform
24m AOL members
2.8m CompuServe members
4.4m international members
And advertisers are scrambling to sign up to be seen on the site.

Before the merger was announced, AOL's stock market value stood at $164bn - double the worth of IBM.

Since then, its shares have had a rough time, and the company is now worth about $133bn.

Shaky start

But its fortunes have fluctuated since it was founded as Quantum Computer Services in 1985.

By 1994, after changing its name, AOL had a million subscribers and had listed its shares on the stock market.

In the early years it was almost brought down by the problems of introducing unlimited access for a fixed monthly fee. As usage increased, so did capacity problems, making thousands of customers angry as they could not get their connection to work.

The problem was solved by a deal with MCIWorldCom, which led to investment in a much-expanded internet backbone, and a merger with rival Compuserve.

AOL Milestones
1992: floats on stock market
1994: 1m subscribers
1996: launches in Europe
1997: 10m subscribers
1998: acquires Compuserve and Netscape
1999: 20m subscribers
2000: merges with Time Warner
It further strengthened its position in 1998 when it acquired Netscape, the internet browser company, for $4bn, in a deal that shook rival Microsoft.

The company also had to fend off rivals, most notably AT&T, the biggest US telephone company, which tried to take over AOL before purchasing cable company TCI in order to launch its own internet services.

Chief executive Steve Case, the 41 year old former rock musician who fought for his company's independence, has now been able to merge on his own terms.

Expansion: portal power

AOL's aggressive marketing campaign - including direct mail shots to millions of US homes with copies of its software - has paid off handsomely.

The company now has a dominant position in the US, with a total of 27m subscribers out of its more than 31m worldwide.

It made nearly $7bn in revenues during the past financial year (which ended in June), a figure that had more than doubled in the previous two years.

Once again the company beat analysts' expectations, when it announced profits of more than $1.2bn.

Last Christmas AOL reported $2.5bn of online sales through its site, double the total of 1998. The figure represented 60% of all online Christmas shopping.


Steve Case: fought off AT&T merger plan
And revenues from e-commerce now make up one-third of AOL's revenue. It has commercial deals to market everything from General Motors cars to financial services to computers with Compaq and Gateway.

It is also planning to be part of the internet's mobile revolution, ensuring that it will be on Motorola mobile phones and Palm Pilot handheld computers.

Broadband concerns

One of the biggest fears of AOL has been that it will be excluded from the broadband revolution, which allows internet services to be delivered at much higher speeds than currently available from dial-up modems.

AOL's headquarters is just outside Washington, DC
AOL's headquarters is just outside Washington, DC
These services, which have been available in the United States for the past year, and will be introduced in the UK later this year, are expected to replace the existing means of accessing the internet for many customers.

They allow the delivery of video-on-demand, interactive conferences and gaming, and swift downloads at a cost little more than that of AOL's subscription charge.

AOL had been extremely concerned that AT&T might not allow it to operate across its high-speed service, Excite@home. It has been leading the campaign to force AT&T to allow open access to the high-speed network, which is delivered via a cable modem, and has had some success in persuading local governments to enforce this principle.

Now that AOL has tied up with the other main provider of high-speed cable internet access, Time Warner's Road Runner service, it remains to be seen how much it will continue to fight for the principle of open access.

But US competition autorities worry that AOL and AT&T could co-operate, as AT&T holds a large stake in Time Warner Entertainment.

AOL meanwhile has also invested heavily in other means of delivering broadband services, both through conventional telephone lines and satellite television in the US.

Expansion overseas

Recently AOL has tried to expand its overseas activities, in the expectation that in the next few years the internet will grow faster in Asia, Europe, and Latin America than the US.

It has a joint venture with China.com to provide internet services in Hong Kong, and linked up with NTT Docomo to deliver internet content in Japan.

And it is working with Cisneros in Latin America to develop Spanish- and Portuguese-speaking services, with the first launch in Brazil, followed by Mexico and Argentina later this year.

But it has not been as successful abroad as in its home market in the United States, where it has a dominant position.

That is partly because of the different system of telephone charges, which means that it is more difficult to offer unlimited access for a flat fee - which works in the US because there are no additional telephone charges to pay, as local calls are free.

But it may also be due to cultural differences, with rival Yahoo perhaps more adept at making changes in its local pages that reflect cultural differences.

But with its enhanced media and financial clout, AOL may well want to renew its drive for worldwide dominance.

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See also:

25 Nov 98 | The Company File
AOL snaps up Netscape
25 Nov 98 | The Company File
Portal wars
23 Jun 99 | The Company File
AOL fights to stay on top
20 Jul 00 | Business
AOL's billion dollar profits
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