Steve Case Interview - circa 1994

BUILDING INFORMATION EMPIRES
The Herring sits down with Steve Case, CEO of America Online, and Manny Fernandez, CEO of Gartner Group, to discover how these two bright and innovative CEOs are capitalizing on the current explosion in the information services market.
By Anthony B. Perkins
From April 1994 issue

America Online CEO Steve Case first got interested in online services back in 1982 when he signed up for "The Source," one of the first services for the home computer market. "Although it was difficult to use and limited in value, I thought there was something quite magical about being able to sit at my desk and connect with information and people all over the world," he explained to The Herring. According to Mr. Case, the vision for America Online is and has always been to accelerate the growth of interactive media by offering a service that is interactive and participatory. And judging by the numbers, the vision of the founders of America Online has taken hold and, at 35 years old, Mr. Case now finds himself at the helm of one of the most explosive new technology companies in America. The company is currently signing up two thousand new subscribers a day, and Wall Street analysts are projecting that America Online's 1994 total revenues will be $150 million, over three times the revenue totals the company registered in 1993.

Like Mr. Case, Gartner Group's CEO, Manny Fernandez, had a vision for building an information empire that is being supported by the numbers. Not only has the company been maintaining its double-digit growth rate over the last several years, but Gartner Group's stock price has virtually doubled since it went public last October. "We are the Consumer Reports of the information business," Mr. Fernandez explained to The Herring. A great product to offer, we would presume, since over $700 billion was spent worldwide on information technology in 1993. Wall Street analysts apparently agree. "We think Gartner Group has great potential for growth, through expanding its international coverage, serving medium to small-capitalized companies, and further developing its electronic services," says Robert Maire of Morgan Stanley. "It's great to run a company where your customers absolutely love what you do for them," Mr. Fernandez added in his typically charming and positive manner.

The Herring believes that building information franchises based upon innovative delivery mechanisms is one of the greatest business opportunities in the technology market today. Read on and learn how two bright and innovative CEOs are keeping their companies on top of the current explosion in the information services market.

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Steve Case, CEO, America Online

The Herring: What was the founding vision behind America Online?

Case: I first got interested in online services back in 1982 when I signed up for a service called "The Source." I remember going through a fairly arduous process of setting it up. After purchasing a modem, a cable, and the software and computer to run the service, it took me a couple of months and hundreds of dollars to get all the pieces to work together. And when I finally connected to the service, I found it difficult to use and limited in value. But, nonetheless, I thought there was something quite magical about being able to sit at your desk and connect with information and people all over the world. It just struck me that if it were done right, by packaging it so it was easy to use and offering a broad range of services that were useful and fun at an affordable price, you could create an exciting new medium. The vision for America Online is, and has always been, to accelerate the growth of this new medium by offering a service that is interactive and participatory.

The Herring: The first service your company offered ran on a Commodore 64 computer. What was the rationale behind starting with that platform?

Case: Back in 1985, there were not very many computers in homes, but they were the only device that people had that could hook up to a phone line and tap into the outside world. So, pragmatically, the quickest and cheapest way for us to build this market was to take advantage of the existing installed base of home computers. And back in 1985, the leading home computer was the Commodore 64. We eventually created various software packages so our service could run on the Apple II, the Tandy machine, DOS, the Mac, and Windows. Back in 1990, we thought that the time was right, both in terms of our development as a company and the development of the market, to move away from the segmented approach to the market and offer an umbrella service which we called "America Online" and which brought together all our services into one electronic community.

The Herring: How did you originally fund the company?

Case: We first got started by getting Commodore to agree to bundle the access software to our service with its computers if we were able to raise the venture capital necessary to support our operations. Essentially, Commodore was interested in supporting our service but didn't want to fund or operate our company. The venture capitalists were interested in the market opportunity and viewed our deal with Commodore as a way to reduce our market risk.

The Herring: Who were your original VCs?

Case: Our original VCs were Citicorp and Allstate Insurance. But we've taken money from six other firms along the way: Kleiner Perkins, Alan Patricof, Union Ventures down in Los Angeles, Inco in New York, and H&Q was a small investor. I know I'm missing somebody. I'm probably forgetting the lead investor (laughs).

The Herring: How much venture capital was necessary to launch America Online? This question is for the entrepreneurs out there who want to know how much it costs to start a consumer online service company.

Case: As I recall, the cumulative venture capital we raised over three rounds was just under $10 million. But when you compare that amount to our competitors in the market, such as Prodigy, which was rumored to have spent upwards of a billion dollars to build its service, that's really not a lot of money. The game has certainly changed in our business. I believe that the cost of entry into the online market today would be quite a bit higher than it was when we started. It's very unlikely that any startup will emerge out of some garage somewhere and become a major system operator of online services, because it would have to compete with a lot of big players poised to enter the market such as AT&T, Apple, Microsoft, Ziff-Davis, and others.

The Herring: So you really think there are no new opportunities for startups in your market?

Case: There are certainly opportunities on the content side for companies with highly specialized information services and on the technology side for companies developing new, enabling technologies.

The Herring: Just prior to going public in 1991, you didn't exactly have a track record of the kind of spectacular growth the investment bankers are generally looking for before they like taking companies public. How did you justify your IPO?

America Online at a Glance

At the IPO March 19, 1992Offering Price:$11.50 per shareCommon Stock Offered:2 million sharesMarket Valuation at IPO:$62 millionTotal Amount Raised:$23 millionUnderwriters:Alex. Brown & Sons
Robertson Stephens Co.Underwriters Commission:$1.6 million

As of 3/31/94Stock Price:$72.00Market Valuation:$518.0 million

Summary Financial Information (in thousands)Statement of
Operations Data:6/30/90
FYE6/30/91
FYE6/30/92
FYE6/30/93
FYETotal Revenues:$19,545$21,388$26,591$40,019Operating Income:3031,4713,3334,500Balance Sheet DataFYE 6/30/93Total Assets120,320Long-term Obligations5,962Total Equity91,089

Source: The Company Prospectus

Case: You're right, we didn't exactly blast out of the blocks like a Compaq Computer. But new media take a while to develop, and people always have an unrealistic view of how quickly new markets will coalesce and grow. This was the case with the telephone one hundred years ago, fax machines thirty years ago, online services and multimedia in the 1980s, and it's true today in the personal communicator market. The common denominator here is evolutionary revolution. The ultimate impact of these new media end up being very significant, but it takes time to get there. It takes patience and perseverance to create new markets.

The Herring: You folks never seemed too psyched that Paul Allen [billionaire cofounder of Microsoft] bought a big chunk of the company.

Case: No, no, that's not true. We actually welcomed his involvement with the company, and still do because he's a very smart guy, and he is really committed to the interactive medium. But we feel it is important to draw a line in the sand in terms of how much influence a single individual is perceived to have in our company. A big part of our strategy depends upon being in a flexible position to cut the right deals with media, computer, or telecommunications companies, and we can't have these people concerned about who might be controlling the company. We really do not want any individual or company to own more than twenty-five percent of the company.

The Herring: AOL has an incredibly long list of strategic partners already. What has been the strategy behind this approach to building your business?

Case: Our view has always been that the interactive service medium has the potential to have mass appeal, serve tens of millions of people, and, ultimately, earn its place next to other mass media such as television and radio. The only way to develop this opportunity quickly is to collaborate with lots of different companies that bring different skill sets to the party; whether they are content companies that produce and craft interesting services, telecommunication companies that have an expertise in delivering the information, software companies that create the unique user interfaces, or computer and consumer electronic manufacturing companies that create access devices. We have worked hard to build a tapestry of strategic relationships that cut across these industry segments so we can offer a service that is simple, friendly, and affordable, and drive it into the mainstream. Our challenge, of course, is to stay focused on the whole tapestry and make sure it fits together right.

The Herring: Now that Apple has launched eWorld, does that mean that it will eventually phase out of working with AOL?

Case: We have an interesting relationship with Apple, because we actually licensed our technology to them to create eWorld. We have spent a lot of time over the last year and a half modifying our technology to support Apple's requirements, including globalizing our software so Apple can launch its service internationally. We have therefore received development fees and will enjoy a royalty stream based on every hour of usage generated by eWorld. So you can certainly bet that we'll be working very hard to help eWorld become successful.

The Herring: Isn't that creating serious competition for your own service?

Case: Yes. But our view is that competition is inevitable. So rather than putting our head in the sand and hoping competition doesn't happen, we have developed a way to license our technology platform that makes it easier for content companies to participate in a broader way and is also potentially profitable for us.

The Herring: What do you think is AOL's most unique advantage?

Case: Generally, our service is the easiest and most fun to use. But we have also focused on building what we call "electronic communities" within our service. We don't see ourselves as merely a content provider, since we also provide a service that fosters interaction between people with similar interests.

The Herring: While AOL is the fastest growing online service, it will be a while before you catch up with Prodigy and CompuServe.

Case: Those folks are strong today because they offer a broader array of content that is deeper in key areas such as investor services, news, and reference material. But in the consumer area, we are generally perceived as offering a better service in a friendlier format at a lower price. Interestingly, most of our growth has not come from stealing customers from CompuServe and Prodigy, but rather from new subscribers.

The Herring: Are you still signing up over one thousand new subscribers each day?

Case: Over the last six months, it's been closer to two thousand a day. But as you have probably been reading, this tremendous growth has also stretched our capabilities. But we are getting everything under control.

The Herring: What's the single biggest source of new subscribers for your service?

Case: There's no magic bullet in this market. There's not a single service that's going to drive mass appeal, nor is there a single access device or marketing channel. You have to pursue a hybrid strategy. On the marketing side, we do a fair amount of our own independent promotions, as well as joint programs with our partners, such as bundling our software with IBM and Compaq computers. And we have content partnerships with publishers like Time, PC World, and The Chicago Tribune. We also do a lot of direct mail.

The Herring: Do you ever wake up in the middle of the night and worry that you're promoting a new fad, and one day all your subscribers are going to get bored and go away?

Case: Oh, I don't think so. We've been at this almost a decade, and the interest in our service is broadening. But we certainly take very seriously the challenges ahead, such as the entry of new competitors and the need for constantly improving the depth and breadth of our service content. One of the nice things about being in the subscription business is that recurring revenue becomes fairly easy to predict over time. When we went public two years ago, the average subscription of our customers was twenty-five months. Last Fall, it grew to thirty months, and it seems to be continuing to trend upward. So all the statistical signs suggest that our service is getting better and consumer appeal is broadening.

The Herring: Will your service become more commodity-like over time?

Case: No one knows for sure. This is a market where the big players will benefit from economies of scale, in terms of certain costs of running the network, and the ability to invest in R&D, and partner with the large content companies. Essentially the big will get bigger. The other dynamic to remember is the potential for interactive advertising and online transaction services, whether you are buying software or mutual funds. Right now one hundred percent of our business is subscriptions. That's going to change when all these new services come online, and this should help our industry maintain a long term record of growth.