The resurrection of AOL
CEO Jon Miller is betting that new ventures like social networking, VOIP and video advertisements can make the once-mighty portal relevant again.
By John Battelle, Business 2.0 Magazine contributor

(Business 2.0 Magazine) -- For years, Wall Street placed a big, fat zero on AOL's worth. As growth in subscribers and advertising revenue stalled, the online service seemed to have lost its way in the age of broadband.

The arrival of Jon Miller - a veteran media dealmaker who had worked for Barry Diller and Sumner Redstone - as CEO in 2002 didn't halt the decline, and the unit's lack of direction weighed down shares of Time Warner (Charts) (the parent company of both AOL and Business 2.0).

miller_john_aol.03.jpg
AOL CEO Jon Miller says his outfit is back in the game.
Mixed message
AOL has lost 30 percent of its subscriber base but is recovering in advertising revenue by offering video content and creating better ways to search it.
August 2002
Jon Miller joins as CEO
November 2003
Acquires video-search company Singingfish
August 2004
Acquires online-ad network Advertising.com
July 2005
Streams Live 8 concerts
January 2006
Acquires video-search company Truveo
May 2006
Launches AIM Pages (social networking) and AIM Phoneline (VOIP); acquires Lightningcast (video ads)

But even with subscribers defecting to cable and phone companies, AOL still controlled enough of an Internet audience to make or break the competition - a fact that came to the forefront when AOL's contract to have Google power its search engine went into play.

With Microsoft (Charts) and Google (Charts) competing for AOL's search business, Miller's wheeling and dealing kept both companies at the negotiating table through last December, and let him walk away with a $1 billion investment from Google that valued AOL at a cool $20 billion.

These days it's not the discount on AOL's valuation that has Miller bothered - it's AOL's reputation among the Silicon Valley set as uninventive. While AOL is playing catch-up in social networking and VOIP, he says it's ahead of the pack in video search, a key battleground as online video explodes.

Business 2.0 spoke to Miller about the prospects for a public offering and what's coming next for AOL. [Eds. note: This interview took place in June and was first published in the July issue of Business 2.0]

AOL always seems to be late to the party with its products. Is that because you're stuck out in Dulles, Va., far from the action?

Dulles isn't the center of the universe, but what are you suggesting is? Silicon Valley? New York? Please. Innovation in 2006 is wildly decentralized, and quite a bit of it takes place in such untrendy locales as Dulles.

But it's true that too much of our innovation was locked behind the subscriber wall. It was less than a year ago that AOL moved out onto the Web, launching AOL.com, which is such a good broadband portal that our friends at Yahoo (Charts) have redesigned their homepage to look a whole lot like it.

We've got a lot of momentum. We webcasted the Live 8 concerts and launched In2TV and TMZ.com with Warner Bros. We became the third-largest online-ad network this year. And we've just launched AIM Pages and AIM Phoneline, which capitalize on our strong lead in instant messaging.

So you're hoping AOL Instant Messenger can rival MySpace and Skype?

AIM is a Web product, with a pure Web audience, not just AOL users. We're trying to bring all of AOL out onto the Web. And since AIM is a market-leading product, it's foolish not to leverage it. It's already where we're trying to get to as a company.

And AIM turns out to be more extensible than I think anybody would have imagined. As it turns out, it can be used for real-time voice communication, not just text. Adding in video chat and other things is another opportunity.

Social networking seems like another natural extension. You can link your social network directly to your AIM buddy list. And that buddy list is an application that is already installed on some 80 million computers.

Of course, MySpace has launched its own instant-messaging service. Worried?

All the players are trying to do the same fundamental things: e-mail, search, and now social networking. MySpace is the newest entrant - the new kid on that block, if it turns out they have real staying power.

The new entrant before them was Google. Everyone else in the rest of the group -Yahoo, Microsoft, and so on - is more than 10 years old, which I think is important to consider. Achieving one of those primary positions is genuinely difficult; it doesn't happen every day.

I'm less concerned about them and more concerned about the startups and other companies that might be gaining on us. If a hundred companies achieve the kind of scale we have, then the pie gets much more fragmented. As it is, there's plenty to go around between Yahoo and us and the others.

When last we spoke, I asked you about the possibility of AOL becoming independent through an IPO, and you demurred. What's your answer now?

People mean different things when they say words like "independence." I don't believe there's a scenario where there's a truly independent AOL. If we were a stand-alone company now, we would be acquired by another company - anyone can generate the list of suspects who would buy us. The independent scenario exists only as a way station.

Are we ready for a partial spinoff that would give us a stock currency of our own? We're still not quite there. This year we are very much in a process of transitioning the business. And there are very positive signs.

Our ad sales figures in the first quarter were up 26 percent, which compared favorably with almost everybody. We had some good news in terms of pageviews. But at this point, I can't forecast the numbers well enough to say an IPO's a sure thing.

Even without your own stock, it seems like you're learning how to throw your weight around again. What's your takeaway from the Google deal?

Well, I think the process reminded people that AOL has real value on the Web, and it was nice to be wanted. I think that was healthy for our company. We had to decide whether to extend a great partnership with Google or start competing with it. At the end of the day, it was too much of a jolt to leave Google.

And at crunch time, Google indicated a willingness to do some things with us that hadn't been on the table before, like letting us sell search ads directly to our advertisers and making a $1 billion investment in us. On the other side, with Microsoft, it was difficult to figure out how to run the proposed business.

Google already had a great search engine and a great way to monetize search. We decided that running a search engine was not our business. Our business is innovating on top of the platform - in this case, Google's search - and going after certain areas that ride on top. One area we're pursuing heavily is video search.

To that end, you've bought a host of startups - Truveo, Singingfish, and most recently Lightningcast - to help you search or insert ads in online video. What's the plan?

The pricing around video advertising is similar to that of cable TV, which makes it attractive to advertisers. That is clearly a growth area, and one that we're investing in heavily.

Search as we know it grew up in a dial-up environment - it's all about text. But broadband enables a different kind of search. You can put multiple sources together. In an upcoming version of AOL's search, you're going to have Web search results from Google, video search results from AOL, and community-driven search from AOL users.

If you think about it, innovating on top of a platform is what AOL has done historically. AOL innovated on top of Microsoft Windows. I remember lots of discussion that we were at a disadvantage because we didn't own an operating system. Well, that proved wrong. We never owned an OS, but we became the most significant application that ran on Windows.

To me it's similar to saying we're at a disadvantage because we don't own that underlying search technology. Certainly that's a terrific thing to own. But we also think there are other things to do and other ways to create experiences.

Google is now selling video advertising too. Are you going to end up competing with your partner there?

There's a very significant opportunity for AOL to excel at the more complex forms of advertising.

The question is, What is the right advertising, in which form, to serve to which person at which time? That also goes for what is the right content to serve to the person, of course. In fact, you want the content and the advertising to relate to each other. Both need to be dynamically generated, based on a complex set of variables that ultimately yields the best user experience and the highest revenue. Maybe it's sponsored links; maybe it's a banner or video advertising. We're agnostic.

The systems to create this do not exist yet today, but we think we're as far down that path as anybody. And we'd like to stay further down that path than anybody.

John Battelle is the chairman and publisher of Federated Media Publishing and the author of "The Search."

____________________________

Related:

AOL as Yahoo wannabe

Product packaging can pay off.

How to re-start a start-upTop of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.