The Third Wave: An Entrepreneur's Vision of the Future (4 page)

Had Steve Jobs been at Apple at the time, I suspect the deal would never have happened. Steve never would have licensed the Apple name or allowed such a critical decision to be made by lower-level executives. But Steve had been fired by Apple a couple of years earlier, so we had an opening. Six months after I’d moved to San Francisco, we finally inked a deal to build the service. It would be called AppleLink Personal Edition.

I moved back to DC, where the team greeted me like a conquering hero. Securing a partnership with Apple and convincing them to license their brand name to us was a coup. With Apple’s commitment and endorsement, we were able to bring in a $5 million round of funding—the most we
had ever raised. We opened a Cupertino office not far from Apple’s headquarters so that our people could work in close collaboration with theirs. And we ramped up hiring to handle the Apple launch, which was going to be our biggest ever.

Once the early software prototype was ready, I had the chance to sit down with Alan Kay, one of the pioneers of the early computing era, to get his advice. In the 1970s, Kay was part of the team at Xerox PARC (Palo Alto Research Center) responsible for designing a programming language called Smalltalk, which could be used to network computers together and would later help inspire Apple’s early Macintosh computers. When I met with him, he was working as an Apple Fellow, living in Los Angeles. I flew down to get his take on our design and to ask for guidance in making the software more intuitive, something that was his—and Apple’s—specialty. It was an honor to sit with such a legend. But it would turn out to be one of the very few good days I had working with Apple. The honeymoon was short-lived.

We spent a year building the AppleLink service, and geared up for an ambitious (and expensive) launch. But from the beginning, our companies clashed. Apple wanted to sell the software and limit distribution to authorized Apple stores. We thought that approach was a terrible idea and ran counter to our whole strategy. We wanted to give the software away for free—in a wide range of retail stores, pre-installed on Apple computers, bundled with magazines and modems, and sent by mail. We wanted to make the initial trial free, too, so that
it would be easier to convince people to try the service. We needed paying customers—but that meant making it as easy as possible for consumers to try us. (It’s ironic that two decades later, Apple’s success would be propelled by free software in their App Store.) We argued bitterly for months, battling over various marketing approaches, without ever finding common ground. It bred frustration and distrust, and a growing skepticism inside Apple.

I was late to the office one morning; there’d been an accident near Dulles Airport, and traffic was backed up for miles. When I arrived, there was a note from my assistant on my desk marked “urgent.” A senior executive at Apple wanted to speak to me, she said, and he didn’t sound happy. On its face, there was nothing that unusual about the message. We’d been arguing with Apple for months, and I’d gotten an earful from plenty of their executives. I didn’t realize they’d be asking for a divorce.

“Listen, Case, bottom line is this,” the executive said sharply, when I finally called him back. “This was a mistake, and we need to cancel the deal. We’re out. It’s over.” I tried to change his mind, to see if there was any alternative, but even as the words came out, I knew it was futile. We were never going to see eye to eye on strategy, and each was convinced the other was wrong.

It was over. Really over. And none of us had any idea what to do.

I
SAT SILENTLY
at my desk after I hung up the phone. I don’t think I budged for an hour. I had no idea what to do, and I didn’t want to break the news to the others until I had some semblance of a plan. But what possible plan was there? Our whole strategy had been to team up with computer manufacturers, but now we were without Apple, our largest and most important partner. At some point, I had to just get up and alert the others. I gathered the troops in our conference room. It was like going through the five stages of grief all in the same afternoon.

First, denial. Marc was convinced the deal wasn’t really dead, that this was just a bluff in a game of poker we’d been playing for months. Then came anger, first at Apple, then each other. “Why did we have to be so goddamn rigid?” Jim yelled, looking straight at me. “We can’t expect to work with partners
and get everything we want. It doesn’t work like that!” Then came bargaining. I stood at a whiteboard and wrote out a list of concessions we could offer Apple to get the deal back on track. Everyone called out suggestions. But by the time we were done putting the list together, we realized that none of us were really willing to make those kinds of sacrifices. “If we do it Apple’s way, we will fail,” I said. “But if we lose Apple, we could lose our investors. At the same time, I don’t know how we can make an offer like this and then look at our investors with a straight face. What’s the point of continuing on a path that’s going to fail?”

That’s when the depression set in. I couldn’t imagine how uncomfortable the next board meeting would be. Our investors had already taken a flier on us—twice. And several had pushed Jim to fire me for spending too much on the Apple launch. This surely would be the final straw.

We sat silently in the room, disappointed, frustrated, and fearful. We were at the end of the line, it seemed, and no one wanted to be the one to say so. Jim finally broke the silence.

“Here’s what we have to do, guys. Apple can’t just unilaterally cancel the agreement. We raised and spent millions to support the AppleLink launch. We need to threaten to sue them, and force them to pay us a settlement. Then we can use that money to stay alive until we figure out our next move.”

The next move was really the only move we could make. It was both obvious and terrifying. “We have to move beyond the private label strategy,” I said. “We need to create our own brand, propelled by our own marketing, paid for by us. Let’s
combine all of our independent separate services—Q-Link, PC-Link, AppleLink, and Promenade—into one service.”

“Do we even have the runway for that?” asked Marc.

“No, but we need to find a way to raise the money to make the transition,” I said. “And the first place to focus is on getting as much money from Apple as we can. If they want a divorce, so be it. But they need to pay for it, so we can move ahead on our own.”

I left the room and went back to my office to reread the agreement we had signed with Apple. I jotted down all the commitments they had made that they were now reneging on. I huddled with Jim to figure out a plan. Then we took a deep breath and hit redial on my phone.

We told the Apple executive that we didn’t want protracted litigation over the breach of contract, that it wasn’t in either of our best interests to go down that road. And so we suggested a settlement: For a onetime payment of $5 million—the amount our venture capitalists had kicked in to support the Apple deal—we’d agree to void the contract. Otherwise, we’d file suit, and be noisy about how bad a partner Apple had been.

The response was tentative. The $5 million demand was rejected, but it was clear Apple recognized that they had culpability and liability and would pay us something to go away quietly. After a few weeks of back-and-forth and several trips to California, we finally struck a deal. Apple would pay us $3 million to tear up the contract. We’d stop using the Apple brand and go our separate ways.

Just a few years after pivoting from CVC to Quantum, we were once again starting over, this time with Apple’s cash. Our team rallied, working endless hours to make the new vision a reality. It felt, at times, like a moonshot. But it was ours, and we weren’t going to stop until we got it right—or ran out of money trying.

By then, our team’s mood had brightened. Fear was replaced by relief. Apple was a difficult, demanding partner, and for months we had been dealing with one crisis after another. Once the shock had passed and acceptance kicked in, people got back to work, filled with excitement about what we might build.

We had the chance to become the direct portal to an online world for everyone with a modem. It was a long shot—but what if it worked?

We didn’t know what to call it, and couldn’t afford to hire a branding firm. So we held an internal competition with our employees and debated the options for weeks. The leading choice was Online America, which most people generally liked but which never struck my ear the right way. “How about we flip it? America Online,” I suggested. It stuck. We renamed the service (and later the company) and suited up for launch.

The rollout of the AOL service was a little bumpy. Users had different computers and somewhat different needs, so it took
us nearly a year before we got much traction. Our growth finally accelerated once we launched the Windows version. We were suddenly picking up users at a rapid clip, and they seemed to love our service. The press was intrigued as well; our coverage was wonderful. We were the underdog startup, fighting the big, entrenched companies. And we had a better sense of what consumers wanted, because we were living and breathing the service, not just relying on focus group research.

One afternoon, I was chatting with some of our employees at AOL’s headquarters in Tysons Corner about trying to make the software feel a little more friendly and accessible. There were still plenty of online skeptics, plenty of people who couldn’t understand what the Internet would offer them. It all seemed too impersonal, too detached from genuine social interaction. I knew that was wrong, both from my own experience and from that of our happy customers. AOL wasn’t limiting social interaction; it was magnifying it, making it possible to communicate to more people in more ways than at any time in human history. But we needed to listen to the concerns of the unconverted so that we could convince them to give AOL a try.

I had an idea. Why not make the service more personal by adding the voice of a person? Karen Edwards, one of the customer service team members, overheard me make the suggestion.

“If you need help with that, my husband, Elwood, does voice-overs,”
she told me. “He’s done a bunch of radio commercials.”

I’d never met him, and didn’t know what his voice sounded like. But I figured it would at least be a good prototype, a sample we could play for other voice-over actors when we started auditions. So I scribbled a few phrases onto a Post-it note and handed them to Karen.

“See if he’s interested in recording these for us. Think he could get it done by the end of the week?”

“He’ll do it tonight,” she said. “I’ll make sure of it!”

The next day she brought the recordings to me. His voice couldn’t have been more perfect. It was disarmingly friendly, like the voice you’d expect from a stranger who offered to carry your grandmother’s groceries. The second I heard it, I knew we weren’t going to be auditioning anyone else. I instructed our engineers to add the voice files to the new version of our software.

Within a month, we were mailing CDs to millions of Americans, each containing our upgraded software and a message from Elwood.

“Welcome. . . . You’ve got mail.”

You could feel the excitement in the office as it became clear our pivot had been successful. The fear of going under had subsided, and our team was genuinely enthusiastic about our future prospects. After many years and several false starts, we had finally found our footing.

In the process, I emerged as the company’s leader. People
appreciated the critical roles Jim and Marc had played to get us going, but the team increasingly looked to me for guidance. In January 1991, the board voted to make me the CEO. I was thirty-two.

My key focus was expanding our customer base. We knew tough competition was coming, so I pushed the team to go faster and grow faster. “It will never be easier or cheaper to gain market share” became my mantra. We slammed on the accelerator, dramatically increasing our marketing spending.

To raise money to fuel this rapid expansion, in late 1991 we decided we needed to take our company public. The board concurred, but there was a catch. America Online would be the first Internet company to go public. The market size was unclear, and the competitive risks significant. So the board quietly huddled and decided to reverse the CEO decision. They concluded that I was too young to be accepted by institutional investors who were used to much older CEOs.

Jim took me to lunch to break the news. “Everybody thinks you’re doing a great job,” he assured me, “but you’re young and untested, and most companies going public have much older CEOs who have long track records. So I need to step back in as CEO. You need to go back to being executive vice president.

“Don’t worry,” Jim told me, “it’s only temporary.”

I was devastated. Furious. I felt like I’d been robbed. I wasn’t an accidental CEO. I had earned the job painstakingly over time. And to be sidelined, not because of my skills, but because of a theoretical fear that investors would be skittish about my age—it
all seemed totally preposterous to me. I thought about quitting. And when others on the team learned of the board’s decision, many offered to resign in protest. I was heartened by the support, but I knew that I couldn’t leave the company, and couldn’t let anybody else leave, either. I’d invested too much of myself into it—and so had they. So I let my dissatisfaction be known but ultimately chose to suck it up and stay.

In March 1992 we went public. At the time, we had fewer than 200 employees and a mere 184,000 subscribers. We had $30 million in revenue and had raised a total of $10 million over the previous seven years. We raised an additional $10 million in the initial public offering, at a $70 million valuation. Most institutional investors weren’t particularly interested in us, seeing us as a small player in a niche market. The
Wall Street Journal
didn’t even call AOL an “Internet company” or a “tech company”; in describing our IPO, they called us a “computer-based provider of consumer services.”