The Third Wave: An Entrepreneur's Vision of the Future (8 page)

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There was a lot of tension at AOL headquarters. We increasingly felt that Microsoft could easily use its monopoly power to put our little upstart out of business. And the perception wasn’t just internal. The market was similarly skittish; our stock tumbled.

We knew it was important to reassure our employees, who were understandably concerned and anxious. So we called a company meeting that looked kind of like a corporate pep rally. Ted Leonsis was one of the key speakers. He created a giant dinosaur poster, and he used it as a prop in a rousing speech—about how Microsoft was a dinosaur, and how we would prevail. At the end of the meeting, the entire staff signed the dinosaur poster. Everybody left pumped up, ready for battle.

In August 1995, Microsoft launched MSN in tandem with the launch of their new Windows 95 operating system. As Gates had promised—and we had feared—MSN was now a standard feature of Windows, with the MSN icon prominently displayed on the opening Windows screen. But that wasn’t all. Microsoft
decided to attack AOL where we were most vulnerable, which was our pricing. Our monthly subscription fee included use of some services, but hourly charges would kick in for premium services. By contrast, MSN announced that they would offer unlimited Internet access for a flat fee of $19.95 a month. We learned about that on a Friday. That night, I decreed that we had to match the MSN pricing, and that we had to work through the weekend so we could announce our new $19.95 pricing on Monday morning. Many folks on our executive team argued against the move, but I knew that we had to do it to remain competitive, and that we had to act quickly, before MSN got traction. First thing Monday morning, we announced that we were going to $19.95 unlimited as well. The strategy worked—we hobbled Microsoft at launch, while fueling further momentum for AOL.

But the move wasn’t without consequences.

With unlimited pricing, usage skyrocketed, creating all sorts of system problems. We couldn’t add server capacity fast enough. Customers would get knocked offline and would often get a busy signal when trying to reconnect using their dial-up modems.

At the same time, Wall Street saw our costs going up and our margins going down and panicked. Our stock declined precipitously. We rushed to New York to meet with institutional investors to try to mollify them, as many were convinced that our move was rash—and likely fatal. It took a few months to work through the operational issues and add more capacity. But there was really only one way to calm investor fears, and
that was to identify new revenue sources to make up for the losses from the pricing switch.

That’s when we really began to embrace advertising and ecommerce, something I was uneasy about doing. I had never been a fan of online advertising, but I knew that with an unlimited pricing model, we didn’t have much choice. I remember a meeting we had to discuss our first advertisement, a Sprint ad that, by today’s standards, was actually fairly small. “Isn’t there a way we could do this . . . you know . . . a little bit smaller?” I asked. “So it won’t be so visible?” I was nearly laughed out of the room. And it was hard to blame them for laughing. I had to accept that we were moving inexorably, along with the rest of the Internet, into an advertising space that felt more like we were selling access to consumers than providing them with a service.

Over time, the model turned a profit, and by the spring of 1996 investor worries subsided. Despite the hype, MSN never got a strong foothold in the market. And we had completely turned the tables on CompuServe. A few years earlier, they had been trying to buy us. Now we were preparing to buy them. Rupert Murdoch caught wind of the acquisition and decided to sue AOL to block the deal, saying we were already too powerful. News Corp had its own nascent online competitor, Kesmai, and Murdoch was concerned that it had no real shot against us. Christopher Holden, the chief executive of Kesmai, complained that “AOL’s customer base is the only commercially viable cyberspace audience on the planet.”

I liked the way that sounded.

S
TARTING UP
and speeding up is complex, often confounding work, as my early AOL experience makes clear. Elon Musk once compared starting a business to “staring into the face of death.”
¹
Whether that sounds bleak or exhilarating is a good litmus test for whether you’ve got what it takes to start and run a successful Third Wave business. The upside, both in terms of lives improved and value created, couldn’t be higher. Indeed, the startups of the Third Wave will collectively shape what could be one of the most thrilling chapters in the history of American entrepreneurship. They will be propelled by bold, ambitious thinkers, people who know how to navigate a set of complicated challenges strategically and confidently—and who relish the chance to do so.

The superstars of the Third Wave will pursue bold visions, but their true gift will be mastery of execution. AOL was not
alone in believing in the idea of the Internet, but we outhustled and outexecuted our competitors. The big companies, like IBM and GE, should have prevailed, but they didn’t. Their lack of agility and entrepreneurial passion and culture hobbled them.

When I talk to aspiring entrepreneurs about the Third Wave, I’m often approached by people excited about the possibility but concerned with the same basic question: What do I need to do differently if I’m going to start a Third Wave company?

I tell them that it all comes down to the three P’s: partnership, policy, and perseverance.

There’s an old African proverb I’ve come to appreciate: “If you want to go quickly, go alone. If you want to go far, go together.” As simple as this advice may sound, I think it’s one of the most important lessons in business. It’s particularly true for the Third Wave, where the success of a company will depend largely on the partnerships its leadership can forge—sometimes even with the very organizations they are trying to disrupt.

During the Second Wave, some of the most successful companies were those that essentially optimized a niche app, figured out a way to get traction, and then drove viral adoption. They were able to follow a fairly straightforward playbook:
Focus on product. Focus on audience. Don’t worry about monetization until you have millions of users.

During the Third Wave, a great product will only get you so far. You typically won’t be able to build an audience by dropping your app in the App Store and waiting for users to sign up. That’s because most Third Wave industries have gatekeepers. There are key decision makers in school districts who will need to approve any products that have to do with classroom learning. The same is true in healthcare, transportation, finance, education, and food.

For the most part, success will hinge on an entrepreneur’s ability to form constructive, supportive partnerships with the organizations and individuals that can influence those decision makers and, eventually, with the decision makers themselves. These Third Wave companies won’t have the option of going it alone.

The story of Apple’s work on the iPod is illustrative. Steve Jobs saw great potential in portable MP3 players when they debuted in the 1990s. But he and his fellow executives were surprised by how poorly companies were commercializing them. “The products stank,” Apple vice president Greg Joswiak told
Newsweek
. So Jobs organized a team.

“Picasso had a saying,” Jobs explained, according to biographer Walter Isaacson: “ ‘Good artists copy; great artists steal’—and we have always been shameless about stealing great ideas.” The nascent MP3 player and online-music industry was no exception.

I met Jobs to discuss the music business about a year before he launched the iPod. The two of us sat in a dark corner of a quiet San Francisco sushi restaurant, hoping that nobody would recognize us so we could talk in peace. At the time he was still just envisioning the iPod, and he lit up when he talked about it. I thought it was a great idea, and I encouraged him to continue to develop it and told him I would do whatever I could to be supportive. AOL later offered to be the online music store for the iPod, but Jobs decided to create his own iTunes store instead.

Soon after, Jobs put Tony Fadell, an engineer with Apple, in charge of the iPod project and gave him three key requirements: It had to be fast, simple, and beautiful. It also had to be ready by Christmas. Fadell worked with Phil Schiller, Jony Ive, and other Apple talent—and they beat the deadline.
Newsweek
rapturously described it as a “double-crystal polymer Antarctica, a blankness that screams in brilliant colors across a crowded subway.” It would launch alongside iTunes.

Yet, no matter how beautiful the product or well built the software, Apple couldn’t go to market alone. They still needed to license the music content, which meant building a working partnership with the same companies that would be threatened by Apple’s success.

Apple handled this dilemma in a clever and artful way. They approached the music companies and told them not to worry, that iTunes only worked with Macintosh, which at the time had a meager 2 percent market share. Apple pitched iTunes
as a risk-free laboratory for the record labels, the opportunity for the industry to test a different model—a model seemingly more sustainable than endlessly litigating piracy, which had been the music industry’s primary strategy to that point. In the end, the pitch worked. Had Jobs been more frank about his ambition—that is, had he admitted that he was aiming for a billion users—he likely wouldn’t have gotten the licenses, and iTunes would have gone the way of Bill von Meister’s ill-fated Home Music Store.

This maneuver was a tightrope walk for Apple. But it would have been even harder for any other company. When Jobs approached the music labels, he was doing so as a well-known and well-respected brand in his own right. He was coming to the table with ideas and resources and a strategy that was thoughtfully de-risked.

But if a young startup had come up with the same idea, what are the chances they would have gotten the meeting? And even if they had, what was the likelihood that record labels would sit across the table from an unknown quantity and have the confidence that any partnership was worth their while? This lack of credibility may be the single greatest challenge for Third Wave startups. It’s also one that can be overcome. What it requires is more partners. Different partners. Partners who can lend credibility and provide momentum and help create a sense of inevitability.

This was a particularly acute challenge in AOL’s early days as well. We had to build credibility—and create a sense of possibility—not
just around our company but around the emerging industry itself. We had to convince potential partners, first, that the Internet would become a core part of everyday life and, second, that even though there were a lot of big companies, little AOL was the one to bet on. But we couldn’t do it alone, and we had to start small. Our first deal was with Commodore, and because we did that deal, we could do one with Tandy. And because of those two, we could do a deal with Apple. And because we had Apple, we could get IBM. And because we did deals with all of them, we had the credibility that enabled us to raise capital and gain traction in the market.

We would never have gotten funding if we had said, “We’re going to create this company on our own, and we’re going to market it on our own. We have no brand, we have no money, we have nothing but will.” That’s what our biggest competitor—Prodigy—was doing, but they had $1 billion in investment. We couldn’t compete against them alone. Our only chance was to stitch together enough alliances to create a sense of possibility—and, we hoped, inevitability.

Often, forging external partnerships depends on bolstering the internal team. A brilliant developer who comes up with a new way for hospitals to track patients isn’t likely to get an audience—or a fair hearing—from the medical community on her reputation alone. But that dynamic changes instantly if she shows up with her newest board member, the former CEO of the Cleveland Clinic. Now she has a foot in the door, and a
serious shot at a partnership. If she manages to land the deal, she’s more likely to land the next one, creating a virtuous cycle of credibility. These endorsements can attract and assuage prospective investors. And credible investors will ratchet up the founder’s own credibility factor even more, opening the possibility of raising a new round with others.

Securing partnerships can be very difficult. In 2005, I put together a company called Revolution Health, with the goal of (you guessed it) revolutionizing the healthcare industry. I recruited a dream team of investors and board members, made bold statements about our plans and ambitions, and launched a full-scale effort to attract the right partnerships. We invested in a company that provided health screenings at retail stores, and one that would focus on remote concierge health services. We purchased a software company that made personal health management software and another that would help small businesses and corporations form their own healthcare plans.

Some of it ended up working. We sold one company to Towers Watson for $435 million, and another, Everyday Health, is a public company today. But much of the effort fizzled. It was partly an issue of timing: A lot of the technology being leveraged to disrupt healthcare today wasn’t available to us then. But it’s hard to blame the timing alone. We tried to do too much too soon and we failed to secure critical partnerships. We did come close to getting the use of the Mayo Clinic brand for convenient care clinics, and almost got Walmart to team up
with us. But in the end, we couldn’t get the discussions across the finish line. Both concluded that it was too early and too risky to take a leap.

Partnerships in the Third Wave are the prerequisite for success. And that can create a Catch-22—where a company needs a partnership before it can get funded, but can’t secure a partnership without showing proof of concept (or, at least, proof of life). Getting over that hump will require persistence—and patience.