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AOL's Ted Leonsis Keeps the Faith

As one of the last members of the original America Online (AOL) executive team still onboard, Ted Leonsis is jazzed that the No. 1 Internet service provider is going back to its roots as a community-based online service. Under new CEO Jonathan Miller, Leonsis is heading a top-to-bottom reexamination of AOL that will lead to a new strategic blueprint by the end of November (see BW, 10/14/02, "AOL Is Relearning Its ABCs").

Leonsis, now AOL vice-chairman, is also part owner of the Washington Capitals National Hockey League team and the Washington Wizards National Basketball Assn. team. He had great success building his team brands online and hopes to use what he learned in sports to buff up AOL, too.

BusinessWeek Washington Correspondent Catherine Yang caught up with Leonsis at the company's Dulles (Va.) headquarters recently to chat about his vision for the new AOL. Edited excerpts of their conversation follow:

Q: Why is it you're still at AOL?

A: I'm like a cockroach that survives the nuclear winter. I feel I understand the heart of the service and that I can add value. As I put it, we are out to do the three R's: reset, revitalize, reconceptualize. That's our challenge as a company.

Q: What went wrong at AOL?

A: We went from a company that was organized purely to be an enabling environment for our members to congregate to a business that was focused on a merger and earning $11 billion in EBITDA [earnings before interest, taxes, depreciation, and amortization].

Q: How do you start turning that around?

A: We can never lose sight that 80% of our business comes from [subscriptions from] our members. Yet the majority of the discussions internally and externally were on a revenue stream that's a small part of our business [online advertising]. The first thing we have to do is level-set what is our base business. And we have a very strong base business.

Q: How do you make the most of that base business?

A: Today, the No. 1 reason people cancel their AOL account is that their free trial is over. The second is dissatisfaction with connectivity. They're getting bumped off, or they're finding the startup is slow. The third is cost -- it's $24 a month. The fourth is they're going to broadband.

Small, incremental fixes have dramatic financial [results]. If you have less churn, you'll get better [margins]. If connectivity and communications are big drivers -- and we know members leave because of those issues -- it doesn't take a rocket scientist to say we need to be investing more in what we're [doing in those areas].

Now we're fixing e-mail, spam filters -- and in AOL 8.0 [launching Oct. 15], if you get knocked offline, it freezes a couple of pages for you and redials automatically. This came right out of that research.

We need a culture change away from Wall Street and EBITDA goals. Those are byproducts of having a happy member base. That's how you're rewarded. They're not ends in themselves.

Q: Did AOL's problems predate the merger with Time Warner?

A: During the dot-com boom, we had companies giving us $25 million to $100 million for our traffic. That was much bigger and faster than we could commoditize some of our own things. Financially, it was astute and the right thing to do. But that era is gone. And when we get back to what the core is, the membership, we're fortunate. Even last quarter, we had 490,000 net additional subscribers. I don't think there was another subscription-based service in the world that added a half-million new members paying $24 a month.

Q: How will 8.0 represent the new priorities?

A: AOL 8.0 is a big step. The last two product releases -- 6.0 and 7.0 -- were primarily driven by how we can create inventory to run ads and how we can bring [magazine] subscriptions to our partners at [Time Warner]. With 8.0, we brought in our best product-marketing team, which is our 35 million members.

If they're spending a lot of time doing instant messaging, we should give them better instant messaging. If they're spending a lot of time in music, we should give them better music. But we should combine instant messaging with music, because that's where our value is. In 8.0, you can listen to the same song I'm listening to.

Q: What is AOL's strategy on broadband?

A: The good news [with broadband] is we don't have to supply the connectivity. Somebody else does. If it's really good, we won't have people leaving because the connectivity is bad. So how do we justify the additional price? That will come from what we talked about -- how we'll make communications, community, content, and functionality "broadbandy."

Q: So how will you make money in the future?

A: We have multiple drivers of the business. But first and foremost is the membership. [We have] lots of levers there. If [members] stay longer, there's less churn. And there are also new services we can sell. We're about to launch a whole series of voice-portal products.

Some 60% of our audience has one phone line. The new service alerts you when a call is coming in, and you can leave the caller a message, and they can leave you a message. Those will be packaged and sold as add-ons. There won't be a ton of these add-ons. Most of the innovations will go into the core price to make it more valuable to the customer.

Q: Are there other ways to make money?

A: We have to revitalize and reconceptualize advertising. As you know, I own a separate business, sports teams. We didn't have enough season-ticket holders. We needed to build [those team brands] online. "Come to a Caps game. It's a lot of fun. Here are the ticket packages, and this is where you can sit."

We moved everything onto the Web. It's a lot of information that we could never do in an ad. We built an online presence and went from 2,900 to 13,000 ticket holders, and 68% of [all tickets sold] were sold online. [Advertisers] can use AOL in the same way to get across brand, information, and transactions. But the most important [money drivers will be] customer-relationship management through e-mail and instant messaging.

Q: So where is AOL heading?

A: In great literature, there are three big themes. The first is the new kid comes out of nowhere and beats the odds -- David vs. Goliath. Next act is the kid meets fate, has bad luck, makes bad choices, and falls. The third is redemption.

At any one time -- as a person, in a career, with my sports teams -- you're in one of those acts. AOL is certainly into the redemption, reinvention, comeback mode. But it's not like we're unprofitable. How many companies [that are in turnaround mode] have 35 million customers, will add 2.5 to 3 million new customers, and will make $1.8 billion in profit?

At the same time, our calling and destiny are so much bigger, and we can improve so much by revitalizing the core. I think it's doable. That's why I'm sticking around.

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