Aol: The Right Kind Of Busy Signals

Its new president is keeping his eye on the bottom line--and it shows

In the online industry, the mantra used to be "content is king." Companies spent lavishly to get the latest electronic goodies to keep the public clicking away--never mind how to pay for them. Not anymore. Just ask Robert W. Pittman, the freshly anointed president and chief operating officer of America Online Inc. The new No.2 to CEO Stephen M. Case says that now cash is king. If the choice is between generating profits today and developing long-term projects, he says, it's a no-brainer--profits rule.

That is a huge change from AOL's growth-at-any-price strategy of a few years back--and a big reason for the online giant's stunning reversal of fortune. Just 12 months ago, the news about the company was a scary tale of subscriber complaints over persistent busy signals and lawsuits by state attorneys general over its marketing practices. The company was reporting losses, and on Feb. 11, 1997, its shares closed at 33 1/4, down from 70 just eight months earlier.

And now? Exactly one year later, on Feb. 11, 1998, AOL stock reached an all-time high--trading at 115 7/16 before closing at 114 1/2. AOL's shares soared on a series of announcements. On Feb. 2, the company announced that it had completed its purchase of rival CompuServe. On Feb. 9, it disclosed the reorganization that put more control in the hands of the investor-friendly Pittman and a plan to charge most of its 11 million customers $2 more a month. The next day, the company reported earnings for the quarter ended on Dec. 31--$20.8 million on record revenues of $592 million.

Where AOL goes from here will be determined in large part by Pittman. Credited with bringing stronger management to the company when he arrived in October, 1996, the 44-year-old exec is now being rewarded. Under the reorganization announced on Feb. 9, he will run the AOL and CompuServe online services as well as AOL Studios, the unit that develops proprietary content for AOL. Until early February, AOL had been planning to save some money by spinning off the unit into a free-standing partnership with Germany's Bertelsmann and Chicago investment bank Madison Dearborn. But, flush with cash, Chairman Case called off the deal.

With all three AOL operating units reporting to him, Pittman has consolidated his power and taken his place as the day-to-day operating chief under Case, who is now devoting himself to broad strategic issues. "Bob got kissed on the cheek as the new cyber-Don," says Jim McCann, president of 1-800-Flowers, a longtime AOL partner.

"SECRET SAUCE." Pittman's challenge now is to turn AOL into a blue-chip company from a hot, but often erratic, young growth company. In late 1996, the company changed its aggressive accounting methods and took a one-time charge that wiped out previous profits. The company went on to prove, however, that it could turn a profit without financial tricks.

Even more important, it has confounded all the industry experts who said its service would be gutted by competition from lower-priced Internet services. In fact, AOL has added 2.9 million customers in the past year, and because average monthly usage is up, it feels confident enough to raise prices. At the same time, the increased traffic is attracting more online advertisers and merchants, who pay fees to AOL. Pittman, a veteran radio and cable programmer, says AOL is successful because it packages user-friendly online content and activities for consumers who don't want to sort through the Web. "The secret sauce is convenience," says Pittman.

Hey, they don't call him "Bob Pitchman" on Wall Street for nothing. An unabashed self-promoter, Pittman has won the adoration of investors. "His charge is to never disappoint the Street," says Alan M. Braverman, an Internet analyst with Credit Suisse First Boston. "His moves so far have been phenomenal."

Indeed, investors credit the former MTV and Century 21 executive with pulling AOL out of a tailspin. When he joined, the company had just switched to flat-rate, unlimited-use pricing from per-hour charges in response to competition from Internet services. Pittman pushed AOL to wean itself off subscriber fees in favor of more profitable advertising and online commerce fees--a move the company had vowed to make for years. His multimillion-dollar deals with partners such as Cendant Corp., a direct marketer, and Barnes & Noble Inc. helped generate AOL's first substantial earnings in 1997. In 1998's fiscal second quarter, which ended in December, ad and E-commerce revenues rose 25% from the previous quarter to a record $108.8 million.

Now, Pittman has catapulted past former equals Ted Leonsis, president of AOL Studios, and ANS Communications President Bruce Bond, who ran the network infrastructure. ANS has been sold to WorldCom in exchange for CompuServe's online service. And AOL Studios is now part of Pittman's empire. "My first priority is to get better management, to help AOL realize its potential," Pittman says dryly. Bond has already departed. Leonsis says he plans to stay.

By pulling AOL, CompuServe, and Studios under Pittman, all three units will share the same sales and marketing, customer service, and back room functions. The goal: more efficiency and a stronger bottom line. "We probably missed some dollars that if we had been coordinated, we could have gotten," says Pittman.

OLD WORRIES. These days, at least, AOL has cash on hand--about $750 million, including the $225 million it raised by selling ANS. The company isn't saying how it plans to spend its wad. But it does have a new way of dealing with its portfolio of investments: AOL Investments. Former Chief Financial Officer Len Leader is heading up the new unit, which is managing existing investments in online content and E-commerce companies and scouting out new ones. Case says AOL is looking for acquisitions that "expand our Web presence" and "give us broader distribution capabilities." AOL has been a rumored buyer of Netscape Communications Corp.'s Web site and is negotiating a partnership with Boston-based Family Entertainment Network.

But Bob Pittman's AOL still faces some of the same old questions. Wall Street still wants to be convinced that online advertising and E-commerce revenues will become significant. Also, says David M. Simons, managing director of Digital Video Investments, "There's an increasing pull exerted by content on the Web."

Even so, a year after its busy-signal crisis, AOL has made a remarkable turnaround. Under Pittman's influence, the online pioneer looks like a more mature company--and Wall Street seems ready to celebrate its adulthood.

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