AOL's Point Man in the Web War

How CEO Barry Schuler plans to leave Microsoft in the dust

Barry M. Schuler has the typical geek pedigree. The CEO of America Online Inc. (AOL ) took apart gadgets as a kid, built his own microcomputer in the mid-'70s, and now has rigged up a home network so he can listen to his collection of 7,000 jazz and rock music files through speakers in any room in his house. But Schuler has something many techies lack: He understands most people aren't like him. "Normal people don't lust after technology," he says. "They want whatever it's supposed to do."

That helps explain why AOL is far and away the most popular online service in the world, with 29 million subscribers. AOL Time Warner Inc. Chairman Stephen M. Case is known as AOL's Internet visionary, while co-Chief Operating Officer Robert W. Pittman is seen as its marketing whiz. But Schuler, 47, who has been the online service's CEO since January, deserves just as much credit for AOL's explosive success. For the past three years, Schuler has run the AOL service, putting his stamp on much of the design that makes it so simple to use and the features that make it so popular with families.

Now Schuler is being put to the ultimate test. Software giant Microsoft Corp. (MSFT ) is vowing to overtake AOL with its MSN online service, which is No. 2, with 5 million subscribers. And Schuler is firing back. On June 16, he broke off negotiations with Microsoft that were aimed at extending an alliance. AOL won't be obliged to use Microsoft's Web-browser technology in the future, and Microsoft won't include AOL's software in its major operating-system update, Windows XP. Schuler says AOL just doesn't need Microsoft anymore: It will be able to reach consumers through direct mailings of AOL disks, special promotions, and deals with PC makers to install the service on millions of new computers. Windows "as a driver of subscriptions has long, long gone away," says Schuler. "This is not going to impact our business in any way."

His strategy is to stay one step ahead of MSN by combining AOL's ease of use with Time Warner's trove of movies, TV shows, and music. He'll use those to fashion unique services that will attract new subscribers and keep people online longer. Consider what he did with Eden's Crush, a female pop group hatched by the Popstars show on sister company WB Television Network. On two weeks notice, AOL created a site where members could download their single, Get Over Yourself, and get a sneak peek of the video and behind-the-scenes footage. When the song debuted on Mar. 21, it zoomed to No. 1 on Soundscan's Single Sales Chart.

INSURMOUNTABLE? His next salvo: a subscription music service. The plan is to launch it this summer or fall, serving up thousands of songs by Warner Music artists and those from other music labels. "We're really excited about music. It's like e-commerce five years ago," says Schuler. Microsoft is planning a far less ambitious service called MSN Music that will let Web surfers listen to a variety of preprogrammed tunes.

Schuler also is extending AOL's e-mail, instant messaging, cybershopping, and other features to TVs, handhelds, and other non-PC devices. The company, for example, is quietly developing software that will allow family members to tap into the Net at the same time from any kind of device. All told, analysts say Schuler is building up an insurmountable lead. All Microsoft can do is "keep a finger in the pie," says analyst John Corcoran of CIBC World Markets Inc.

Microsoft is no pushover, though. As Web services develop and multiple devices hook into the Net, it will take software--Microsoft's specialty--to make it all work smoothly. To capitalize on a $1.95 price hike by AOL, to $23.90 a month, Microsoft just launched a new $50 million ad campaign offering three months of free service. Exults Yusuf Mehdi, the vice-president in charge of MSN: "There's nothing holding us back toward knocking them out." He believes MSN will do well by getting information and entertainment from a wide variety of partners, rather than relying so much on its own content the way AOL does.

Schuler couldn't disagree more. While he praises Microsoft for being "a fabulous business-to-business company," he says it has a poor track record with consumers. "If we do right by our customers, it will be hard for a competitor to take them away," he says.

You can credit Schuler's parents for encouraging his eye for design, his comfort with technology, and his stay-close-to-your-customers credo. His artsy homemaker mom encouraged his childhood enthusiasm for painting, sculpture, and photography--even letting him turn the basement of their suburban New Jersey home into a darkroom. Schuler's father, a Jew who fled Austria a step ahead of the Nazis, ran a warehousing business. He also repaired TVs on the side in the family home, where Schuler tinkered with them. The elder Schuler won the loyalty of his customers. When the economy slowed, some would even apologize for cutting back on their need for warehouse space.

Schuler's career has followed a winding path. After graduating from Rutgers University in 1976, he founded his own company, a freelance producer of industrial and commercial films. Schuler's life took a radical turn when he became obsessed with computing after reading an article in Popular Mechanics magazine about how to build a microcomputer. Realizing most of the budding tech entrepreneurs hadn't a clue about how to sell their machines, Schuler turned his company into a marketing and communications business serving tech clients.

He eventually joined one of them. He became president of Philadelphia-based Cricket Software Inc., a pioneer of desktop programs for Apple Computer Inc. (AAPL ) that created the first color desktop presentation software. When the product failed to take off, Cricket's venture backers showed him the door. Intrigued by the entrepreneurial ferment in Silicon Valley, he headed West in 1989 and founded Medior, a multimedia development company.

ADS TO BURN. Since then, Schuler has had almost a sixth sense for what consumers want. Case hired his outfit in 1994 to revamp AOL's screens and liked Schuler's work so much that he bought Medior for $35 million in stock in 1995. Schuler has since managed all the AOL redesigns. His innovations include a tool bar that weaves the Net seamlessly into the rest of AOL's information and community offerings. His comfort with technology and his business acumen made Schuler a standout at the then-struggling company. "He had the credibility to go toe-to-toe with the technology guys, and it made him almost indispensable to executives who didn't have a clue," says former AOL vice-president Robert J. Jennings, who is now retired.

Schuler's off to a strong start as AOL's chief executive. While other Internet companies are reeling from the advertising slump, ad and e-commerce revenues at AOL jumped 37% in the first quarter of 2001, helping to fatten total revenues by 17%, to $2.1 billion. A "flight to quality" by media buyers helped, as did cross-promotional deals with Time Warner properties. Since he took command in January, AOL has added 2 million new subscribers. It took MSN nearly two years to add that many. At this rate, Schuler will always be looking at Microsoft through the rearview mirror.

By Amy Borrus in Dulles, Va.

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