Transcript of the Ted Leonsis Interview

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Does it get tough always defending America Online?
Ted Leonsis:What's interesting is that our members love us. We've never been a leader before; we've always been the scrappy underdog. And now we're the dominant player, and so we'll naturally be criticized.

I think what we're looking for, and I think I'm starting to see it a bit in the press, is recognition that we have a really good management team. Steve Case kind of invented this business. We believe that consumers will decide what wins in this business.
We haven't done big partnerships like MCI and NewsCorp or Sears and Prodigy. One of the ones that we have done is a service in Europe, which is a 50-50 JV with Bertelsmann AG, and it's been very, very successful. So we've tended to execute well. And we tend to listen to customers who are spending over a million hours a day on the service. I have to laugh when I hear all of these experts. I say, 'But we're doing 30-plus million hours a month, and we are participating in all of these areas, so we have real experience as opposed to conceptual experience.'

What we're seeing now is a lot of prognostication, so that's why I put that cable chart up today to say, 'Remember this?' This is where everyone thought were the hot areas. And what it all comes down to is consumers really liking what you have. MTV won't work if kids don't like it.

SVR:What's the greatest threat to AOL?
Leonsis: Execution. We have so much momentum, right now, and it's interesting. This is a business where the big are going to get bigger. The bigger you get, the more money you have, and the more you can spend on R&D and can pay for content. That lets you go out and bring on more customers. It just spirals up.

That was one of the reasons we just went out and recruited a president and CEO for the company, because we're going to be a multibillion dollar, global concern, and we're young managers. It was just like Netscape went out and got Jim Barksdale. We actually hired a protégé of his, Bill Razzouk, who was a VP from Federal Express, to focus on quality issues, customer-retention issues, better operating. So we're growing up as a company, but we need to continue to remain very flexible and entrepreneurial with this underpinning of being well managed. I think we're making that transition because we're at a billion-dollar run rate right now.

SVR:You mentioned how advertisers are creating their own Web sites. Content has its own Web site; there's not a mix between the two.
Leonsis:Yeah, I view that as being a business-model flaw today. When television was starting, the advertisers were intimately involved in getting it going. The soaps, they're called the soaps because Proctor & Gamble basically asked the programs to create programming for women in the daytime. We're not seeing enough of that happening. I'm seeing Web sites appear, and then corporations put up their own corporate brochure, and advertisers put up their own area, and I don't think that's a pleasant consumer experience.

I also don't think consumers are going to go to the Fidelity Web site if it's a big brochure. I don't think they want to get online, spend the time, the effort, to go read a brochure. And so I think what's going to happen is we're going to see a lot of shake-out on the Web. In fact, I would predict that in 24 months there'll be less Web sites than there are today. It won't continue to grow; there'll be less because there won't be the ultimate business to support the rapid updating and the absorption of all of the technology. So we're gonna see a shake-out.

It's not unlike what happened in the software business. Fifteen years ago, everyone was writing code. There were thousands and thousands of companies, and today we have hundreds and hundreds of companies that are basically in business.

SVR:You mentioned something about MTV or HBO coming to the Internet.
Leonsis:Yeah, I think I view the Internet as not being a market; I don't think there's an Internet marketplace. I think there is a set of business methodologies and technologies, and that it's open, and that entrepreneurs will take advantage of the power that's available.

So it's not unlike the fact that there was a telecom industry that made satellites and fiber and cameras and electronic news-gathering equipment and fly-away satellites; but it took a Ted Turner to take those, and weave them together, and make a 24-hour news service. Turner wasn't a player in the camera industry, yet he created a new medium. And that's how we look at the Internet. We're looking at it as being a set of technologies and methodologies. I think that over the coming years AOL will look more and more like the Web: more open, better publishing tools, perhaps tiered services. But the Web will need to start to look more and more like AOL: more community, better chat, a bit more programming, a bit more terms-of-service management, so that parents feel safe, daughters feel safe, kids feel safe.

I think at some point you won't be able to distinguish between the commercial services in the Web. Oracle's become a superset of the Web that's not only the entry point and the front door, but the brand that people come to to get out. And so the more Web sites that occur, the more developers and the more ISPs there will be. It may sound kind of intuitive, but because no one wants to deal with all of that confusion, the bigger we get the more people will stay with a brand that they trust to create an environment that they feel comfortable in.

SVR:Are you suggesting that what AOL does best is package information?
Leonsis: Yes. In fact, I would say that we're fortunate for a young company because we have so many competencies: we know how to build the brand and recruit customers, recruit members. We do that better than anybody.

The second big competency that we have is, we know how to support that member once he gets online or on the Net. We have well over 2,000 people who are trained on the Internet, on AOL, who are providing service and support, and I think that's a huge area of entry.

We also know how to scale the network, which becomes important, and perhaps most importantly we know how to bring what I'll call technology to the masses: we can dumb the things down when necessary and work with disparate pieces. It's interesting if you just look at our browser.

It has not become the standard, but the idea behind what we did with the browser was very sound. We looked at what Prodigy had done, which was to use a Prodigy application to open a window and then get out on the Web. And we looked at what CompuServe did, which was a bundle: here's CompuServe and here's a bundle. And we said, 'What our members want is to not be able to differentiate between AOL and the Web. And they don't want to be typing in long URLs and addresses. So we'll take the AOL channels, and we'll put Web sites by their icons. We want you to be able to click on the icon to get right to that place on the Web. So we're going to need a threaded browser. We're going to need the browser and the code to become part and parcel of the AOL client. Well, the Netscape architecture didn't allow that. So Booklink at the time allowed that for us. And that was really the real reason we chose the Booklink browser.

SVR:You said there are some Web sites and there are grave sites.
Leonsis: Well, I think sites that aren't updated on an ongoing basis, that aren't linked in what I'd call a digital keiritsu -- where you're collaborating with like-minded companies and like-minded sites and you can almost create your own little network where 12 like-minded parent sites get together and then one person goes and approaches an advertiser to connect all of those together -- would seem to me to be a much better way to work than just placing all these billboards up. These disparate, lonely billboards.

I think the second thing is that the rush to do all these graphics and video and sound is very cool. It's very compelling in a demo, but if you try to get the consumers who have a 9600, 14.4, less of that is better. And so there's the real programming challenge of how do you look cool and contemporary, but not turn people off because it takes too long to download the site? The biggest complaint we have in America Online today is that the downloads take too long. That's why we have to go to this progressive rendering notion that we'll have with our next client.

SVR:What's going to keep the Web from being a mass medium? What is the worst-case scenario?
Leonsis: I am of two minds when it comes to the Web. The amazing thing about the Web is that there are days when you say, 'This is the next great enabler for the next media. It's the printing press, right? And all sorts of great things will happen.' And then there are other days when you say, 'But there's no business model and that's why it's become so popular; it's free, it's open.'

So the issue that I see is nobody is scaling the Internet right now. And the thing that really scares me is that we've spent in the computer industry 20 years of moving intelligence down from the mainframe to the PC. Now they're talking about moving the intelligence into the network and having dumb appliances, 3270-like terminals, right? For 500 bucks. But all of the processing, then, is going to be done in the network. Yet nobody is scaling the network. No one's sitting and looking at simultaneous usage and performance standards, and so my concern is that the industry so populates it and the network is so freeform that consumers get a very negative first or second impression, and they don't come back.

And still today, it's too hard to use. I'll go to my hotel tonight and I'll do two things: I'll first turn on my computer. I'll have to plug in and find a phone near a socket. And then the computer'll warm up and I'll have to go into the hard drive. I'll have to pull up AOL. I mean it takes 8, 9, 10 clicks, and then I'll finally get on if I can get out. Then I'll take a shower. Then I'll turn on my television by remote, and 'bang' it goes on.

That's where we need to get to. We need to get to where every person very quickly on impulse can be on. You look at things like MTV, it's always on. You know? There are people who just leave MTV or CNN or the financial CNBC on all the time. We're not at that yet. Telecommunications costs money. I think we have a lot to overcome to become a brand that's in your household, a Time, ABC, MTV, things of that ilk.

SVR:You said you wish you could attract as many people as Seinfeld does in a night. What are some of your favorite content Web sites, maybe your top 10?
Leonsis:I love Utne Reader. The Utne Reader site is very literate and snide and has a point of view. I like Pathfinder, because I can go to one place and get lots of stuff. I like "Voices" in our own GNN. They give the place, the wherewithal for new voices to emerge.

There are a couple of things that I've seen lately that I find very hot, very interesting. I really like PointCast; maybe you've seen PointCast systems. I think the marriage of offline and online is very, very important. I like the promise of Excite, what architects have done. I like Ferndale, which is a soap opera. It's done by a company called Songline Studios, one of our investments. They also do Web review.

It's interesting with so many sites out there. I think CNET has some really cool stuff on it. But you can count on your two hands the number of interesting Web sites. On television, I like ESPN, I like MTV, I like CNN, I like Seinfeld, and so on. So we're not quite there yet. And the business has changed. If you look at television in the early days, it was talking heads, and now you have shows like Gulliver's Travels, which cost $28 million to produce.

I think that what happens is that as the audience gets bigger, the advertising comes, and then you can pay for the talent to do the programming. And we're miles away.

SVR:How many years before we're there?
Leonsis: I think we're a good five years away from having a nationwide cable-like audience, 50 million plus. And you really need to have 20 million plus to be a national ad buy. To get the Proctor & Gambles interested in you, you really need to be at 20 million. So you need to have an AOL working with a Netscape, or an MSN or Pathfinder working with an ESPN or a Disney.com. You think you're going to see these keiretsus emerge so that in combination you have big numbers that you can go to advertisers and offer.
SVR:Multiplexes, right?
Leonsis: Yeah, you're really going to need that, because without it the advertisers just won't be interested.
SVR:So you like playing basketball. What are some of your other interests outside of the Web?
Leonsis: I hang out with my family, my wife, my two kids, and I have a house in Florida. I love the beach. I spend a lot of time there.

I bet I spend a good 12 hours a day in front of my computer, working, or with the computers, either the demos, playing a new site, answering e-mail. I'm pretty wedded to my computer.



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