Is evolution making AOL extinct?

Editor's note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.

AOL Time Warner has announced that it will shut down its Netscape division and stop producing the Netscape browser. Although this represents an emotional milestone for the Internet as one of its early stars passes away, this decision is yet another example of AOL's wasteful evolutionary approach to management and business strategy. In the end, I believe this flaw could kill the company.

America Online has historically been very successful at growing its core business - online services. That success has made up for the company's dismal record at profiting from its vast array of acquisitions. As competitors' broadband offers continue to shrink AOL's core subscriber base, the company's foolish management of acquired assets and capabilities is likely to haunt the company.

America Online has often been heralded as a savvy acquirer, using its highly valued stock as currency to acquire companies rich in assets, capabilities, customers, and brand strength. This acquisition acumen came to the fore in 2000 when the Internet upstart acquired the much larger Time Warner at the very peak of Internet stock valuations. Much has been said about the combined company's failure to leverage their joint strengths to maximize the value of the acquisition, however, even this miserable failure could be considered a success relative to what AOL has done with most of its acquisitions.

Netscape is certainly more characteristic of the America Online approach to managing an acquisition. I would characterize AOL's management approach as Darwinian. In most cases, the company will invest in two or more competing products or technologies and let evolution take its course. The product or technology that best adapts to the changing environment, or that has some built-in functional advantage survives. The other technology becomes extinct.

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In Netscape's case, although AOL spent over $4 billion to acquire the browser company in 1998, AOL continued to invest in integrating Microsoft browser technology into the AOL service. Netscape could never overcome Microsoft's functional advantage of being able to integrate the Internet Explorer browser with the dominant desktop operating system. In May, as part of settling a lawsuit against Microsoft for anti-competitive practices, America Online signed a seven-year licensing agreement to include Internet Explorer in the AOL service. This month, the company announced that it would stop development of the Netscape browser technology.

AOL Time Warner's shareholders should be furious about the company's complete failure to properly steward the resources it has received. The company spent over $4 billion and has virtually nothing to show for it. The Netscape browser was in trouble when America Online acquired it, but AOL should have been uniquely positioned to solve those problems. At the time, AOL was the dominant Internet provider. Using its marketing savvy and integrating Netscape-unique capabilities into AOL services should have been enough to overcome Internet Explorer's functional advantage. America Online also had the customer knowledge and the development resources to overcome Netscape's technology problems. But the company failed to do so, and now we sadly watch as Netscape fades from view.

Don't get me wrong. There are two truths that must not be overlooked.

First, Netscape technology will continue to live and grow. Several years ago, Netscape launched an open source initiative by contributing the Netscape source code to the Mozilla project. Thousands of developers around the world have been building upon that base and the Mozilla browser has surpassed Internet Explorer in many key technical and feature areas. Since Microsoft is slowing down and narrowing down future development of Internet Explorer, Mozilla is likely to continue to widen its technology lead. Whether or not that technology lead can translate into marketshare leadership remains to be seen.

Second, free markets are critical to development of quality products that serve consumers' needs and to development of healthy and profitable businesses and economies. Microsoft should be allowed to compete with Netscape in the browser space, and if Netscape's product fails to successfully complete, then it is natural for it to become extinct. That's how the marketplace should operate. It is NOT how companies should operate. America Online should have done everything in its power to make Netscape a successful product rather than empowering an outside competitor to kill Netscape.

And the Netscape story is more the rule than the exception at America Online.

Scanning through the press releases listed on the AOL website, here's a survey of acquisitions since 1992 (the year of AOL's IPO):

• 1994: Redgate Communictions
• 1994: NaviSoft
• 1994: BookLink Technologies
• 1995: ANS
• 1995: WAIS
• 1995: Medior
• 1995: Global Network Navigator (GNN)
• 1995: WebCrawler
• 1995: Ubique
• 1996: Johnson-Grace
• 1996: ImagiNation Network (INN)
• 1997: Lightspeed Media
• 1998: Compuserve
• 1998: NetChannel
• 1998: Mirabilis
• 1998: PersonaLogic
• 1998: Netscape
• 1999: MovieFone
• 1999: When Inc.
• 1999: Spinner.com
• 1999: Winamp
• 1999: SHOUTcast
• 1999: Tegic Communications
• 2000: Time Warner
• 2000: MapQuest
• 2000: Quack.com
• 2000: iAmaze
• 2001: InfoInterActive Inc.

Of these, only one is a recognizable strategic success - MapQuest.

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Two of the others are fascinating studies in AOL's internal competition approach to acquisition management. In 1998 AOL acquired Compuserve, historically one of its fiercest competitors. Amazingly, instead of killing the Compuserve service and folding the Compuserve subscribers into the AOL service, the company has continued to support the Compuserve service and kept the brand alive. Undoubtedly, this is a popular move with longtime Compuserve users; however, it is baffling to consider why this is a wise business move.

Similarly, also in 1998 AOL acquired Mirabilis, the developer of ICQ. ICQ was a pioneer in instant messaging and many would argue that the ICQ messaging client is still better technology than AOL Instant Messenger (AIM). Amazingly, the only thing that AOL has appeared to do with ICQ is compete with it. America Online does not appear to have used ICQ technology to improve AIM and the company certainly hasn't used its marketing strength to promote ICQ. In fact, until recently, ICQ users and AIM users couldn't even send each other messages! Since ICQ has been amazingly successful, despite AOL's failures, in this case, AIM may end up being the evolutionary loser and become extinct.

Such foolishness is unsustainable. When AOL was in hyper-growth mode, the company could afford to make multi-billion dollar mistakes, but not anymore. America Online's leaders must learn that a Darwinian management style is poor stewardship before the company's owners and customers make that lesson perfectly clear.

Just as in science, where the more we learn about creation the more we see the wisdom of the "intelligent design" theory over the "Darwinian" theories, so it is in management.

A company that simply evolves through random chance and accidents is inevitably doomed to failure. However, a company that is intelligently designed from the beginning - with wise leadership setting a direction, defining goals and objectives, and taking well planned steps to the end - has a much higher likelihood of surviving and thriving.

Especially when spending the owners' currency (in cash or stock) to make an acquisition, the goals of that acquisition must be clearly understood, the acquisition must be aligned with the overall corporate strategy, and the post-acquisition assets and capabilities must be wisely stewarded to achieve the original goals.

In this, AOL has clearly failed.

In the Bible, Jesus accurately says "From everyone who has been given much, much will be required; and to whom they entrusted much, of him they will ask all the more." (Luke 12:48)

It seems that AOL shareholders have a lot of asking and requiring to do of the company's management!

Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God's eternal truths to their real-world business challenges through Business Reform's online services. He can be reached at [email protected].