|AOL--this was an interesting article I had been saved a long time ago to post|
AOL Transforming Itself in Expansion Bid Abroad
Tuesday, May 29, 2001
By Alec Klein,
Washington Post Staff Writer
LONDON – World domination begins with a woman named Connie.
The biggest Internet company in Britain got that way on the shoulders of a make-believe character who stands 5 feet 11 inches tall and sports a strawberry-hued bowl haircut. Connie is
endowed with distinctly British attributes to serve as a television pitchwoman for the local audience: She's crisp and proper and a helpful nanny to the Internet, someone to hold the hand of
Think Mary Poppins, cyber style.
That's what AOL Time Warner Inc. was thinking when it concocted Connie. Be British – to a point. As the U.S. media giant spreads its brand around the globe, it's trying to blend into the local
scenery while still exporting its powerful stable of American entertainment products. It's a delicate balancing act that AOL has turned into a new model for globalization.
AOL is not simply imposing American culture. It is reinventing itself for each unique audience. And it's finding success: Connie is something of a cult figure in Britain, and AOL is the nation's
No. 1 Internet provider.
From an obscure Internet start-up conceived 16 years ago in the leafy suburbs of Northern Virginia, the local kid from Dulles has moved to New York and transformed itself into the planet's
largest media and entertainment company with its $112 billion acquisition of Time Warner Inc., which was completed in January.
The patriarch of Washington's technology corridor is now pushing its products overseas by using a strategy that is an alchemy of quirky advertising and personal politics, fueled by corporate
strategists who are employing the science of market research, giving away software on compact disks, wooing the media and propping up grass-roots groups.
"Where there's growth, we ought to be," says Robert W. Pittman, AOL Time Warner's co-chief operating officer, adding: "We're going to be in the moron hall of fame if we don't take advantage
of the brand."
In AOL's global strivings, there is a hint of manifest destiny. Chairman Steve Case talks of its "mission of becoming the world's most valued and respected company." But there also is a
practical dimension to all this empire-building: The technology sector is a shambles, the Internet revolution is in question, and growth in the U.S. market is slowing.
Multinationals such as AOL – explorers in search of new dominions – must look abroad for customers. And yet these behemoths find themselves strangers in foreign lands, where they play
the part of scrappy start-ups, battling entrenched competitors. The campaign has not been easy for AOL as it encounters government monopolies, the vagaries of the political process,
unfriendly telephone-pricing plans and a host of challenges indigenous to the Internet.
A hulking brick building tattooed with a giant "T" sits across the street from the AOL headquarters in Hamburg, a constant reminder of its dweller, rival Deutsche Telekom AG, and of the
hugeness of the American company's challenge abroad.
If AOL is to prevail in Europe, it must succeed in Germany, one of the most powerful countries on the continent.
It is 10:41 a.m. in a sterile-looking conference room, and Michael Lynton, president of AOL International, is sitting back, arms folded, listening to his assembled troops. Just arriving after an
overnight flight from New York, the 41-year-old executive cuts an elegant, casual figure in an open-collared checkered shirt, gray slacks and chocolate suede shoes. But there is no mistaking,
he is agitated.
AOL has run into a wall in Germany. Deutsche Telekom – or DT, as it is known – is the country's biggest Internet provider, and it controls the telephone network that links AOL customers to
the Web. DT also happens to be majority-owned by the German government.
DT charges AOL by the minute for use of its phone network. But AOL charges its customers a flat monthly rate. That means the longer customers stay online, the more it costs AOL. It's a
problem because AOL wants to encourage its customers to stay connected. The longer they are online, the more inviting a target they are to advertisers.
To change the rules, Gunnar Bender, AOL's top lobbyist in Germany, says AOL needs the help of Chancellor Gerhard Schroeder, who has made technology a top priority of his administration.
The German leader wouldn't be terribly impressed if AOL arranged a sit-down with, for instance, President Bush, Bender says. But a meeting with AOL's chairman, Steve Case? Now, that
would get Schroeder's attention.
"He likes to talk to the big boys," Bender says.
Lynton agrees, saying he'll "make sure we have Steve in front of Schroeder."
AOL needs friends on a continent where its chief competitors aren't Microsoft Corp., Walt Disney Co. and the rest of the usual suspects in the United States. Abroad, it's competing with
former state monopolies and telecommunications giants with home-field advantage: DT, British Telecommunications PLC and France Telecom SA.
Since launching its international operations in 1994, AOL has stumbled beyond its borders at times. One of the most embarrassing missteps occurred two years ago after the company kicked
off its service in Latin America. When some customers loaded the AOL software on their computers, they were greeted by a blaring Brazilian samba – a factory glitch.
Still, 2000 was AOL's best year overseas. It added about 2 million subscribers, growing by 50 percent over the previous year, to more than 6 million members abroad. AOL already is the
closest thing to a global Internet provider, with more than 32 million subscribers. AOL has planted its flag in 16 foreign countries in eight languages, serving more than 1,000 cities.
Its best showing overseas has been in Europe, where it tops the British market in online subscribers and is No. 2 in Germany and France. Five years after entering Europe, AOL has garnered
more than 5.6 million customers.
AOL continues to carve out new markets. In the Netherlands, for instance, the company only offers its CompuServe online service, not the flagship AOL. Lynton wants to do better, as he
makes clear at a meeting a day later in London.
"Do we have a business plan that could work?" the international chief asks the head of AOL operations in the Netherlands. "How much cash do we have to burn before we get to a big
He is told 100.
As in $100 million. That would be the cost to AOL to establish a beachhead in the Netherlands. Lynton doesn't flinch.
Next up: the Asia-Pacific region, a tough market including Japan, China and Australia, where AOL has been forced to team up with local companies to make inroads. Japan has been
especially difficult because there are so many local competitors. Which may be why Lynton is frowning now.
He and a top lieutenant are going over a chart showing different pricing plans for the online service and how company officials expect Japanese consumers to respond to them. It's not pretty.
Lynton glances at his watch: "I'm running out of time."
Moments later, a driver is escorting Lynton in a black Mercedes sedan to Heathrow. In the back seat, he is working his Motorola cell phone, telling a colleague, "I'm just going to Paris for a
A Hectic Life
Globe-trotting is part of the job. Lynton, a platinum frequent flier, tallied 372,186 miles last year (not including trips in the corporate twin-engine prop plane), logged 1,316 cell-phone minutes in
March alone and fields about 400 e-mails a day. His children – 6, 4 and 2 years old – have already learned to hate daddy's cell phone and laptop.
But Lynton is no stranger to the pace. A boy wonder of the corporate world, he's a Harvard graduate who speaks four languages and has run Disney's Hollywood Pictures and Pearson PLC's
esteemed publishing house Penguin Group.
Since he arrived at AOL in December 1999, the company has increasingly leaned on him in its mounting push into foreign markets. He says it's a matter of opportunity – consumers overseas
are awakening to the Web, logging on in increasing numbers. "Now is the moment when AOL should make a push," he says.
The numbers back him up: In 1999, there were about 90 million Internet users in the United States and about 80 million users abroad, according to analysts. That U.S. lead is expected to
disappear by 2003, with about 180 million Internet users in the United States and about 240 million abroad.
But there is another trend that compels AOL to go overseas. About 60 million U.S. households, or 60 percent of the nation, will have Internet access by year's end, 11 percent more than last
year. But that is only half the growth rate over the previous year, according to Forrester Research Inc.
"Slowly but surely it is becoming saturated," says analyst Steve Harris of International Data Corp. "There are only so many people who can go online."
A big AOL breakthrough in Europe occurred in October 1998, when Connie was invented after intensive market research.
The experts made the character a woman, which they determined to be less threatening than a man. They gave her mass appeal, demographically situated as an older sister or mature
Connie proved to be a hit, with hundreds of photograph requests arriving each month from fans. AOL accommodates them by sending postcard pictures of Connie – signed, of course.
Meanwhile, the British actress who plays the role – Rachel Willis – has been the subject of tabloid fodder. And AOL has used her likeness widely in its British marketing campaign, including
promotional appearances where look-alike models wear ginger-colored wigs and hand out free CDs.
Rosie Blake, for one, can attest to Connie's effectiveness. Last year, the 30-year-old Londoner was an Internet newbie who feared the technology but wanted to learn more, especially how to
e-mail her older brother Paul in Vancouver. "I was terrified, absolutely terrified," she says, "but I was also intrigued."
The Connie ads hooked her. "They were whizzy; you couldn't ignore them," Blake says. Then, AOL hit her with its distinctly American promotion – direct mail – enclosing a CD with 50 free
online hours in one of her book-club packages.
Before Connie's arrival in Britain, AOL had considered using inanimate characters to pitch its wares – such as an anthropomorphized computer – but officials decided against them when
research underscored the importance of humanizing the online experience.
Rival British Telecom went the other way, enlisting E.T., the cute alien from the '80s movie, as the television shill for its online service. BT says it is confident its alien can go head to head with
AOL's Connie – but AOL is growing faster, garnering about 2.5 million subscribers since launching the service in 1996.
That growth hasn't come cheap. Competitors say AOL has racked up massive marketing and capital expenditures to grab market share. AOL doesn't disclose such expenses, but
competitors reckon that AOL has lost hundreds of millions of dollars in its foray into Europe, spending heavily on huge television advertising campaigns and building the computer network to
serve its expanding base of subscribers.
"They've got a huge loss-making business in Europe," says Simon Preston, chief executive of Tiscali UK, a big Italian-owned Internet service provider. "They will have to think about an
alternative strategy in Europe."
Lynton disagrees. "We have a business model that works," he says, "and it clearly works in the United States."
What remains to be seen is how AOL will incorporate Time Warner to boost its presence overseas.
"Now it's AOL Time Warner; that's a totally different animal," says Preston Dodd, a senior analyst at Jupiter Research. "Where is that going to go? How are they going to leverage their
content? What are they going to do globally?"
Looking for Partners
For now, Lynton, AOL's point man on international operations, uses a variety of tactics to build the subscriber base. One is to form corporate partnerships.
At another meeting in AOL's London office, the talk focuses on a major German consumer electronics retailer that wants to get out of the Internet access business and become a partner of
The benefits are unstated but understood: AOL would acquire subscribers – in company parlance, "subs," the driver of revenue growth. What the German retailer wants in return is another
matter: cash and equity.
"We would pay them bounties to migrate folks," says Lance Conn, AOL's top dealmaker in Europe. By "bounties" he is referring to the cost of transferring the retailer's customers to the AOL
service. "The trickier piece is: How do we give them upside on AOL stock?"
"It's expensive to us," Lynton says.
"Maybe we agree on an amount, say $100 per sub, half in cash and the right to buy if AOL IPOs," Conn says.
He is talking about potentially huge stuff. AOL would offer the retailer the right to buy stock in an initial public offering of shares in AOL's European operation. The payoff could be enormous:
Last year, AOL spun off its Latin American division, raising $200 million. With a bigger audience, Europe potentially would be worth billions.
Lynton anticipates a counteroffer from AOL's German rival. "Are we in a footrace?" he asks.
Conn beams a confident grin, which can only mean one thing – the retailer has approached AOL alone. "Their original thought," he says, "was that AOL would come and sprinkle its magic
The Look of an Upstart
For all its corporate muscle, AOL's operations abroad have the feel of an unceremonious upstart. It is just before 6 p.m. on the ninth floor of AOL's Hamburg offices, and Gunnar Bender has
his feet kicked up on his paper-strewn desk, overlooking the red-light district below and his four-person crew next door.
On his cabinet rests an AOL gingerbread cookie in the shape of a heart. A can of Spam sits on top of a stack of books. And then there is Bender's prized possession – a snapshot of himself
as an intern in AOL's legal department in 1997, standing next to Case, the AOL chairman. Both men are in shorts.
Bender, now 30 years old, is AOL's chief of public policy and government relations in Germany. He runs a mostly small-time lobbying campaign. He is not above faxing fliers to members of the
German government containing such statements as "Please help!"
Another prong of his attack: He helps orchestrate activities of a grass-roots group headed by a Berlin student. Bender and his 23-year-old compatriot strategize about regulatory issues and
how to get momentum. It helps when there's a groundswell of public support, not just a big company stirring things up. AOL assists the grass-roots group by partially funding newspaper
advertisements, giving it contact names and addresses and writing draft press releases for it.
"We make it sound professional," Bender says.
The big splash so far came last October after AOL helped the group come up with the idea of circulating a petition calling for a change in German regulations, which resulted in 40,000
signatures being delivered to state officials in a wheelbarrow – and a whole lot of press coverage.
AOL has employed another standby of the lobbying trade: gift-giving. Earlier this year, the company sent the head of AOL Germany on a four-city tour of universities. Bender, concerned about
whether students would show up, helped come up with the idea of handing out free plastic coffee mugs, emblazoned with the AOL running-man icon. Even with that inducement, however,
sometimes only 30 students showed up at his talks. "It was humbling," Bender says.
But not more so than the Becker scandal.
Boris Becker, the former tennis star and AOL's chief pitchman in Germany, recently fathered a Russian model's child out of wedlock, divorced his wife and made headlines over an alleged
tryst with a German rap singer.
If necessary, the company was prepared to remove Becker from the advertising campaign and replace him with its generic "At Home" television spots that feature soft music and happy family
members. But first AOL wanted to consult its market research to see how the public felt.
The results were off the charts. The scandal actually "had a positive impact," says an AOL marketing official. As it turns out, the adage holds – sex sells, and bad publicity is good publicity.
AOL's research showed that while Becker was an idol before the controversy, he was even more popular after the divorce because he's a superstar, and no one expects a superstar to lead a
Not one to lose the advantage, AOL is now in production on a Becker television campaign that makes a lighthearted mention of his divorce. Sometimes, conquering the world requires a touch
"As long as he doesn't do drugs," the AOL marketing official says, "that's fine."