AOL's Demise and What it Tells Us About the End Of The First-Mover Advantage

When I interviewed Gerry Campbell, we looked at the History of AOL. While we go back over twenty years, there are some valuable lessons to learn from the whole story. Let’s see why, but first, let me give you a quick recap of what happened during these years.

The first internet wave and the first walled gardens

In the first wave of the commercial Internet (1994-1999) the first big tech players and tech giants were walled gardens. Those platforms enabled access to proprietary networks (this wasn’t really the Internet, as those were not open protocols) where users could enjoy a set of online services (emails, news, forums, and later on search). These first tech giants were companies like AOL, Prodigy, CompuServe, and GEnie. Their business model was straightforward, you would pay for a monthly subscription, and enjoy a few hours of access to their proprietary networks. For each additional hour users spend on top of the subscription, they would be charged based on consumption.

The first Internet giant: AOL

As AOL took over the Internet in the first wave of the mid-90s, it also opened up its platform to more and more people, by changing its revenue model. From the subscription and consumption model, AOL had to adapt to the unlimited subscription model where users could enjoy unlimited access to AOL’s proprietary network. With this new model, AOL users’ base grew even further. But it also showed some of its weaknesses, as the platform became unstable, with a wide number of new members. In this time period, the Internet also grew exponentially, favoring the birth of a few tech players. In this period, something very counterintuitive happened. Search, which seemed a feature to offer on top of the Internet, became a killer commercial application!

Browsers wrecked down the walls of the proprietary networks

As the number of sites on the Internet grew exponentially, this opened up the need for a tool that enabled one to surf the web to find the most relevant web pages. In parallel to the development of proprietary networks, like AOL, other tools had turned out to be congenial to the Internet. The first was the browser, with a player like Mosaic, which in a short time span, became very popular.

Yet by 1994, a group of young people that had also worked at Mosaic (among which venture capitalist Marc Andreessen, founder of a16z), also built a browser called Netscape, which by 1995 became very popular. Netscape drew the attention of Microsoft’s Bill Gates, which understood how browsers could become the gatekeepers of the Internet. This spurred a war between Microsoft and Netscape, which culminated in Microsoft’s release of Internet Explorer, bundled in its Microsoft Office products. Thus, Microsoft leveraged its position in the market, to quickly gain market shares, against Netscape. This drew the attention of the regulators who called Microsoft for abusing its dominating position. This led to the parallel development of another commercial killer application: search.

Search turns out as a commercial killer application

As the Browsers’ War went on, search became the most important application of the Internet, enabling users to surface the growing numbers of pages on the Web, which was growing at an untamable pace. Search, therefore, was essential. However, the first search engines, while useful, they were still too much focused on paid placements, and also much easier to game, by webmasters who could easily have their pages show up as relevant, even if not. This paved the way for new players. One epitome of that was GoTo.com, created by the legendary Bill Gross. GoTo.com not only mixed paid results as if they were organic results.

It enabled everyone to bid and compete on its advertising platform. Thus, making the paid search a primary feature. While this model, called CPC was revolutionary, it was also skewed substantially toward paid vs organic results. In that period, toward the end of the 1990s, another player had developed a search engine able to index, and rank the growing mole of web pages. This was first called Backrub, out of a P.h.d. project at Stanford. And later it was called Google! Google picked up quickly, becoming de facto the most popular search engine at the time. Its ability stood in enabling websites to rank organically without having to pay. Initially, Google’s founders were quite skeptical of the advertising model for search engines, as they thought this would be intrinsically biased toward paid ads, thus not giving relevant results. Yet, over time they set to change that. They, therefore, started to build an advertising machine, able to also rank paid results based on various factors. Thus, Google borrowed from the GoTo.com CPC model and it improved on it. This formula turned out to be extremely powerful.

The Google’s deal that made it the tech giant we know today

While Google’s user base was scaling quickly in its early years. Its advertising machine would be built later on (2001-2004). Thus, in the early years, Google had to rely on business development deals to further scale-up, strengthen its position, and become the market leader. Among the most important deals Google sealed at the time, there was the deal with AOL. Indeed, AOL saw search as a feature within its proprietary network, thus featuring a search engine that enabled users to surf the web. Initially, GoTo.com (later called Overture) had a deal with AOL to be featured as the main search engine. Yet as this contract expired by the late 90s, Google jumped on it, managing to get the deal with AOL, in place of Overture! This deal was a very important one, which put Google on a further growth trajectory.

Proprietary networks got stuck in their game while users’ sophistication grew

Over the years and going into the early 2000s, proprietary networks had become less and less relevant, as more Internet/Web players had spurred up. From e-commerce to search, platforms like AOL had lost traction. In that scenario, Google became the new King in town.

The new King in town is Google

From then on Google became the new dominant player of the Internet. From wrecking the walls of closed proprietary networks. Over the years (the 2010s – present) Google, then become Alphabet turned into a sort of Walled Garden.

No more about first-mover?

Technologies can give an important advantage in the very short term. However, those advantages can be lost pretty easily, if a technology is not leveraged fast. Yet implementing new, unproven technology is also risky, initially very expensive, and often requires the ability to develop a whole new market. To make things worse, even when this new market has been developed, that doesn’t give you a long-term competitive advantage. In fact, new players that come in can do the same, by simply copying part of the strategy that turned out to be successful.

In short, the first player laid the foundation, for the latecomers to leverage the existing technology, and by improving on it to gain an advantage. But if being first is not giving a long-term advantage, what’s the key ingredient there?

The value of network effects

Many tech companies, from the rise of Microsoft going forward, understood the value of a platform strategy. A platform strategy consists in creating value for users by enabling an entrepreneurial ecosystem on top of it. The essence of network effects stands in the fact that the service becomes exponentially more valuable for each additional user as more users join in. Of course, building network effects isn’t easy either. As many platforms like Uber and Airbnb figured at the beginning when they needed to understand how to kick off these networks’ effects.

Thus, when it comes to creating a lasting competitive advantage in this digital landscape, even if you are a first-mover you got to think in terms of network effects.

The first-scaler advantage matters only if you can dominate a market in the long-term

When Netscape built the most valuable commercial browser, back in the mid-90s, the company gave up profits, to grow as quickly as possible. The bet was if Netscape grew large enough to have most market shares of the browsers market it could eventually enjoy also wide profit margins in the long-term. Yet, Netscape awoke Microsoft too early. And while Microsoft did leverage its dominating position to crush Netscape, it also managed to overtime destroy its market leadership. Indeed, while Netscape became a multi-billion dollar success, it never turned a profit, and it eventually sold to AOL, as the pressure from Microsoft was becoming unsustainable.

Thus, even when you do scale, and you do it first, you still need to make sure to stably control that market. Otherwise, like in the case of Netscape vs. Microsoft you might be taken over. Of course, in this particular case, Netscape was crashed by a tech monopoly that took advantage of its dominating position.

Changing business playbooks

When browsing took over the early Internet, that was quite unexpected for many. Also, very smart people, like Bill Gates had envisioned a more linear evolution of the Internet, almost as if that was supposed to bring TV online. While this vision would be in part realized through the 2010s (see Netflix) in reality, it also shows that the model of entertainment of the Internet evolved in a whole different way than TV.

The same applied to search. When Google took over, existing giants like AOL, who had successfully dominated in the previous decade, were taken aback by the success of the latecomers in the Internet revolution.

First, players like AOL thought that search was not a commercial killer application, but rather a feature to be added on top of their services. Second, they didn’t envision, initially, how search would change the whole Internet playbook altogether. No more, based on conventional marketing, a tool like Google took over, as it combined product, marketing, and distribution as if they were a whole.

Third, even when consumers were quickly shifting to these new tools, it was very hard to acknowledge for existing/dominating players.

In short, things might work the same for a long-time and then suddenly change. And when things do change, they do it so quickly that the dominating market position might be swept away pretty quickly.

That is the essence of business innovation!