One year ago former AOL CEO Jonathan Miller told Web 2.0 Summit program chair John Battelle that the new AOL would be truly open. At the Web 2.0 Summit 2006, Miller talks about the changes over this past year and what it has meant for revenues.
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Transcript created by Casting Words.
ANNCR: One year ago, AOL CEO Jonathan Miller, told Web 2.0 Summit Program Chair, John Battelle, that the new AOL would be truly open. At the Web 2.0 Summit 2006, Miller talks about the changes over this past year and what it has meant for revenues. Here's, AOL's Jonathan Miller, with Web 2.0 Summit Program Chair, John Battelle.
John Battelle: I want to bring up on stage, assuming that he's ready. I got a nod - Good, good, good, a fellow who graced this stage last year. We had a great conversation. One of the reasons was, cause he just had this Cheshire cat grin on his face - that AOL was in play, you may recall. And he was being courted from many sides, he was seen as a prize, there was a great contest to see who might win AOL's business between Google, and Yahoo, and Microsoft. And Google won that round, and it was a great conversation. He told me that we have to be more careful this time, and I'm absolutely going to follow that.
Jonathan Miller, CEO of AOL, please come on up.
Jonathan Miller: Oh, look! We have comfy couch cushions. This is a new homey touch someone...
John: Went to target.com last night.
John: Welcome, back.
Jonathan: Thank you for having me back, yeah.
John: I'm very pleased to have you back. So, did that deal like happen right after you got off the stage or something?
Jonathan: What was the date last year that we were there?
John: It was October, roughly seven, eight nine...
Jonathan: No, 60 days later.
John: 60 days later?
John: Right, OK. So, we can't take any credit for any of that happening?
Jonathan: None, whatsoever.
John: Now, you renewed with Google...
Jonathan: I did.
John: They run your core search services, and they invested in the company, they bought 5%.
John: How's it going? I mean, is it working out?
Jonathan: It's working out very well. I think, certainly we know Google is doing terrifically. And we not only use their search services, we do things on top of them, and we've recently introduced I think some nice stuff. I urge you to check it out. It combines video image in shopping and news search, all into one presentation.
So, we take what Google does and we add to it. That seems to be going well. It's very new, but it's going well. One of the tenants of that deal was that we would also get in the business of selling paid listings with Google.
Jonathan: Cause that was important to us. It was an area of Internet advertising that we just weren't in. And I think everybody wants to have - every body's in that business wants to have one, and only one, conversation with an advertiser. And that kind of conversation is, "Give me all your money", and you hope the nice advertises think that's what they want to do with their money.
John: Do they?
Jonathan: And, but we couldn't have that conversation, because we weren't in that area of the business. So, that will be coming online soon, and that's part of that deal. So, that's been being built - a white label search listings markets place. So, that is real intangible coming out of that.
John: Now, we're going to get back to Google down the road. But...
Jonathan: You have this all mapped out though?
John: I do, I've got it right there. Last year I asked you about taking America Online, spinning it out and taking it public. And you've said, what you've said many times when I ask you that question, which I seem to do every time I speak to you, which is - if and when, then and how. Something like that, with some other verbs and articles in there. Generally, you wouldn't rule it out, but you know you got some work to do, you got some proof to make; you've got to see that the AOL's business model really has traction. Well, in the last year you've announced a new strategy, and you've executed on that strategy.
John: Which is to be open, basically.
John: The vestiges of the garden walls that were around AOL have now been torn down.
John: You've sold your access business in Europe for a couple billion dollars and that gave you some nice cash to play with. And you have pretty much, not abandoned, cause that's not a right word, but you pretty much said, "We're not interested in the access business here in the United States anymore. Going forward, we will continue to service it."
Jonathan: Yeah, I think we said, "What we want to be when we grow up?"
John: What you want to be when you grown up?
Jonathan: Yeah. Yeah, I think we said that.
John: So, where are you, at 14 or 18? Can you drink yet?
Jonathan: [laughs] Well, you know I was reflecting on this, cause a year ago when we were here, the thing that I was getting asked a lot is, "OK, you're tearing down the walled garden. You're going to let some content out there, you're promoting AOL.com isn't that going to kill your business." And to us? We thought it was absolutely the right thing to do. We were a little worried, so we didn't put out the AOL.com email address, for example. We did hold that back. But, it allowed us to get in the game and create what we thought would be a broadband portal, and about 96% of the usage today of AOL.com is broadband. And it allowed us to keep moving down this path, and now a year later, we went the whole way. I mean, we basically did go for what we feel is true openness, and in all the ways you described, including to me, free as part of being opened. It takes down another barrier. And so we did do it. And the results so far have been very encouraging.
John: Now, let's talk about the results. What you said last year was, you know, "you needed to prove something in the advertising part of your business." You know, you had a good advertising revenue, but year on year - last year's revenue versus this year. How is that?
Jonathan: Yeah, it's been terrific. If you look the progression just on the reported quarters this year, we were up. In Q1 of this year - 26%, in Q2 - 40%, and Q3 announced two weeks ago - 46%.
John: Are those revenues replacing the revenues lost by subscribers who are saying, you know, "Sianara"? Or yet? Or...
Jonathan: The short answer is no, but I've got to give you the little bit longer answer, which is, nor did we expect them to. So, the top line revenues of the company will in fact decline for awhile, and we said that. Also, some costs come out for not pursuing subscription acquisitions.
John: You laid off 5,000 people, as I recall.
Jonathan: We said that we were going to do that. That is an example of costs. The actual most - those are very, very important costs, and affects people's lives. In business terms, the most significant cost is the actual acquisition marketing costs.
John: Right, right. The cost of acquisition of a...
Jonathan: Those are the single greatest. So, that comes out, and advertising comes in. Now the important thing though, and the thing that actually balances, so to speak, the bottom line is, the margins are different on those sources of income. So, subscription business, which is a great business, has margins typically in the 20s, if you're actively marketing and going around. That's how that business works. And in the advertising business, when you hit a certain point of scale, which we believe to be north of a billion dollars in ad sales, every dollar after that falls very heavily to the bottom line. 50 cents on the dollar, sometimes more; and we have reached that point of scale. We're beyond it now. So, you actually get more money to the bottom line out of a dollar over here than a dollar over there. And that kind of - that makes it all work.
John: Right, as a matter of fact, Time Warner's and AOL's earnings came out recently, prompting an email to me in which you said, "I'll be able to talk, very openly, about that earning, so we're looking forward to all that openness. When the earnings came out, I found that a representative quote from the coverage of those earnings. AOL was a star for a change, said this fellow at an investment bank. It appears that the strategy has taken hold. Can you say with confident that the right move has been made?
Jonathan: I think I can say what I have said that I felt strategically it is absolutely the right move, and I have never had any doubt about that. I don't think any leadership of the company does. That is what we wanted to do, and have wanted to do. We just had to get the strength to get there, strength in the advertising business. And I think the results in that sense speaks to themselves.
In the acceleration of our advertising growth to be certainly greater than the market rate of growth. And then I think the other thing that has been encouraging is that we listen. The biggest risk is that people says, "I am going to move to free, I am not going to pay you anymore. You know what? It turns out I am just not going to use the service that much going forward either". That would have been a real problem.
And that is not what has been happening. What's happening is that they are using the service as much as they were used to. We had a whole bunch of new people sign up. More than we anticipated. What says to me is that, we had a pricing problem more than we had a product problem, at least for a large segment of the people. It was the price which is the barrier to the adoption of our service in any cases and not the product itself. That's what we have learned so far.
John: One of the product you have created is called OpenRide. And as I understand it, sorry, I am not a user of OpenRide, but....
Jonathan Miller: You will be.
John: Well, the reviews I read kind of scared me off, to be honest. Well, they have been lukewarm, saying it might be a good migration product for people who are access users of AOL, but not full scale users of Internet. Who are you designing for when you are designing product? Do you have a typical consumer in mind?
Jonathan: I actually think a company like ours has design for multiple segments. As the Internet matures and we go into Web 2.0, and that matures, things segment. People want different types of experiences. In fact what we need to do, as any company need to do, is over time provides the experiences people want in the forms they want. I think we are more mature in that regard in our Instant Messaging. For example, we have AIMPro which is often aimed at the business or the enterprise market. We have the full AIM client, we've been introducing the web based Instant Messaging. We have light client products. So to me, you covered the different segments.
OpenRide is a client and it is designed for people who want to immersive in the experience. Many people want an a-la-cart experience. Mix and match, make their own, change it as they go, and that is great too. We want to be part of that world. Our history is that we actually make all in one experiences, and OpenRide is the next generation of that. It's designed to be a platform that we can continue to evolve and make more open, and things can switch in and out of. That product is designed for people who want an immersive experience, don't want to have to manage every piece of it.
John: So now that things seem to be going your way, and you have a few quarters of being the bright light in Time Warner. By the way, are you guys followed the news of Time Warner. It is kind of like following GM for a while. The news was often either bad or because Time Warner is such a big powerful media company, the news out of New York often was beating up Time Warner. Used to be that AOL was the reason that Time Warner was being beat up, but recently it has just been beating them up generally because the stock price has been a flat line. But now here you are a bright spot. Two or three quarters of bright earnings and I am guessing that things are looking good into the future, without making any forward statements, of course?
Jonathan: Yes. We have got good strategically.
John: I will let that hanging.
Jonathan: I understand. I feel really good about the way the advertise business is going. It's not like we woke up one day and "Oh, look, we're making some sales." We did a lot of things over a period of actual years. To get our systems better, our sales processes better, our people, our infrastructure and all those things, that then started to yield something. It is built on a foundation. So that will be good. It will continue to be good.
John: So the dot, dot, dot is do you think Time Warner is considering, assuming you have insight into this, is considering spinning AOL out and trying to capture some of that value? Because their big pop in their stock is from eighteen to nineteen and a half, and you've argued on this stage last year that there is a lot more value in AOL of then is being expressed on that stock. Is that a course that might be chartable now?
Jonathan: You have worded the question really well.
John: [laughing] That is not an answer.
Jonathan: I got really burned two weeks ago, saying what I said in Europe, and I just can't....
John: What did you say in Europe?
Jonathan: It was misquoted.
John: [laughing] Can someone find out what he said?
Jonathan: Well you can't. Because it wasn't printed correctly, and it was picked up everywhere, and it was unfortunate for me, so...
John: I see, I see, you got spanked. [laughing] Maybe that is not the right verb. All right, I will check that one off my list there. Getting back to the advertising thing, there is much to talk about how this is not the zero sum gain and the market is growing. But when you are growing faster than the market, you are taking shares from someone. The earnings coverage, one of the quotes that came from you perhaps, or someone in Time Warner, is that you are taking share from Yahoo. Why do you think that is?
Jonathan: It wasn't from me, but I do think we are taking share in the market generally, and they are certainly the leader in display advertisement, so...
John: There is a target.
Jonathan: There is a target there for us. That's good and healthy competition. And I think what is really interesting about the market it that you talked about zero sum gain. What has happened in the Web 2.0 world is you've had, we've all had, an explosion, I think, of just great consumer services, products and companies. And it's world wide, and it's happening, it seems to me, in an increasing pace. I think it is terrific.
At the same time, that fragmentation of both the services and the places they comes from and the usage is going many, many, many more places than before. At the same time of that fragmentation is occurring, it appears, and I am just an observer, it appears there is consolidation on the modulization side. The companies involved with that most directly are ourselves, Yahoo, Google, Microsoft. The money, if you will, is consolidating in the advertising world, anyway, online around those companies. That is interesting in the two counter forces at the same time. Spread out of product development and usage fragmentation of that and consolidation on the revenue side.
John: Do you think that can stand because if you look at the model for example last great innovation in media and technology which spurned massive media companies was television. And we had three networks where all the money was. Then 40 years later, lets hope we don't have to wait that long, we had the [indecipherable] of cable and cable now is larger than the actual networks in terms of media wise. Do you think this could stand?
Jonathan: In principle and in theory, I don't see how it could. In practice I don't see what stops it. And I'll tell you why, on the later. Because all of those companies are putting in systems and infrastructure and things that really do distance them from other folks. The Google search network performs on a very high level. If you're going to be in the search game, and the search network game you really got to figure that out to perform at the level, not just at the level of consumer experience and advertisers experience, the Dynamics that affect pricing and so on. And I don't know how that easily changes overnight for example. Same with other people in the search game. So, I don't know what causes it to change though in principle I don't think these things last forever.
John: Right, Right, you have a good point. Let me ask you this. Were you interested in YouTube?
John: What stopped you?
John: Too Expensive...
Jonathan: Yes. Anyone who wasn't interested in YouTube was either a sleeper or not being honest, in my view, because they should have been. But if you think about the dynamics it's very hard for anybody to go in and pay cash, which is what my company would have had to do.
John: Couldn't have Time Warner, or was it an issue of speed?
Jonathan: No, no it wasn't... it's my personal belief that it's very hard for any large traditional company, or any company to pay cash. In fact, nobody did. It was stock. And it was very few companies and perhaps only one who could've done it that way. And they did.
John: Because of the value of that, correct?
Jonathan: Yeah, and for the reward that they got. Meaning that is was immediately rewarding.
John: Well, yes they bought YouTube, and then their market cap when up by five YouTube's.
Jonathan: Exactly. And I'm not sure any other company would have that dynamic.
John: You don't think that Time Warner had, that would've given them a bump from 1950 to 1960 or 70, or something. Sorry man. I'm starting to get a little punchy here.
Jonathan: It's OK. I'm just remembering this from when you had a public company.
John: Boy man. So this brings up the issue.
Jonathan: Which is another point though, have I said that. Do you mind?
John: No, please.
Jonathan: Which is the other thing as an observer I note. As I say for all of us, to think what could it mean? I could be correct about this. I'm pretty sure in the US; the question is around the world. Let's list all the Web 2.0 companies that are now public companies. I think in the US that list would be zero.
John: Oh I think you are bulling me.
Jonathan: Well OK all right all the newer companies have been bought.
John: Oh, well right. I want to talk about this tomorrow with Roman Roger. Well definitely the public markets. I mean look at Bob Parsons presentation earlier he looked at the public markets and ran.
Jonathan: MySpace is a division of News Corp. And YouTube with now be a division of Google. And many other companies have been bought. I guess what I'm wondering is, is web 2.0 an underlying movement that many, maybe all of us will adopt. And take to heart. That is not necessarily expressed in standing entities. Because it may just be that it gets absorbed.
John: And the standing entities become it, I think. The following question to the YouTube question, and I ask this earlier of Ross is What are you looking for? You just bought a company, why did you buy that company? Tell us a little bit about it. Tell us what you're looking for. Why did that company fit the bill?
Jonathan: I don't know how many people saw it. But we bought a company this morning called Relagence, which has been providing real time information to the financial services industry. And the reason we were interested in starts with the thought that a portal as it's been know, has been know for a while. And if you think about it, there's not been a lot of tremendously new things about the idea of the portal. We thought we were the first people to do a pure broadband expression of it last year. But essential the portals were pretty stayed. In my view. So we're obviously in the portal business, along with a few other people. And portals have been supported to email, by search, by instant messaging. But were also trying to think, how to your rethink some of the basic things that are also all the content around it are the new approaches. And what Relegence does, real robustly, is real time information. As you can imagine the financial services industry, thrives on truly, speed of light information. And we though we could look at that as broadly as we could and turn that into consumer applications. In this day-and-age people like speed of information and that would be something that would help to innovate the basic proposition of a portal.
John: Interesting, so is that one of the things you're looking for when you're looking to acquire a company.
Jonathan: Yes, and if you're looking at it more broadly I also very much on the monetization, which goes to your earlier question, that some things with break though. And I think there's a lot to be done there and I think we will continue to search out companies and push them in that regard.
John: That sounds like a technology and product integration question. You bought a company that has a market here and a technology that might be extensible, so now you have to extend that technology. This brings me to AOL labs, and the recent announcement about open API's. This is something that this audience sees Yahoo and Google as really, really good at doing. I don't think there's a vibe around AOL that you're an engineering company. Do you wish to change that?
Jonathan: Very materially. I think the business thing that's changing that everyone focuses on is going from a paid model to a free model. To me, the real heart of what's going on is AOL to become a product driven company. In the early days of the internet it was very much an innovative product company, they created IM and parental controls and things like that. Even the way we're organizing the company now is around products and product lines. I think we, and me, personally fully embrace a lot of the things that are being talked about as the open web and web services and platforms and syndicated models--all that we take to heart. And I think that the biggest change in our company is embracing that and organizing for it and having removed all the barriers for it.
John: That brings me to my next question: Which is talent. We had an interesting interplay and john tapp-Scott about how you can't lock talent up but the fact of the matter is that there is a humongous company in Mountain View who is really good at getting the best talent and keeping them. And there have been some really talented people in your company who have recently left to go to baby center and other Ted Leonsis who left to run some sports teams and stuff. I know a lot of engineers and I have a hard time getting them up to Sausalito much less Virginia. How are you going to compete for talent when you're in Dulles?
Jonathan: Well, I think we're not just in Dulles first of all; we're in a lot of places.
John: Are you going to extend your presence?
Jonathan: Yes. I think we need to extend, not in the Bay area, but literally, and I mean this, around the world.
Jonathan: I think the important thing to understand about talent is that it exists everywhere. The question is how do you organize yourself to harness it, to make the kind of environment that talent wants to work in and is rewarded in and is excited by. How do you do that truly on a worldwide basis? Because thinking of it as Dulles or, frankly, thinking of it as the Valley, or anything like that. I think that long term is not the way to think. The real question in a distributed web world is how do you harness the talent around the world. So our orientation and mine is to think through that.
John: Right. I'd like anyone who wants to ask questions to please come up now. We'll have time for a few. Come up to the microphones in the middle if you have any. Oh good, there's one there. Questions over here?
Man 1: OK, quick question. What did AOL learn from the incident where you published three month's worth of search results?
John: That was the one I was just about to ask. [laughs]
Jonathan: Unfortunately, we learned a lot by that. Well, fortunately, we learned a lot by the unfortunate incident. The thing that was difficult about that was it was entirely well meaning. It was people in the company doing something for an academic research project absolutely for what they believed to be the right reasons, and with good intentions for humanity. It was obviously a bad call.
John: Someone fell on the sword for that.
Jonathan: It was a bad call. It just was. But for well-meaning, well-intended reasons, and that was the thing. As a manager, how do you balance a world where you want people to have authority pushed down into an organization, where you want openness to be a hallmark of the company, you want to encourage people to participate in all forms of discourse, including academic discourse and you want to be part of that community. At the same time, you can't do that.
And so, the learning has been around how do we try to balance those two things and have rules of the road, i.e. don't drink and drive. And at the same time to still empower people to be parts of the community that they are part of and to do things that are part of the web world.
John: Over here.
Man 2: Yeah. One thing that distinguishes the portals from traditional media is that lack of editorial opinion. Do you see that changing, and, if so, when. For instance, would you see any of the big four websites picking a presidential candidate?
Jonathan: I missed the last part of the question.
Man 2: For instance, would you see any of the big four websites picking a presidential candidate for '08?
John: Backing a presidential candidate.
Man 2: Oh, I'm sorry, backing.
John: Like the New York Times does, for example, right?
Jonathan: That's a really interesting question and one that we talk about a lot. Not the presidential one, per se, but the whole idea of, do we have a voice, or are we an aggregator and reflector of many voices? That is a continuing question for us.
One of the ways we're working through that is with Netscape, where there is both a wisdom of the crowds layer and an editorial layer on top of that seems to me to be a pretty good product and is getting better and better all the time. That's one way of looking at it and there's definitely an editorial judgment exercise there as there is on what goes on our main screens.
So, we don't yet go as far as saying that we have a voice and we have an editorial position. We're not at the point where we would think that we're in the business of endorsing a candidate versus another candidate. But we're trying to think this through as the media matures. Our central position is that we're an aggregator of many voices today. That's the stage where we are, as we try to work this through.
John: Over here?
Man 3: Just curious what the growth of broadband video on demand, what AOL's plans are for the future with video and also the coaches.AOL, where that's going to come in?
Jonathan: Again I lost the end of that.
John: You asked about video and?
Man 3: Where is AOL taking video on demand and there's a new coaches.AOL?
Jonathan: Oh coaches, sure. I've said for a while that I think that it's only going to be a short period of time before on demand viewing becomes the principle form of viewing video at least in the United States and maybe well beyond. Last year I would have said that would be in a number of years, five, seven years out. I keep pulling in the time frame in my own thinking. I think on demand video over IP will become absolutely the biggest form of viewing in a short period of time measured in single digit years. I think there's a huge change in personal video consumption. Again, that's a personal belief.
I think it's underway already. So we want to be participant in that, at all levels from offering great consumer services, aggregating again many different sources of both copyrighted and user generated content. We're working at multiple levels with deals with studios, with deals with BrightCove, which is a company we've been in from the beginning, with their own uncut video, which anyone can upload. So we want to cover that waterfront and very much engage in the monetization of video viewing.
Currently we do very well. We do a lot with pre rolls. I have a personal view that pre-rolls will not be the way of the future. It's a little too intrusive. It's not the best user experience, in my view. I think the industry as a whole needs to find a better answer than that and I look forward to hopefully being one of the companies that figures that out. I'm hugely bullish on all of that.
John: All right, now Mark, I've got to cut you off because we're totally over time.
John: Let me ask the question for you. Are you going to embrace open data so that people can take their data out of AOL and put it anywhere else?
[laughter and clapping]
Mark: I already know he's going to say yes! I had a different question.
John: Oh, I'm sorry, I will ask him that question and then we really have to go.
John: You two don't need me do you; you can do this between yourselves.
Mark: What about all the other properties like X-Drive and Movie Phone and all this incredible stuff you have from the 1.0 day? Now that you're a 2.0 company should you connect them all together into a new kind of match-up that would provide compelling experiences to the people who really love your brand, which are down the pyramid from more normal people who aren't nerdy enough to know who flicker is, but who would benefit from gluing together all these cool things you've got?
Jonathan: Very interesting question, I'll tell you how I think about it. I think that eventually yes, which means that one of the things people like about our company is that we put things together for you; we do the work so you don't have to. Again, a lot of people like that; some people want to do it themselves. But a lot of people like that and that is a hallmark of this company.
At the same time, it is important to just make great consumer experiences. What we have done in the past, in my view, is err too much on the side of integration of things, and not enough on making just an absolutely great killer experience in whatever area that was. So, my mindset today is, make it great. Make it just great at what it's doing, you know, standardized technology and things like that so that we can weave that web and tie it together as we move forward. But the emphasis today is on making stuff great.
John: All right, well, first of all I want to thank you for Lou Reed tonight. Thank you very much for coming.
Jonathan: Thank you John.
Daniel H. Steinberg is the editor for the new series of Mac Developer titles for the Pragmatic Programmers. He writes feature articles for Apple's ADC web site and is a regular contributor to Mac Devcenter. He has presented at Apple's Worldwide Developer Conference, MacWorld, MacHack and other Mac developer conferences.
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