Business Models - Online Services Model

ONLINE SERVICES MODEL

At the core of online service providers like Earthlink, MCI WorldCom, and America Online Inc. (AOL) is a subscription-based model; revenues are generated by charging users a monthly fee for Internet access and e-mail service. Quite often, these firms also generate revenues by doing things like selling advertising space on their sites. For example, AOL founder and CEO Steven Case developed a successful business model that allowed his firm to make money in a variety of ways, such as charging subscription fees, selling online advertising, and developing e-commerce deals with online retailers.

In May of 1985, Case launched AOL as Quantum Computer Services Inc., a modem-based online service offered to Commodore personal computer (PC) users. Within two years, the service had been expanded to include owners of PCs made by Tandy Corp. and other companies. Profitability came in 1987, and by the end of the decade the young firm had made online services available to owners of IBM-compatible PCs and Macintosh machines. Believing a mass market existed for interactive online services and content, Case began working on a nationwide online network for PC owners called America Online. Officially launched in 1989, AOL included games, e-mail, and real-time chat capabilities. The firm used aggressive marketing tactics, like giving AOL software away for free, to grow its subscriber base.

Realizing that additional content would draw more subscribers to the site, AOL orchestrated licensing deals with media firms like Knight-Ridder and CNN. To counter predictions that the World Wide Web would render online services like AOL obsolete, the firm created a gateway, AOL.com, to offer subscribers a link to the Internet from AOL. A pivotal cross-marketing deal with Microsoft, signed in 1995, resulted in Microsoft including AOL software on its Windows 95 platform. By 1996, AOL was a leading online services provider. Robert Pittman, hired that year as president and chief operating officer, was charged with the task of developing AOL's e-commerce strategy. Pittman began forging agreements with online retailers, such as Amazon.com, who wanted to sell their merchandise on AOL. With a membership of more than 10 million subscribers by 1997, AOL also found itself well positioned to sell advertising on its site.

To grow both its subscriber base and its services, AOL completed two key acquisitions in 1998: rival CompuServe Inc. and instant messaging firm ICQ. The following year, AOL bought browser firm Nets-cape Communications, and in 1999 the firm extended its services to wireless consumers via AOL Mobile Messenger. In perhaps its boldest move to date, in 2001 AOL took part in one of the largest mergers in media industry history—a $183 billion union with Time Warner Inc. to form AOL Time Warner Inc. The marriage of an online services provider with a major media player created a "new media business model," according to an April 2001 article in Electronic Media, which explained: "AOL Time Warner is dependent upon subscriber growth and advertiser partnerships and its ability to leverage those relationships while selling its content to its own and other outlets." AOL Time Warner's ability to develop this new business model will likely have a significant impact on future business models in both e-commerce and media industries.