ORGANIZATIONAL LIFE CYCLE

“America Online”

A Report Submitted to
Prof. Ernesto Noronha (Instructor)
Ms. Silpy Gupta (Academic Associate)

By
Abhiram R
Amruth K
Ashutosh Sinha
Sucharitha Dasireddy
Gaurav Singh Teotia
Jandhyala Srinivas
(Group C13)

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Introduction
AOL, short for America Online, was founded in the year 1985. AOL was perhaps most
popular as a search engine. However, it was not just a search engine but also an Internet
Service Provider, and later a media company. In fact, for a large period in the 90s, during
the initial era of the Internet, many thought that AOL was the Internet. Such was its
influence. The latter part of the 90s and the new millennium witnessed the diminishing
power of AOLs over the Internet, and AOL soon became insignificant amidst a slew of
new Internet companies (Yahoo! and Google, for example). Over the course of this
report, we will analyze the organizational life cycle followed by AOL.

Stages of Life Cycle Development

The stages of development experienced by an organization can be roughly categorized
into four different stages
1) Entrepreneurial stage
2) Collectivity stage
3) Formalization stage
4) Elaboration stage

An illustration explaining each stage can be seen in Exhibit 1. Further, we look to

elaborate each of these stages and examine AOL’s transition to each of these phases
along the course of its life.

Before looking at the organizational life cycle for AOL, it is important to trace its origins.
Before AOL got its name, it was called CVC (Control Video Corporation) – A company
founded by Bill von Meister in 1983. It was a few years before it became the company
that was to create history in the world of the Internet. We now look to identify the various
stages of life cycle development that AOL faced.
Entrepreneurial Stage

When AOL began as Control Video Corporation, it was a highly responsive, flexible
organization - An entrepreneurship that had a simple structure and was organic in nature.
As mentioned before, it had only one product called Gameline. It enjoyed greater
employee commitment because it was easier for people to feel like a part of the AOL
community. Gameline was offered to Atari 2600 gamers who downloaded games via
phone line and modem. Even though Warner Brothers initially rejected the idea, it later
gained popularity among other gamers.

It is often observed that startups or entrepreneurial ventures fail not because of lack of
capital but because of the lack of steady, clear leadership.1 Indeed, in the history of many
of the successful technical companies of today, it is observed that each of them brings in
an experienced leader as they move past the initial entrepreneurial stage. Entrepreneurial
organizations face a need for leadership, since the founders devote their complete
energies to the technical activities of production and marketing. 2 AOL felt this need too.
This was when they brought in Jim Kimsey in May 1983 as the CEO of the company as
well as Steve Case and Marc Seriff. These were experienced leaders and they brought a
strong sense of business acumen to the table. Meanwhile, the founder of the company
made his exit in the year 1985.

Collectivity Stage

As the leadership crisis was resolved, Jim Kimsey, the new CEO of the company,
changed the strategy of the company and provided a clear direction to the company’s
progress. Instead of focusing on online video games and downloads, he shifted the focus
of the company to offering online services to the Commodore 64 and 128 models. The
product Q-link was officially launched in 1985.

1 The Value of Leadership: Why Startup Ventures need a Steady Hand at the Helm -
http://www.socaltech.com/articles/the-value-of-leadership--why-start-up-
ventures-need-a-steady-hand-at-the-helm/a-0000007.html
2 Chapter 12, “Understanding the theory and design of Organizations”, Richard Daft
Initially, in the mid-1980s, employees of AOL faced problems related to delegation. This
was just as the company began to grow in size. It needed the delegation for removal of
autonomy and establishment of rules and structures.

As Jim Kimsey gave the organization its new strategy, it led to a collective sense of goals
as well and there was an established hierarchy of authority and clear division of labour as
well (see Exhibit 2). Here, with this successful organizational structure, AOL was able to
circumvent the need for delegation crisis that is normally felt by organizations in this
phase. This was largely due to the forward thinking of then-CEO Jim Kimsey.

The progress that AOL achieved during its collectivity stage set it up for its tremendous
growth in the future years. This was especially because top management was able to
ensure that all parts of the organization were coordinated and pulling together. 3

Formulation Stage

In the early 1990s, AOL adopted to the problems of delegation by adopting policies that
any large corporation would adopt after facing some amount of growth. It started
implementing internal systems. They used more control systems, rules and procedures.
AOL also had its first public offering. Case had been made CEO in 1992, and he wanted
to win the first place as a top Internet Service Provider. Specialists and technicians were
added as an important source of production. Most of middle management was taking care
of issues while the top management was busy raising IPOs and looking for potential
growth opportunities strategically. For example, while internal management focused on
operations, higher management sought to lower the price below competitors. By end of
1993, more than 600,000 users were using AOL services. The new environment (caused
by changes and structural improvements) enabled the organization to continue to grow.

At this stage, AOL started looking at inorganic ways to grow and they started buying up
companies that would benefit its subscribers. Prior to that, they were considered a closed

3 Chapter 12, “Understanding the theory and design of Organizations”, Richard Daft
network, offering the users only a limited set of services. This strategy helped AOL to
grow quickly, but it also added a lot of managerial challenges. The internal systems and
control systems that had been adopted earlier were not able to scale up to meet the
requirements because of this inorganic growth. This led to a crisis in the form of too
much red tape.

Elaboration Stage

By late summer 1996, AOL reached 6 million subscribers and that fall they started
offering flat-rate monthly service fee of $19.95. During this time, AOL connections
would be flooded with users trying to get on, and many cancelled their accounts due to
constant busy signals (As a parody, people began to call AOL as "Always Off-Line").4

AOL had reached a point of maturity as an organization and there was a decline in
customer service levels even though the actual revenues and subscriber base were still
growing. The organization had started facing problems and there was a need felt for more
collaboration and teamwork to tackle the issues. There was a need felt within the
organization to revitalize the brand image of AOL. In this regard, MTV’s creator Bob
Pittman was hired to improve their brand and customer service. He later on became the
President and Chief Operating Officer.

AOL further continued to grow by means of acquisitions that focused only on providing
the customers with a variety of services. They acquired Netscape, an Internet giant on the
decline, and their web portal and browser were included in the deal. They also entered
into a 5-year agreement with Microsoft that resulted in a bundling of AOL with
Windows. The company had lost focus of innovation within its own ranks and was
searching for external means to meet the need for revitalization. This was a crucial
turning point in AOL’s history.

4 http://en.wikipedia.org/wiki/AOL
AOL’s Decline
AOL’s decline in the early 2000s can be attributed to environmental decline. This
essentially caused a reduction in size of its market capitalization. The primary reason for
AOL’s decreasing market share in early 2000s was the burst of the dot-come bubble. A
major part of AOL’s growth was during the period when the dot-com bubble was
expanding. Thus, it came as no surprise that when the bubble finally burst, it took down a
giant with it. The share prices of AOL saw a high of $90 per share in January 2000 and
then slipped to $35 per share by March 2001 (see Exhibit 4).

At the same time, reports on its organization atrophy also surfaced. AOL signed up
more users that it could handle the bandwidth demand for. Its failure to adapt to the
surging consumer demand gave rise to popular synonyms for its name like ‘Always Off
Line’5. A possible lack of coordination between different functions within the
organization could be an explanation for this breakdown underlining the ineffective
procedures existing in the organization.

Stages of AOL’s Decline

Blinded Stage

This stage was characterized by the lack of harmony with the customer of AOL. Based on
the media reports and popular blogs 5, 6, it can be seen that this stage started in 1999. A
number of customer service practices of the company didn’t go down well with the
public. As a result, the company was even faced with a number of class action lawsuits.
There were class action lawsuits against AOL for its practice of rounding up the ‘used
minutes’ of usage to the next whole minute. AOL claimed that this was done to account
for the sign in/ sign out time. Since, this was not made clear to its user, the company lost

5 Simpson George, “Great Moments in the Decline and Fall of AOL”, Media Post News,
November, 2009 http://www.mediapost.com/publications/article/118114/
6 Hansell, Saul, “Eleven Years of Ambition and Failure at AOL”, The New York Times,

July 2009 http://bits.blogs.nytimes.com/2009/07/24/eleven-years-of-ambition-

and-failure-at-aol/
the case. Also, AOL made it difficult for its customers to terminate their accounts. A
detailed auditing of the company’s policies made it clear that it rewarded employees who
purported to retain customers who had called up to cancel their accounts. Many a time,
such retention was made without customer knowledge too.

The executives in the company were largely unaware of the environmental changes and
went wrong in their forecasts of the same. They were planning to foray into television
and even mobile phones. There were bold statements made by its CEO Steve Case like,
“Windows is the past. In the future, AOL is the next Microsoft”7. This came at a time
when its earnings were merely 6% of that of Microsoft.

Inaction Stage

As the dot-com bubble was bursting which sent the AOL share prices plummeting, there
were increasing demands from the Wall Street for AOL to boost its advertising revenues
to meet the rising expectations. However, by the time that the executives acknowledged
that the company was going into a decline, it had become a little too late for their liking.
Thus, the company resorted to unconventional methods to boost its financial numbers8.
This practice had begun by 2000 in AOL. The company misrepresented its accounts in
three quarterly periods in 2000 and 2001. In one of its deals eBay, the company booked
all of the revenue generated from the resulting transactions as gross revenue, rather than
simply its commission. It also tried hard to turn an arbitration settlement with a British
entertainment company Wembley PLC into an ad deal, lifting artwork without permission
as it raced to put the ads online. As a result, $23 million that would have been booked as
a special item was instead booked as advertising income. A similar deal was reached with
TicketMaster9.

7 “Now, AOL Everywhere”, New York Times, July 1999

http://www.nytimes.com/1999/07/04/business/now-aol-everywhere.html
8 Verma, Kamal, “The AOL/Time Warner Merger Where Traditional Media Met New

Media”, http://archipelle.com/Business/AOLTimeWarner.pdf
9 Orlowski, Andrew, “AOL cooked books as dot.com bubble burst”, The Register, July

2002, http://www.theregister.co.uk/2002/07/18/aol_cooked_books_as_dot/
One of the reasons why AOL cooked its book during the dot-com bubble burst was that at
that point in time, it was contemplating a merger with Time Warner. Thus, it wanted to
increase its valuation and thus, was engaged in ‘unconventional transactions’ before the
merger took place10.

Faulty Action Stage

AOL entered this stage with its ill-fated merger with Time Warner. Both the companies
had a clear vision of their synergies. AOL believed that the combined companies had the
means to be uniquely positioned in order to bring interactive media into customers’
everyday lives and to further penetrate this market. However, this action failed primarily
because of their failure to communicate their visions and ideas to each other. For
example, there was inadequate marketing for all the Time Warner content through the
channels employed. Even after combining, they were unable to predict the trends in the
digital entertainment industry. Another reason for failure was that the companies were
not able to encourage a climate to initiate the proposed synergies.

Further, there was a lot of confusion around the process of downsizing the company by
laying off personnel. On October 15, 2007, AOL CEO Randy Falco announced plans to
lay off 2000 employees worldwide by the end of 2007, beginning "immediately" 11. That
evening, over 750 employees at Dulles alone received notices to attend early morning
meetings the next day and were laid off that day though the employees would remain on
the payroll until December 14, 2007 in accordance with the Worker Adjustment and
Retraining Notification Act. Other employees whose groups were due for phase-out as
part of the restructuring were informed on October 16, 2007 that they would be kept on

10 Klein, Alec, “Unconventional Transactions Boosted Sales”, The Washington Post,

July 2002, http://www.washingtonpost.com/wp-dyn/articles/A21983-
2002Jul17.html
11 Hansell, Saul, "Tuesday is Layoff Day at AOL", The New York Times, October 2007,

http://bits.blogs.nytimes.com/2007/10/15/tuesday-is-layoff-day-at-aol/
until December 14, 2007 to complete any outstanding tasks, after which they would be
laid off12.

The methodology adopted in downsizing came as a shock for those employees who were
laid off after being summoned for a meeting. The company didn’t follow an open
communication approach to this action. This implied that the company didn’t think
through its downsizing implementation.

The faulty action stage with started with the merger with Time Warner continues till
today. Although the company demerged with Time Warner in 2009, the company is still
taking decisions which reflect its persistence in the faulty action stage. Its recent
acquisition of Huffington Post has been criticised in the media citing absence of strong
compatible culture in the process13. The attempt to acquire a culture in pursuit of scale
and getting the whole thing wrong has come under the media scanner.

Given the scale of the current operations of the company, the Crisis and subsequent
Dissolution stage still seem to be at some distance. However, the company needs to be
careful about its decisions and policies going forward as incorrect decision arising from
lack of foresight or inability to predict changes in market trends might trigger the last
stages of its decline.

12 AOL (TWX): Live Layoff Coverage", Business Insider, October, 2007,

http://www.businessinsider.com/2007/10/aol-twx-how-to
13 Bell, Emily, “AOL + Huffington Post = disaster?”, The Guardian, February 2011,

http://www.guardian.co.uk/commentisfree/cifamerica/2011/feb/07/huffington-
post-aol?intcmp=239
Exhibits

Exhibit 1: Steps and crises involved in each stage of organization development

 Jim Kimsey
CEO

Marc Seriff Steve Case Doug Coward Janet Hunter

CTO VP, Marketing Tech Team Tech Team

Exhibit 2 – AOL Organization Structure in the Collectivity Stage14

14Collated from http://www.webhostingreport.com/learn/aol.html and

http://en.wikipedia.org/wiki/AOL
1989: Instant Messenger and the greeting "Welcome! You've
got mail" debut.

1991: Quantum is renamed America Online Inc. AOL 1.0 for

DOS, a computer operating system, ships.

1992: America Online goes public on Nasdaq Stock Market at

initial price of $11.50.

1993: Disk mailings begin.

1994: The first advertisers appear on AOL, whose services

reach 1 million members.

1995: AOL.com debuts.

1996: AOL reaches five million members and introduces flat-

rate pricing, the Buddy List and Running Man.

1997: AIM 1.0 debuts.

1998: Acquires CompuServe and ICQ.

1999: Acquires Moviefone and Netscape.

December 1999: AOL stock surpasses $90, its highest to date

2000: AOL and Time Warner announce merger agreement.

AOL acquires MapQuest.

Exhibit 3 – AOL’s Growth Trajectory in the 90s15

15http://www.washingtonpost.com/wp-
dyn/content/article/2010/05/23/AR2010052303551.html
Exhibit 4 - Adjusted Closing Share Price and Daily Trade Volume for AOL’s
Shares16

Verma, Kamal, “The AOL/Time Warner Merger Where Traditional Media Met New
16

Media”, http://archipelle.com/Business/AOLTimeWarner.pdf