What happened to AOL: analysis of the key governance errors

What happened to AOL? An analysis of the top governance errors as the company finally winds down the service that made it so famous. 

It’s incredible how household names in one generation become little-known antiquity terms in the next, and that’s precisely what happened to America Online (or AOL). The company was an internet giant in the late 90s, but things began to unravel quickly after a peak in late 2000/early 2001. 

Now, all these years later, the company has announced that it’s finally ending the dial-up service that made it so famous to begin with. 

Anyone reading that news will likely ask one of two questions:

• “They were still running dial-up this whole time?”
• “What’s AOL?”

How did that company that was so synonymous with the early internet become invisible enough for those kinds of questions? A big part of it has to do with its governance failings in its heyday; things that felt like safe bets at the time, but which proved to be serious misjudgements in hindsight. 

As always, hindsight on one company is a valuable tale of caution for thousands of others, so let’s dive in. These are insights from AOL’s downfall that may help you evaluate your own company’s performance.

• The late 1990s: AOL’s services accounted for almost 40% of the time Americans spent on the internet, far more of a share than its main rivals like Microsoft. 
• January 2000: AOL announced a blockbuster merger with media giant Time Warner, with the combined company valued at around $350 billion; the deal closed in 2001. 
• 2001-2003: Co-inciding with the burst of the dot-com bubble, the emergence of broadband, and the realisation that the Time Warner merger would not produce the promised windfall growth, AOL’s valuation declined sharply, by up to 90%. 
• 2003-present: AOL ownership moved from Time Warner to Verizon Communications, then to Yahoo and subsequently to Apollo Global Management. It has ventured into other areas during this time, including multiple media brands, advertising and internet suites. Advertising has come to take a significant chunk of the company’s revenue but, financially speaking, the entire outfit is nothing like the business which commanded global attention in the late 90s.

While many factors contributed to the collapse in value, several governance issues stand out:

AOL’s core offering was dial-up internet. In the 90s, it was the best solution available, even if it did often mean constant busy signals and screeching dial tones. In the 2000s, broadband became popular. It offered a much more stable connection and the freedom of not needing to stay plugged to a phone line. 

AOL clung to the dial-up subscription model while broadband made inroads. And while this increased competition was a problem in itself, the real nail in the coffin was the pace of change. AOL started the new millennium with huge control of the internet market; by 2003, it was reporting significant losses of customers and revenue.

AOL’s most profitable era coincided with the dot-com bubble in the United States: a period of intense investment in tech startups. Many of these companies failed to make a profit and failed as the bubble burst. Since most of their spending up till that point was on advertising, which brought huge profits to AOL, their folding meant a core revenue stream dried up quickly. 

AOL’s multi-billion-dollar merger with Time Warner was the most significant financial merger the business world had seen up to that point. Proponents promised intense growth as one of the biggest internet and advertising providers joined forces with a media giant. 

This growth never materialised. The synergies simply didn’t exist in the way that AOL and Time Warner leaders thought. The rapid fall in valuation within a year of the deal made many media outlets refer to the merger as a disaster.

At the heart of all of the above was a false sense of security among AOL’s leaders: a feeling that the company was on top of the world and its fortunes could only improve. 

They didn’t have to say it openly every time they spoke to employees, shareholders or the media – and you can bet that new challenges and opportunities were a core part of their rhetoric at the time – but the culture simply wasn’t there to back it up. 

The true leadership culture in AOL’s heyday allowed dial-up to pass out of relevance far too easily, which didn’t encourage more scrutiny of a merger that worked for no one and that had no contingencies in place to deal with market slowdowns. It was complacency among the board and management, and it showed very quickly.

Adaptability is a core goal in governance, allowing a business to continue functioning through shifting markets. Complacency kills adaptability, and in big companies, these effects are far worse because the number of impacted stakeholders is significantly greater. 

AOL’s lack of adaptability simply wasn’t up to scratch at a key moment in its corporate life. Its leaders didn’t put enough time into anticipating the next market demand or asking questions about corporate moves like the Time Warner merger. The results of these failings often don’t show overnight, but once they get going, they become nearly impossible to stop. 

We’ve seen this many times in large companies, and it’s even more interesting when we compare them with more adaptive competitors. Blockbuster faltered while Netflix evolved. Nokia dominated handsets but missed the Apple-led. Kodak invented digital photography, then hesitated to cannibalise film. The common thread: governance cultures that didn’t enforce strategic agility, scenario planning, or independent challenge.

AOL remains active and has managed to build successful business models in other areas like online advertising – enough to keep its valuation in the billions. That said, it’s nothing compared to the command it had over the market in the late 90s and very early 2000s. 

Now, as the company finally closes down the service which gave it a quick win, it’s a good time to remember that opportunities for continues success simply weren’t taken when it counted.