Portal:AOL-Files/Articles/AOL vs. Microsoft

(Originally by AOL-Files staff member Ranma)

In 1985, Quantum Computer Services released a product called Q-Link, which integrated several popular content delivery services into one unified package. The differences, however, were negligible, and the service itself remained largely a glorified Bulletin Board System (BBS). The company would refine its service again with the release of PC Link and Apple Link //. Each of these products made significant headway in differentiating themselves from their (then few) competitors. The culmination of these attempts at unique content delivery found realization in 1989, when Quantum released a service called America Online. Of course, twelve years ago, the minuscule demand for online services provided no real incentive for major companies to place a significant stake in securing any degree of market share. Only in 1992, when the Federal Government made the Internet a public utility would AOL see any real growth. As the Internet grew in popularity, as both a medium of communication and a vehicle of business, so did companies' interests in acquiring a large user base. AOL's experience and literacy with the online community gave it a clear advantage. Indeed, by the time AOL declared its unlimited price plan in 1996, it had created a unique platform that provided a number of services no other competitor could match in totality. Years of refinement and market research had made the online service an industry in itself, and a largely computer illiterate public found it equivocal to none. In the four and a half years since AOL's billing plan change, its customer base has more than tripled, predicated by the company's ability to continually set itself apart from any other entity. In fall 2001, however, things may radically change.

In the past, companies have attempted to (and failed to) emulate AOL's content delivery solutions. Prodigy has switched to a mainstream ISP platform, and CompuServe, the only company to imitate the service with a minimal degree of success, was acquired several years ago. Too often, companies have overlooked a simple yet fundamentally important concept- the presentation, interface, and ease of usability an online service or product embodies. By limiting a user's options-incorporating chat, newsgroups, and internet programs into their client-the company has had an amazing customer retention rate. The assumption can be made that only a company with significant resources has any legitimate chance of creating their own medium to directly compete with AOL's solutions. Such a company has stepped forward. As the court battle between Microsoft and the Department of Justice (DOJ) continues (as it inevitably will for years), the company is free to continue integrating products and services that might be prohibited if a resolution been reached. The threat they now pose to AOL cannot be underscored. A portion of an internal memo acquired by Viowatch states, "Microsoft's (MS) new .Net strategy, coupled with the impending release of XP, presents a significant risk to the AOL Franchise." It is unreasonable or improbable that any company, excluding the entity that creates the platform the AOL client runs on, could pose such a degree of risk.

The fears of AOL are summarized in the last sentences of the memo's introduction, which conclude, "The boundaries that separate the OS and the Internet will disappear. The risk exists that the consumer will not see the value of using the AOL client for online activity and will simply use the default Microsoft solutions." True, by blurring the line that separates an operating system from a client, Microsoft has placed itself in a position to acquire significant market share, previously (and rather exclusively) reserved to the realm of AOL Time Warner. Even AOL's subsidiaries and acquisitions have direct opposition: for WinAmp and Real Player, there is Media Player; for AOL TV, there will be Xbox. For many of Microsoft's content delivery solutions, integration and price (most are free) will supercede their rival equivalency, AOL. Even the acquisition of Time Warner does not warrant that the company can ignore the issue. To combat the upcoming release of Windows XP, AOL has created a number of retaliatory strategies, outlined in the memo as "Response Scenarios." These solutions are as follows:

1) Accept Assimilation: Partner with Microsoft to support their initiatives while gaining specific "carve outs" for AOL. This approach would not necessarily involve the OEMs.

2) Make AOL the Default: Work with the OEMs to create a "Coalition" to ensure AOL is the default application and service for all online activity, and that AOL has extensive presence throughout the OS.

3) Ensure AOL Properties replace Microsoft OOB: Ensure Netscape, Magic Carpet, Aim, etc.. are the default applications for online activities unless the AOL client is registered through OOBE.

4) Replace the default Desktop: Partner with an OEM to replace the default desktop environment and default Microsoft functionality with a custom solution (e.g., xSides).

5) Stall XP Deployment via OEMs: Encourage the OEM to keep ME until AOL can develop an appropriate solution for XP

6) Stall XP Adoption: Until AOL can develop an appropriate XP solution, message to AOL members and the public that XP is "not ready" for broad adoption (i.e., has bugs, will not run AOL, will not run your existing software, will violate your online privacy, etc…)

7) Think Different: Partner with an OEM to develop and launch a more esoteric solution such as an alternative OS or a modified MS OS

The choice AOL makes and the speed of its implementation will determine if its product remains a unique online service or loses market share due to a failure to adapt.

By rigorously analyzing each of the solutions mentioned in the memos, a person can come to a reasonable consensus on which one AOL will implement. Of course, history dictates that the best solution is often not the one most frequently chosen. The first response scenario, "Accept Assimilation," while providing a guaranteed continuance of market prominence, is unlikely. Microsoft would have to agree to such a partnership, which may prove more detrimental (to AOL) than direct competition. Microsoft's main source of revenue is not the target market it is aiming at, and this flexibility allows it to take more risks. AOL, on the other hand, has a great deal to lose if the resulting agreements do not go in its favor. Acquiring Time Warner may have given it increased diversity, but a very large portion of its revenue still comes from members. Additionally, its margins of profitability could significantly wane if it decides to take the "carve outs." In a training session at the Okalahoma City Call Center, an employee stated that providing a disgruntled member with a free month of service costs the company a mere six cents. In this context, AOL can be seen as a paragon of the concept "playing at the margin," since its infrastructure and content have already been subsidized. This fact alone alludes to the partnering scenario being unreasonable, since its opportunity cost is just too high.

The second scenario, "Make AOL the default," would have been a perfect choice if it involved more than merely OEMs and new computers. In this regard, the second strategy can be paired with the fourth, "replace the default desktop." Though AOL has never encountered great difficulty intermeshing its product with OEMs, the limitations are just that: the two proposed strategies only affect people buying new computers. Unfortunately, the computer industry has already seen a dramatic reduction in new computer sales this year, which is reflected in the protracted slump the NASDAQ is currently experiencing. Microsoft is not affected in the same way. Though consumers may not purchase a new computer, they will eventually upgrade their operating system- a product AOL has absolutely no influence over. Also, while it may be relatively easy to saturate the operating system with AOL products, engineering a new desktop may prove more difficult. Alternative interfaces like LiteStep show that the process is certainly feasible, but the company's biggest enemy is time. With an XP launch date in late July, AOL may simply not have enough time to develop a fully functional solution. This stipulation, combined with the low yield impact of a staggering OEM market, make response scenarios two and four the least desirable.

Using the previous argument shows that response scenarios five and six, "Stall XP deployment," and "Stall XP Adoption," while slightly more pragmatic, will also find a limited market in which to succeed. Slowing the speed of XP adoption in both the OEM and consumer markets would give valuable time to produce an effective counter-solution, but it is unlikely that AOL could impact an overwhelming majority. Microsoft has also been partnering with OEMs, and for that matter, popular retail franchises to solicit its MSN Internet Service. To succeed, AOL would need to dedicate massive resources to ensure that enough people were affected. Additionally, by not impacting the entire market, AOL could begin losing membership of consumers who own a second computer in their homes, since retaining a 9X/ME solution on one computer while upgrading to XP on another gives the consumer the ability to evaluate Microsoft's rival services. In this interim, consumers may discover Microsoft's solutions to be a better value, and drop the AOL service entirely. Thus, by attempting to stall the XP adoption process, AOL could "shoot itself in the foot." If, however, the company can quickly advance its product/service line faster than Microsoft, people would retain their membership simply on the basis that they have a better solution. This concept is embodied in the memo's seventh response scenario.

Called simply "Think Different," the last response scenario incorporates the famous economist Joseph Schumpeter's view on capitalism in the marketplace. He contended that there should be an increased emphasis in product quality and marketing, and a reduced emphasis on price. In short, AOL can succeed regardless of its price placement disadvantage simply by continuing the paradigm that has made it so successful in the first place- differentiating itself from its competitors. Only, the competition is now much more up to par, and this proposed venture is by far the most risky. Included in the description of the scenario is the suggestion of an alternative operating system. Certainly, by removing Microsoft from the equation entirely, AOL would be free to pursue whatever initiatives it desired. Yet, the question must be asked, "How many people would agree to such a solution?" Windows XP is itself a product that minimizes the degree of computer literacy an individual needs to operate it effectively. The conclusion can be drawn that the majority of consumers, especially those that use AOL, simply are not ready for the radical change switching an operating system would employ. It is also unlikely that AOL has enough time to release its own alternative operating system by the time Windows XP is released. The solution to Microsoft's new platform should be more conventional, requiring a minimum degree of change the consumer has to experience. In this context, response scenario three may provide the most appropriate solution.

Titled "Ensure AOL Properties replace Microsoft OOB," the third strategy is both practical and attainable in the short interval AOL has before the public sees XP. Development time and human resources for this solution would be minimal and could be easily exported to current users. By integrating its subsidiary products such as Netscape, WinAmp, and Real Player into the client installation, AOL could effectively circumvent Microsoft's integration strategy by removing its degree of presence. The consumer would not see the rival company's content delivery solutions, because they would be fully supplanted by the new AOL client and its affiliated products. As the old adage goes, "out of sight, out of mind." An aggressive marketing campaign, coupled with a moderate OEM partnership could guarantee AOL both retention in market share and room to grow. The risks of this strategy are negligible; even if the marketing campaign fails to encourage all current members to upgrade, it still promotes the service to potential customers. Most important, the circumvention strategy could be fully functional before the public has a chance to purchase Windows XP. Thus, due to its feasibility, dual-purpose marketing economy, and ease of implementation, moderate change for the consumer, AOL's third strategy may prove to be the most acceptable.