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Speaker 1: Get in touch with technology with tech Stuff from how

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Speaker 1: stuff Works dot com. Hey there, and welcome to tech Stuff.

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Speaker 1: I'm your host, Jonathan Strickland. I'm an executive producer with

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Speaker 1: how Stuff Works in I heart radio and I love

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Speaker 1: all things tech. And in our last episode, I traced

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Speaker 1: a O L America Online from its birth out of

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Speaker 1: a company that created a service for Atari twenty hundred

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Speaker 1: owners in order for them to download games, up to

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Speaker 1: the point where this company bought up its longtime competitor,

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Speaker 1: Compuse Serve. Today, we're going to continue this story and

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Speaker 1: look at how a O L got involved in a

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Speaker 1: merger that is frequently listed as one of the worst

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Speaker 1: business deals in tech history. Sometimes it's called the worst

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Speaker 1: merger of all time. But that was not the Compuse

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Speaker 1: Serve deal. Before we get into all of that, I'm

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Speaker 1: going to backtrack just a touch. The company Serve deal

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Speaker 1: started in nineteen nine seven and it was complete by

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Speaker 1: early nine But another thing that happened in nineteen seven

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Speaker 1: was really important to A O L. And that was

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Speaker 1: the launch of a I m AIM or a O

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Speaker 1: L instant Messenger. AIM would become an incredibly popular messaging

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Speaker 1: app for several years, though the company would eventually sunset

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Speaker 1: the service in twenty seventeen. A o L had already

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Speaker 1: baked in a messenger feature into the A o L desktop,

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Speaker 1: but it was part of the overall A o L

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Speaker 1: user interface, who had to be in A o L

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Speaker 1: to use this. In May seven, the company released AIM

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Speaker 1: as a standalone download, at least for machines running on

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Speaker 1: the Windows operating system. The AIM product competed with other

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Speaker 1: messenger services like I c Q, which A L would

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Speaker 1: acquire in and then eventually sell off again in T

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Speaker 1: and MSN Messenger. The lead developers for AIM were Barry Appleman,

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Speaker 1: Eric Bosco, and Jerry Harris. But here's the thing. They

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Speaker 1: weren't supposed to build an instant messaging app. Aim was

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Speaker 1: never supposed to be. They were doing it without the

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Speaker 1: company's knowledge, let alone permission. Appleman and Bosco had been

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Speaker 1: hired as programmers who specialized in the Unix operating system.

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Speaker 1: Harris had joined a o L after the company had

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Speaker 1: acquired the web browser company that Harris was working for.

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Speaker 1: So Appleman had already transformed a o L a few

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Speaker 1: years earlier by adding the Buddy List, which is a

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Speaker 1: feature that just tells users if their friends happened to

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Speaker 1: be online the same time that they are online. Because

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Speaker 1: this was back in the day when you were only

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Speaker 1: online when you were dialing up. You didn't have this

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Speaker 1: sort of permanent online status. Broadband was not really a

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Speaker 1: thing yet before the Buddy List, you would have to

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Speaker 1: use a search tool with the exact screen names of

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Speaker 1: your friends to find out if they were online or not.

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Speaker 1: So that's what a lot of people were doing. They

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Speaker 1: would go to the search tool, they would put in

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Speaker 1: the handle for their friend and see if that person

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Speaker 1: was online. But as I mentioned in the last episode,

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Speaker 1: Steve Case had really positioned a o L to be

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Speaker 1: an online community. He was stressing that part of America

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Speaker 1: online business and their feature set, saying that that was

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Speaker 1: the most important application of a o L over all others.

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Speaker 1: This contrasted a o L with other services that were

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Speaker 1: more focused on things like online shopping, for example. So

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Speaker 1: people were encouraged to make communities online. They were eager

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Speaker 1: to see if their friends were online at the same time,

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Speaker 1: and so a L service was getting hit by tons

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Speaker 1: of search requests and that was often enough just to

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Speaker 1: bog down or even crash servers. Just people looking to

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Speaker 1: see if they're friends happen to be online at the

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Speaker 1: same time. So Appleman thought, what if we just made

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Speaker 1: a tool that would give people this information that they're

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Speaker 1: searching for by default. That way, they don't even have

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Speaker 1: to ask for it, they don't have to send requests,

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Speaker 1: will just tell them whether or not their friends are online.

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Speaker 1: This would become a very important component of AIM as well,

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Speaker 1: the buddy list that tells you who is online and

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Speaker 1: who is available to chat. We see this on lots

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Speaker 1: of online services today. For example, I once in a

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Speaker 1: blue moon get a chance to play games on Xbox

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Speaker 1: or on Steam, and both of those have buddy list

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Speaker 1: features that tell you who happens to be online at

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Speaker 1: that time. But this was a new thing back in

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Speaker 1: the early nineties. Now, the developers had determined that Aim

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Speaker 1: should exist as a standalone service so that it didn't

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Speaker 1: limit its adoption. That way, it wouldn't just be a

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Speaker 1: o l users that could get hold of Aim. But

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Speaker 1: the team quickly ran into it challenge. They had no

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Speaker 1: resources because again it wasn't a sanctioned project. But a

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Speaker 1: service has to run on hardware somewhere. It's not something

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Speaker 1: that can just exist in the air. So Appleman called

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Speaker 1: in a favor with a coworker who was getting ready

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Speaker 1: to ship some old servers to HP. They had bought

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Speaker 1: these servers. The servers were now kind of obsolete, and

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Speaker 1: so the a o L was going to ship the

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Speaker 1: servers back and get a small amount of money in return.

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Speaker 1: So instead of shipping back the servers, his coworker friend

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Speaker 1: quote unquote lost the servers and they actually went to

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Speaker 1: Appleman and his team, and so that team was able

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Speaker 1: to work on developing the messaging app. When they had

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Speaker 1: a finished app, they decided to show it off to

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Speaker 1: their bosses. They thought, well, we've got it all ready

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Speaker 1: to go. Now we just have to convince our bosses

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Speaker 1: that this was a good idea from the get go.

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Speaker 1: A OL management was not thrilled about this. In fact,

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Speaker 1: there was a real danger at first that the whole

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Speaker 1: team might get fired because of their work on this project.

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Speaker 1: They had built the product without telling anyone, They had

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Speaker 1: allocated a server without permission, and they intended to release

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Speaker 1: the app for free, and that really stuck in the

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Speaker 1: craw of a lot of the leaders over at a

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Speaker 1: O L. A o L was a subscription based business plan.

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Speaker 1: The way all L made money in those days was

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Speaker 1: that they would convince customers to subscribe to A O

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Speaker 1: L service, and then the customers would use the A

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Speaker 1: o L interface to dial in and get online. That

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Speaker 1: was the way A O L made money Primarily. They

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Speaker 1: also did some advertising stuff, but that was minor compared

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Speaker 1: to the subscription service. So to give away stuff for

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Speaker 1: free seemed antithetical to A O l's business plan, But

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Speaker 1: ultimately the leadership at A O L was convinced to

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Speaker 1: give it a try halfheartedly, so they launched AIM in May.

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Speaker 1: Released by the way, launching in fact would be really generous.

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Speaker 1: What the leadership actually agreed to do was make AIM

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Speaker 1: available on a file Transfer Protocol or FTP service. Now

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Speaker 1: this FTP service wasn't actually positioned as a public facing service.

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Speaker 1: It wasn't meant to be something that the average person

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Speaker 1: would use to get access to files. But Internet geeks

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Speaker 1: in the know were aware of it, and in fact,

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Speaker 1: we're always keeping an eye on the FTP service because

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Speaker 1: as things would be added to the service, it gave

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Speaker 1: them an idea of what was coming down the road

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Speaker 1: for A O L in general, So it's kind of

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Speaker 1: a way of getting insider information but from the outside

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Speaker 1: so a well initially just made AIM available through this

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Speaker 1: and didn't promote it in any way, So AIM came

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Speaker 1: out with no support and no fanfare. Even so, on

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Speaker 1: that first evening there were nine hundred simultaneous connections on AIM. Now, people,

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Speaker 1: that's incredibly small when we think about the Internet. But

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Speaker 1: when you think about the Internet in the days when

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Speaker 1: folks still weren't really sure what the Internet was, most

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Speaker 1: people were using dial up to access it, and no

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Speaker 1: one was advertising the fact that this messenger service even existed,

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Speaker 1: it's pretty phenomenal. Now the programmers had built in some

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Speaker 1: clever features and AIM that made it awfully hard for

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Speaker 1: i T administrators to block it, and as more people

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Speaker 1: discovered the app, i T departments looked for ways that

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Speaker 1: they could block it because they were worried that employees

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Speaker 1: or students or or whatever would waste time chatting with

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Speaker 1: each other instead of doing what they're supposed to do.

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Speaker 1: But if they tried to block off the port the

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Speaker 1: Internet port through which AIM was communicating, it would automatically

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Speaker 1: start to scan the other ports on the machine it

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Speaker 1: was installed on until it found one it could communicate through.

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Speaker 1: So if you blocked one port. It would just say,

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Speaker 1: all right, well that's that doors closed. Let me look

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Speaker 1: and see if any other doors are open. So does

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Speaker 1: some ad and AIM was essentially corporate backed malware because

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Speaker 1: there was no easy way to shut it down, and

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Speaker 1: people were downloading it and using it to chat with

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Speaker 1: each other, and it got wildly popular. Now I might

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Speaker 1: as well stick with AIM for right now, before getting

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Speaker 1: back to a o L at large. A o L

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Speaker 1: would go on to buy Morabilous, which operated the I

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Speaker 1: c Q chat app. AIM would power Apple's first eye

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Speaker 1: Chat app, although that would change in later versions of

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Speaker 1: eye Chat, and Microsoft, in an effort to take some

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Speaker 1: of the steam out of a o l's engine, built

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Speaker 1: a version of MSN Messenger that could communicate with AIM users,

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Speaker 1: so you could use MSN Messenger and send chats to

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Speaker 1: people who are using AIM and they could talk back

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Speaker 1: to you. This actually made the AIM team really angry

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Speaker 1: because it meant that people would be able to communicate

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Speaker 1: with AIM users without actually downloading AIM themselves, and so

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Speaker 1: began a back and forth or in which ao L

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Speaker 1: would block Microsoft's chat app and Microsoft would engineer a

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Speaker 1: new version of MSN Messenger that would get around this block,

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Speaker 1: and that happened more than twenty times back and forth

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Speaker 1: until the A o L team sent a threat to Microsoft.

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Speaker 1: They essentially said, if you insist on making the ms

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Speaker 1: N messenger app compatible with AIM, we will use that

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Speaker 1: connection to infect your servers with malware. The threat commenced

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Speaker 1: Microsoft to back down. Also, yikes, that's like some sort

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Speaker 1: of nerd gangster stuff right there. This is a nice

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Speaker 1: computed database, he guy. Here'd be a real shame with

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Speaker 1: someone that I don't know infected it with viruses. I

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Speaker 1: apologize for the terrible accent. AIM always existed a little

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Speaker 1: outside of a o L because it was a standalone

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Speaker 1: app that wasn't in the walled garden of the A

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Speaker 1: o L experience. It was seen by A o L

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Speaker 1: executives as being a bit risky. Over on the A

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Speaker 1: o L side, the company could curate the customer experience.

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Speaker 1: The stuff that they would see before they would connect

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Speaker 1: to the Internet at large was completely under the control

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Speaker 1: of the company, so they could censor it. They could

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Speaker 1: make sure that there was no objectionable material showing up

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Speaker 1: in front of people, right they would just make sure

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Speaker 1: that it was all company approved content. But AIM was

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Speaker 1: outside of this garden, and you couldn't control what other

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Speaker 1: users might say or share. AIM kept in adding features

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Speaker 1: like file sharing, voice support, stuff like that. Many of

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Speaker 1: them would be copied into later tools like Skype, but

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Speaker 1: over time AIM began to lose influence. Other tools were

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Speaker 1: popping up. Some would allow users to communicate through multiple

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Speaker 1: chat services using a single client. Some were connected to

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Speaker 1: the blossoming social networking sites, and that was where allowed

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Speaker 1: the chat was moving to. AIM became less relevant over

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Speaker 1: the years, starting in two thousand two, a o L

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Speaker 1: began to scale back the AIM team. This happened each

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Speaker 1: year from two thousand two to two thousand five. Then

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Speaker 1: in two thousand twelve, the only team members who were

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Speaker 1: kept on were support staff, who just made sure that

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Speaker 1: the service wasn't going to collapse on itself. By then,

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Speaker 1: AIM had less than one per cent of the market

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Speaker 1: share of customers for internet messaging services. On December fifteen, seventeen,

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Speaker 1: A O L or rather OATH but we haven't gotten

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Speaker 1: to the part where ao L becomes OATH. That will

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Speaker 1: be in the next episode anyway, they announced that a

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Speaker 1: O L Instant Messenger had been discontinued. Further, there are

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Speaker 1: no announced plans for any sort of replacement. The messaging app,

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Speaker 1: which had at one time been the most dominant of

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Speaker 1: its kind online, just didn't have enough people using it

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Speaker 1: to justify the expense of maintaining it. Now, when I

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Speaker 1: come back, I'll switch over to A O L and

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Speaker 1: what was in store for the company at large. But

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Speaker 1: first let's take a quick break and thank our sponsor.

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Speaker 1: In November, A O L announced it was buying Netscape

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Speaker 1: Communications Corporation, which was the company that created the Netscape

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Speaker 1: Navigator web browser. Netscape Navigator is a fascinating story all

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Speaker 1: on its own, and I'll have to do a full

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Speaker 1: birth to death episode on it in the future, but

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Speaker 1: here are some high points. Mark and Dreason, who while

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Speaker 1: at college had worked on an early web browser called

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Speaker 1: n c s A Mosaic, saw the potential in a

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Speaker 1: web browser for the average person. He partnered with Jim

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Speaker 1: Clark of Silicon Graphics to start a new company ultimately

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Speaker 1: called Netscape Communications Corporation and bring this vision to life.

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Speaker 1: The first version of this browser was called Mosaic, but

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Speaker 1: after some threats of legal unpleasantness, they would change it

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Speaker 1: to Netscape Navigator. Now, this all started in nine by

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Speaker 1: it had become the dominant web browser, largely because there

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Speaker 1: wasn't very much competition. If I'm being totally honest. Netscape

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Speaker 1: became a publicly traded company in nineteen and had a

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Speaker 1: company valuation of almost three billion dollars, a very early

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Speaker 1: start up Unicorn. By things were different because Microsoft started

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Speaker 1: to really go after the web browser market with its

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Speaker 1: own web browser, Internet Explorer. Then there's all the different

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Speaker 1: stuff about Microsoft incorporating Internet Explorer into Windows and uh

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Speaker 1: and then also downplaying the ability to use other browsers

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Speaker 1: on Windows based machines. We won't get into all that,

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Speaker 1: but in ninety eight, Netscape announced it would release the

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Speaker 1: source code that the company had used to build Netscape Communicator,

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Speaker 1: which was a suite of programs beyond just the web browser.

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Speaker 1: This in turn would become the action that would bring

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Speaker 1: Mozilla into being, and Mozilla would eventually produce the Firefox

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Speaker 1: web browser. Well. By the time a O. L announced

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Speaker 1: intention of acquiring Netscape, Internet Explorer had already caught up

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Speaker 1: and taken the lead in the web browser market share.

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Speaker 1: But it wasn't like Netscape was down for the count

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Speaker 1: it had been the dominant player. It was now number

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Speaker 1: two there was every reason to think the company could

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Speaker 1: come back with a new version of its browser and

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Speaker 1: went back. Some folks so would go back and forth

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Speaker 1: between Netscape and Internet Explorer, so it was definitely still

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Speaker 1: an attractive company. When A o L made its proposal,

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Speaker 1: which was for four point two billion dollars, a princely

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Speaker 1: some this deal would end up being a not so

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Speaker 1: good one for either party, though it's not the very

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Speaker 1: bad deal that I referred to in the episode title.

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Speaker 1: Anyone who has been through a merger or an acquisition

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Speaker 1: knows there's always an adjustment as different departments hash things out,

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Speaker 1: cultures attempt to merge. There's some consolidation, maybe people are

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Speaker 1: let go as as redundant departments are are put together.

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Speaker 1: The effect on Netscape was that it slowed down the

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Speaker 1: browser development process, and that was already running behind before

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Speaker 1: A o L purchased the company, and just a minute

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Speaker 1: took even longer for Netscape to come out with the

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Speaker 1: next version of its browser. Netscape six did not come

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Speaker 1: out until April two thousand and Netscape seven followed two

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Speaker 1: years later in two thousand two. By two thousand three,

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Speaker 1: A o L had shut down most of Netscape laying

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Speaker 1: off nearly all the employees. The decision from the top

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Speaker 1: was to shift and focus on Mozilla's Firefox code as

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Speaker 1: the base for web browsers. A o L would outsourced

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Speaker 1: Netscape browser releases to a Canadian company called Mercurial Communications.

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Speaker 1: That company produced nets eight Browser eight and Netscape Browser

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Speaker 1: eight point one in two thousand five and two thousand seven.

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Speaker 1: A o L did put together an internal development team

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Speaker 1: for one last push to make the old browser relevant

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Speaker 1: again in a world that had little interest in it,

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Speaker 1: and they released the AOL developed Netscape Navigator nine. But

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Speaker 1: that wasn't enough either, and a o L finally shut

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Speaker 1: down Navigator for good and for certain in February two eight.

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Speaker 1: So that was definitely not a great business deal. The

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Speaker 1: four point two billion dollars was not money well spent.

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Speaker 1: And I'm sure when I do a full episode on

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Speaker 1: Netscape Navigator, I'll dig much deeper into that story. Let's

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Speaker 1: get back to a O L. It made another purchase

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Speaker 1: around the same time as it bought Netscape. In A

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Speaker 1: O L bought the company movie Phone. That's the telephone

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Speaker 1: service that provides movie information to people who call in,

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Speaker 1: including information like screening times and also gives them the

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Speaker 1: opportunity to purchase tickets at certain theaters. The deal was

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Speaker 1: done in A O L stock and it was valued

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Speaker 1: at three d eight million dollars, which again princely some

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Speaker 1: A O L would hold onto movie Phone for nearly

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Speaker 1: twenty years. The company or the new company that is,

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Speaker 1: the one that holds A O L, sold movie Phone

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Speaker 1: to the beleaguered company movie Pass back in the spring

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Speaker 1: of So how much did movie Pass pay to get

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Speaker 1: this property that A O L had purchased for three

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Speaker 1: eight million dollars in stocks? Well, the agreement was for

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Speaker 1: a million dollars in cash and two point five five

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Speaker 1: million shares of the parent company for movie Pass, which

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Speaker 1: is called Helios and Matheson Analytics. Those shares were worth

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Speaker 1: about eight million dollars at the time of the announcement.

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Speaker 1: Oh and they also agreed to another two point five

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Speaker 1: five million shares at the exercise price of five dollars

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Speaker 1: fifty cents per share. That would add another fourteen million

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Speaker 1: dollars on top of the deal if the share price

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Speaker 1: were to actually reach that level, which puts the whole

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Speaker 1: deal at around twenty three million dollars, or so twenty

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Speaker 1: four million that's not great. A O L was buying

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Speaker 1: movie Phone for three and selling it for twenty four.

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Speaker 1: It might not have been the most profitable deal ever.

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Speaker 1: And movie Pass, just in case you're curious, has continued

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Speaker 1: its trend of changing pricing and services throughout the year

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Speaker 1: in an effort to win customers and become semi stable.

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Speaker 1: I'm amazed it hasn't collapsed in on itself yet. I've

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Speaker 1: already talked about movie Past this year, so I won't

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Speaker 1: go back over it. But holy cow. A O L

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Speaker 1: then invested nearly a billion dollars in Gateway PC after

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Speaker 1: announcing that the company had outperformed all of its earning projections.

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Speaker 1: Al had, that is and all made a one point

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Speaker 1: one billion dollar deal with the map Quest. Do you

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Speaker 1: remember map Quest? Al L owns it. Also in A

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Speaker 1: O L make a one point five billion dollar investment

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Speaker 1: in a company called Hughes Electronics, which is another fascinating

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Speaker 1: company and it traces its history back to the eccentric

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Speaker 1: bazillionaire Howard Hughes. Huge Electronics owned Direct TV at that time,

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Speaker 1: and as part of this agreement, the company would market

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Speaker 1: an American online product called a O L TV, which

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Speaker 1: was an interactive television service. A O LL in turn

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Speaker 1: agreed to market the Hughes Electronics services Direct TV and

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Speaker 1: Direct PC, which was a high speed satellite based internet

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Speaker 1: access service. These days, that same service is called Hugh's Net,

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Speaker 1: and the internet and TV businesses are separate entities. A

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Speaker 1: T and T now owns the direct TV business. And

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Speaker 1: now we get to the very bad business deal, the

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Speaker 1: one that so many people have held up as being

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Speaker 1: one of the worst in business history, particularly for companies

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Speaker 1: in the tech industry. In two thousand, America Online had

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Speaker 1: the opportunity to merge with Time Warner, which in itself

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Speaker 1: was the product of a merger between the company's Time

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Speaker 1: Incorporated and Warner Communications. Now, one day I'm going to

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Speaker 1: have to do a series of episodes to explain how

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Speaker 1: all of that came to pass, But here's a super

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Speaker 1: short background on both big companies. Time Incorporated was known

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Speaker 1: for being the owner and publisher of more than one

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Speaker 1: hundred different magazines, with the flagship, of course, being Time,

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Speaker 1: and others including stuff like Entertainment Weekly, Fortune, Sports Illustrated,

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Speaker 1: and Southern Living. Warner Communications was a holding company, and

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Speaker 1: they had a really super complicated history of its own.

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Speaker 1: It grew out of the Warner Brothers motion Picture Studio

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Speaker 1: and their various businesses UH that included movie theaters and

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Speaker 1: a production and distribution business in the motion picture industry. Eventually,

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Speaker 1: Jack Warner of the Warner Brothers was the only warn remaining,

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Speaker 1: and in nineteen sixty six he decided he was going

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Speaker 1: to get out of the business, so he sold his

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Speaker 1: shares of the company to another company called Seven Arts

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Speaker 1: Production Limited. That company also bought another media company, Atlantic Records.

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Speaker 1: Then you had a guy named Stephen Ross who had

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Speaker 1: built a conglomerate of businesses. He comes in, he acquires

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Speaker 1: the Warner Brothers Seven Arts conglomerate, and now the whole

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Speaker 1: mess Steven Ross's other businesses and Warner Brothers and Seven

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Speaker 1: Arts all becomes known as Kinney National Services. But then

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Speaker 1: there's a big scandal involving one of the businesses. It

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Speaker 1: was actually a parking business and it was all about

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Speaker 1: price fixing, and that led to Ross selling off most

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Speaker 1: of the companies in the conglomerate. The remaining businesses that

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Speaker 1: he kept were the media ones. It became Warner Communications.

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Speaker 1: This was in ninete Time Incorporated and Warner Munications merged

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Speaker 1: in nineteen eighty nine, and that's where we get Time Warner,

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Speaker 1: which at the time was the largest entertainment conglomerate in

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Speaker 1: the world. In this new company, Time Warner had acquired

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Speaker 1: Turner Broadcasting System for nine point six billion dollars, and

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Speaker 1: then in two thousand, America Online and Time Warner looked

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Speaker 1: to merge together. A O L was essentially buying Time

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Speaker 1: Warner for a hundred sixty five billion dollars. So that's

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Speaker 1: how the transaction would look on paper, that A O L.

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Speaker 1: The company was buying Time Warner for a hundred sixty

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Speaker 1: five billion dollars. A O L's founder, Steve Case took

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Speaker 1: the role of chairman of the board, and the new

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Speaker 1: company would be A O L. Time Warner. The association

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Speaker 1: wouldn't quite last a full decade, but it would really

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Speaker 1: make an impression in its short time in the spotlight.

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Speaker 1: I'll talk a little bit more about this troubled relationship

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Speaker 1: between A L and Time Warner, but first let's take

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Speaker 1: a quick break to thank our sponsor. In hindsight, we

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Speaker 1: can look at the messy span of time from two

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Speaker 1: thousand to two thousand nine when A O L. Time

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Speaker 1: Warner was a thing, and we can say what were

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Speaker 1: they thinking? But that's what the benefit of knowing how

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Speaker 1: things played out. Let's rewind the clock a little bit

400
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Speaker 1: and think about what things were like leading into this

401
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Speaker 1: enormous merger. First Time Warner was already a media giant.

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Speaker 1: It had its hooks set deep in the worlds of

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Speaker 1: print with Time Incorporated, and films with Warner Communications, and

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Speaker 1: television with Turner Broadcasting. America. Online was a dominant player

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Speaker 1: in the online space, yet another way for companies to

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Speaker 1: reach out to customers that would be another form of

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Speaker 1: mass media. This was before the com crash, so it

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Speaker 1: was a time when everyone was absolutely certain that the

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Speaker 1: Internet was going to be the twenty first century equivalent

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Speaker 1: of the Gold Rush in California. If you could get

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Speaker 1: on the Internet and if you could stake your claim,

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Speaker 1: whether it was an online store or some web enabled

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Speaker 1: service or something else, it was like a license to

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Speaker 1: print money. The details weren't all worked out. No one

415
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Speaker 1: was really sure how the money was going to roll in,

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Speaker 1: let alone how much money there would be, but it

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Speaker 1: was a foregone conclusion that the future of wealth was online.

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Speaker 1: So a o L being a huge company that was

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Speaker 1: seeing massive profits and had recently expanded by purchasing the

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Speaker 1: former leading web browser company, seemed like the perfect compliment

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Speaker 1: to the established old media represented by Time Warner. On

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Speaker 1: top of that, Time Warner had already attempted to establish

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Speaker 1: an online presence before merging with a o L. Time

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Speaker 1: Warner executives also recognized that the future would be online,

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Speaker 1: even though they weren't really sure what that future would

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Speaker 1: look like. But it seemed pretty certain that the Internet

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Speaker 1: was going to play an incredibly important part in that future.

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Speaker 1: But making something that works online isn't always easy, particularly

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Speaker 1: when you're coming from the point of view of established media.

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Speaker 1: What works for television and for film and print won't

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Speaker 1: necessarily work for online, and the preconceptions you bring to

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Speaker 1: the table could get in the way. So merging with

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Speaker 1: a O L would give Time Warner not just an

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Speaker 1: online presence, but one designed by a leader in the space.

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00:26:42,680 --> 00:26:46,439
Speaker 1: For some people, he will meant the Internet. That was

436
00:26:46,600 --> 00:26:48,280
Speaker 1: what they thought of it. Some people called a O

437
00:26:48,440 --> 00:26:51,720
Speaker 1: L Internet for dummies, but a lot of people just thought, all,

438
00:26:51,840 --> 00:26:54,760
Speaker 1: that's how you get on the Internet. So on the surface,

439
00:26:54,800 --> 00:26:58,399
Speaker 1: all of this seemed incredibly attractive. Other companies were worried

440
00:26:58,440 --> 00:27:00,719
Speaker 1: that this merger was going to mean there was going

441
00:27:00,760 --> 00:27:03,199
Speaker 1: to be a new giant media company and soon it

442
00:27:03,240 --> 00:27:05,520
Speaker 1: was going to become a monopoly, and it would either

443
00:27:05,640 --> 00:27:08,280
Speaker 1: run you out of business or was going to gobble

444
00:27:08,359 --> 00:27:11,840
Speaker 1: you up and acquire you. That's something that a lot

445
00:27:11,920 --> 00:27:14,439
Speaker 1: of folks are saying right now about Disney, not to

446
00:27:14,480 --> 00:27:18,000
Speaker 1: mention some other pretty big companies like A T and T.

447
00:27:19,359 --> 00:27:23,879
Speaker 1: But this all came from a high level conceptual mindset.

448
00:27:24,440 --> 00:27:28,080
Speaker 1: When it came to actually bringing the two major companies together,

449
00:27:29,160 --> 00:27:34,160
Speaker 1: things fell apart pretty quickly. The corporate cultures were drastically different.

450
00:27:34,359 --> 00:27:39,280
Speaker 1: Time Warner executives saw ao L executives as being impetuous, brash,

451
00:27:39,359 --> 00:27:43,159
Speaker 1: and arrogant. A o L executives viewed their Time Warner

452
00:27:43,240 --> 00:27:48,119
Speaker 1: counterparts as being stuffy and conservative and risk averse to

453
00:27:48,160 --> 00:27:52,680
Speaker 1: the point of complacency. And this mismatch in perspectives meant

454
00:27:52,720 --> 00:27:56,000
Speaker 1: there were very few instances of people actually working together

455
00:27:56,359 --> 00:28:00,440
Speaker 1: across company lines. They were frequently feeling like they were

456
00:28:00,000 --> 00:28:04,120
Speaker 1: at cross purposes working against each other. Making things even

457
00:28:04,160 --> 00:28:08,000
Speaker 1: worse was the general economy. Now, As I said, the

458
00:28:08,040 --> 00:28:11,760
Speaker 1: deal happened before the dot com bubble burst, but then

459
00:28:12,200 --> 00:28:15,240
Speaker 1: that bubble did burst. And I've talked about the dot

460
00:28:15,240 --> 00:28:17,760
Speaker 1: com bubble so many times, and I'm sure some of

461
00:28:17,800 --> 00:28:21,840
Speaker 1: you probably could pause the podcast right now and give

462
00:28:21,840 --> 00:28:24,879
Speaker 1: an overview in my voice about the dot com bubble

463
00:28:24,920 --> 00:28:27,880
Speaker 1: bursting and be pretty much on track for what I'm

464
00:28:27,880 --> 00:28:31,280
Speaker 1: about to say. But essentially, you had an intense era

465
00:28:31,880 --> 00:28:35,639
Speaker 1: of a few years in which investors were speculating wildly

466
00:28:35,760 --> 00:28:40,000
Speaker 1: on the performance of various Internet connected businesses. Many of

467
00:28:40,040 --> 00:28:45,560
Speaker 1: those businesses, flush with cash from investors, realized that they

468
00:28:45,800 --> 00:28:48,040
Speaker 1: didn't know how to make any money. They failed to

469
00:28:48,080 --> 00:28:50,800
Speaker 1: become profitable. Some of them failed to even develop a

470
00:28:50,840 --> 00:28:55,760
Speaker 1: coherent business plan. Companies achieved a market value that didn't

471
00:28:55,800 --> 00:29:00,600
Speaker 1: reflect their real value, and eventually there were are reckoning.

472
00:29:00,640 --> 00:29:04,320
Speaker 1: The house of cards grew too heavy and it crumbled

473
00:29:04,360 --> 00:29:07,240
Speaker 1: as investors lost confidence that they would ever see long

474
00:29:07,360 --> 00:29:11,240
Speaker 1: term returns and they began to try and retrieve their

475
00:29:11,280 --> 00:29:13,920
Speaker 1: investments and pull out of the market. This led to

476
00:29:13,960 --> 00:29:17,320
Speaker 1: an overall economic recession and a o L time Warner

477
00:29:17,520 --> 00:29:20,719
Speaker 1: was hit just like everyone else. Then they lost a

478
00:29:20,920 --> 00:29:24,160
Speaker 1: whole lot of value because of it. In the wake

479
00:29:24,320 --> 00:29:28,400
Speaker 1: of that economic stumble, Al had to write off forty

480
00:29:28,520 --> 00:29:34,040
Speaker 1: five point five billion dollars in the fourth quarter of

481
00:29:34,120 --> 00:29:36,760
Speaker 1: two thousand two, and that led to the loss of

482
00:29:36,800 --> 00:29:41,480
Speaker 1: another forty four point nine billion dollars. In all, it

483
00:29:41,560 --> 00:29:45,040
Speaker 1: was a nearly nine nine billion dollar loss. When the

484
00:29:45,160 --> 00:29:49,000
Speaker 1: dust had settled, Steve Case stepped down as chairman of

485
00:29:49,040 --> 00:29:51,760
Speaker 1: the board, though he remained a member of the board

486
00:29:51,760 --> 00:29:57,120
Speaker 1: of directors. Ted Turner, who had founded Turner Broadcasting, resigned

487
00:29:57,160 --> 00:30:00,760
Speaker 1: as a vice chairman of the board. One development that

488
00:30:00,840 --> 00:30:04,200
Speaker 1: people at a O L and Time Warner perhaps should

489
00:30:04,320 --> 00:30:08,720
Speaker 1: have realized before talking about a merger was the general

490
00:30:08,760 --> 00:30:13,120
Speaker 1: trend toward broadband service. Because a O L was a

491
00:30:13,160 --> 00:30:17,160
Speaker 1: dial up service, you would connect your phone to a modem,

492
00:30:17,280 --> 00:30:19,800
Speaker 1: and your modem connected to your computer, and you would

493
00:30:19,800 --> 00:30:25,120
Speaker 1: actually dial up to connect to a L servers. Well,

494
00:30:25,280 --> 00:30:28,840
Speaker 1: broadband was slowly gaining traction, and this would allow and

495
00:30:29,000 --> 00:30:32,080
Speaker 1: always on connection. You wouldn't have to dial up. You

496
00:30:32,200 --> 00:30:35,280
Speaker 1: just would turn on your computer and then away you go.

497
00:30:35,960 --> 00:30:40,200
Speaker 1: Like most technologies, however, it was really expensive when it debuted,

498
00:30:40,240 --> 00:30:44,040
Speaker 1: in fact, prohibitively expensive for most people, and it was

499
00:30:44,080 --> 00:30:48,240
Speaker 1: also very limited in its accessibility. Not very many people

500
00:30:48,640 --> 00:30:52,040
Speaker 1: had access to it. But as years went by and

501
00:30:52,080 --> 00:30:57,120
Speaker 1: more companies invested in building out the infrastructure, the accessibility improved,

502
00:30:57,440 --> 00:31:00,480
Speaker 1: prices began to come down. The number of households in

503
00:31:00,520 --> 00:31:05,400
Speaker 1: the United States with broadband connections jumped fifty percent from

504
00:31:05,480 --> 00:31:10,320
Speaker 1: two thousand to two thousand one. That is increased by

505
00:31:11,040 --> 00:31:13,760
Speaker 1: That's great growth, but it doesn't necessarily tell you anything

506
00:31:13,800 --> 00:31:17,320
Speaker 1: about numbers, because if you have four customers in two

507
00:31:17,360 --> 00:31:20,880
Speaker 1: thousand and six customers in two thousand one, that's an

508
00:31:20,880 --> 00:31:24,840
Speaker 1: increase of fift But by two thousand three, the FCC

509
00:31:25,120 --> 00:31:30,400
Speaker 1: estimated that just under of American households were subscribed to

510
00:31:30,480 --> 00:31:35,560
Speaker 1: broadband services, and A o L's main business was quickly changing.

511
00:31:35,760 --> 00:31:40,320
Speaker 1: Its dial up service was still making money, but it

512
00:31:40,400 --> 00:31:44,240
Speaker 1: was becoming less important. It was generating less revenue year

513
00:31:44,280 --> 00:31:46,320
Speaker 1: over year, and that's typically a number you want to

514
00:31:46,320 --> 00:31:50,760
Speaker 1: see increase, not go down. In two thousand four, the

515
00:31:50,920 --> 00:31:53,600
Speaker 1: A o L unit of the company held what was

516
00:31:53,680 --> 00:31:58,360
Speaker 1: referred to as a strategic off site meeting. Now in reality,

517
00:31:58,480 --> 00:32:00,760
Speaker 1: it was a meeting to talk about why options were

518
00:32:00,800 --> 00:32:03,520
Speaker 1: open to the company as things were getting, you know,

519
00:32:03,560 --> 00:32:07,840
Speaker 1: pretty grim. The company was losing customers to broadband. Companies

520
00:32:07,880 --> 00:32:10,920
Speaker 1: like Microsoft and Yahoo were presenting challenges to A O

521
00:32:11,040 --> 00:32:14,360
Speaker 1: L's curated portal design to the Internet. There was no

522
00:32:14,440 --> 00:32:18,560
Speaker 1: consensus on the right course of action. Some people like

523
00:32:18,680 --> 00:32:21,480
Speaker 1: Ted Leonsis, who was vice chairman of a O L,

524
00:32:22,000 --> 00:32:24,640
Speaker 1: and Mike Kelly, who was the president of the Media

525
00:32:24,720 --> 00:32:27,520
Speaker 1: Networks Group, advocated that A o L should launch an

526
00:32:27,560 --> 00:32:31,560
Speaker 1: online portal similar to that of Yahoo that would entail

527
00:32:31,600 --> 00:32:34,840
Speaker 1: putting the curated A o L content as well as

528
00:32:34,840 --> 00:32:38,440
Speaker 1: the stuff created specifically for A O L up online

529
00:32:38,800 --> 00:32:42,920
Speaker 1: for free. Joe RiPP, who was another vice chairman, opposed

530
00:32:43,040 --> 00:32:46,440
Speaker 1: that idea. He said it would alienate the remaining A

531
00:32:46,560 --> 00:32:50,320
Speaker 1: o L dial up customers if they learned that other

532
00:32:50,360 --> 00:32:53,480
Speaker 1: people were just finding the exact same A o L

533
00:32:53,600 --> 00:32:56,880
Speaker 1: content online for free, whereas they were paying for it

534
00:32:56,960 --> 00:32:59,640
Speaker 1: on a month to month basis, that was going to

535
00:32:59,720 --> 00:33:02,920
Speaker 1: really upset them. Jonathan Miller, who was chief of a

536
00:33:03,040 --> 00:33:05,840
Speaker 1: O L at that point, had everyone take a lunch,

537
00:33:05,960 --> 00:33:08,800
Speaker 1: and on return he said the company was definitely going

538
00:33:08,840 --> 00:33:13,200
Speaker 1: to pursue this portal strategy. The once premium content would

539
00:33:13,240 --> 00:33:16,880
Speaker 1: now be free for users, with revenue coming from advertising.

540
00:33:17,720 --> 00:33:21,160
Speaker 1: In two thousand five, Steve Case would resign his position

541
00:33:21,200 --> 00:33:24,320
Speaker 1: as a director of Time Warner and stepped down as

542
00:33:24,360 --> 00:33:28,120
Speaker 1: a member of the board. That meant that at that point,

543
00:33:28,520 --> 00:33:31,680
Speaker 1: none of a O L's founders were still with the company,

544
00:33:31,880 --> 00:33:34,640
Speaker 1: and any real capacity they had all left at this point,

545
00:33:35,480 --> 00:33:37,680
Speaker 1: and that seems like a good stopping point for this

546
00:33:37,800 --> 00:33:40,440
Speaker 1: part of our story. In our next episode, we'll pick

547
00:33:40,480 --> 00:33:44,920
Speaker 1: back up. We'll continue talk about how that AOL Time

548
00:33:44,960 --> 00:33:47,800
Speaker 1: Warner relationship came to an end and what A O

549
00:33:47,960 --> 00:33:50,560
Speaker 1: L Has been up to in the years since. In

550
00:33:50,600 --> 00:33:53,560
Speaker 1: the meantime, if you have any suggestions for future episodes

551
00:33:53,600 --> 00:33:55,680
Speaker 1: of tech Stuff, why not let me know The email

552
00:33:55,680 --> 00:33:59,000
Speaker 1: addresses tech Stuff at how stuff works dot com. Go

553
00:33:59,160 --> 00:34:02,280
Speaker 1: to our website, it's tech Stuff podcast dot com. You're

554
00:34:02,280 --> 00:34:05,320
Speaker 1: gonna find other ways to contact me there information about

555
00:34:05,320 --> 00:34:08,240
Speaker 1: the show. You also see a link to our merchandise

556
00:34:08,400 --> 00:34:11,760
Speaker 1: store that's over at t public dot com slash tech stuff.

557
00:34:12,120 --> 00:34:14,200
Speaker 1: There are a lot of fun items up there on sale.

558
00:34:14,480 --> 00:34:16,560
Speaker 1: You can go check those out. Every purchase you make

559
00:34:16,600 --> 00:34:19,200
Speaker 1: goes to help the shows. We greatly appreciate it, and

560
00:34:19,239 --> 00:34:28,160
Speaker 1: we'll talk to you again. Release soon for more on

561
00:34:28,280 --> 00:34:30,760
Speaker 1: this and thousands of other topics. Because it how stuff

562
00:34:30,760 --> 00:34:41,239
Speaker 1: works dot com