AOL Co-founder, Steve Case: AI Lessons from the Internet Boom

0:00Steve, welcome to Giant Ideas. Great to have you here. Great to be with you. Okay, we're going to take a walk down memory lane and really talk about what your founding of AOL in the 90s can teach us about the current moment. So you started AOL in 1985 when there were a tiny fraction of people online. Today, everyone agrees that AI is the great platform shift. When you look around today, what feels similar and what feels entirely different? Well, it's as you'd expect the mix. When we started in 85, as you mentioned, only 3 % of people were online. Those 3 % were online an hour a week. Most people didn't think the internet would ever take off.

0:37Most people didn't think it would ever be mainstream. It was more like a niche hobbyist hacker kind of market. And it really took a decade from the time we got started to the point where it started building momentum. In the mid-90s when things started taking off for a bunch of reasons, in retrospect, why it took so long. But it was certainly frustrating at the time. And I think with AI, it's sort of at one level, it seems like an overnight sensation, you know, with ChatGP, GPT launching three or so years ago, getting to 100 million users in 90 days. But in fact, it took 75 years baking in the oven because AI has been worked on by some in labs for literally decades, even longer than the Internet.

1:17So it's sort of a, the difference is it was very, very slow for the buildup of the internet, faster on terms of the adoption of both consumer enterprise adoption of AI because all these platforms have built, all the connectivity existed. So when you had something interesting, a lot of people can adopt it really quickly. The other dynamic, which is sort of startling for me, is when we launched AOL, our first round to get going, the first round of venture capital was$1 million over seven years. We raised a collective toll, grand total over seven years, several rounds of$10 million. We went public in 1992, the first Internet company to go public.

1:57In our IPO, we raised another$10 million. And now, of course, companies are getting seeded with a billion dollars and going public at a trillion dollars. So that is certainly different. And the last point I'd say is I'm more on the policy, politics side of it. when the Internet was coming out and started to build in the 80s, in particular the 90s. There was a debate about what the right public policy should be in terms of what the rules of the road should be, what sort of guardrails should be. But because it was growing so slowly, the general sense was sort of a light touch regulation made sense until we saw more cards.

2:36AI obviously is growing quite rapidly. The adoption is really kind of astronomical, which is forcing folks, whether it be here in Washington, D.C. or Brussels or other places, to say, OK, what should we do here? And obviously, there's a tension between just letting it rip and trying to maximize innovation but take some risk or going too far the other direction and constraining things prematurely. And so the policy debate is now happening faster with AI than it did with Internet. I think the size of those rounds that you raise, and you are the pioneering company of the internet era compared to today, is definitely illuminating.

3:13Another stat I heard was you guys took nine years to get to a million users, which was a huge number at the time. I think ChatGPT got to 100 million users in a year or so. Do you think that that? No, even SAG, it was like three or four months. So no, it was crazy. And, you know, again, venture capital back then in the 80s, there was a small number of firms writing relatively small checks. And the only companies that really could get funded were companies that were viewed as pretty capital efficient. Now there's so much more money. You can take some bigger bets. And obviously that's what you're trying to do at Giant.

3:49So that's positive. You know, more innovation can happen. The part that I'm not as wild about is these companies, whether it be SpaceX now at$2 trillion or Anthropic OpenAI, probably going public around$1 trillion. That's great for those companies. It's great for those investors. But it's not great for retail investors. One of the things I loved about AOL was when we went public, the market value that day was$70 million. Seven years later, when we were merging with Time Warner, it was$160 billion, something like 11 ,000 % increase. that one's in the pockets of retail investors. And so the fact that companies are going public much, much, much later at much, much, much higher valuation, there's some upside, but a lot of downside for the public investors.

4:33And that part of it doesn't, I don't allow. But obviously I celebrate innovation. I celebrate entrepreneurship and I certainly celebrate these recent successes that are not going public. Do you think that reality and phenomenon will reverse and there will be more opportunity for retail investors to, I mean, you could see, I guess, with Robinhood and the likes, that is, there is a bit of a tide moving against that where people are getting access to some of these companies in the private markets. Well, I'd say, yeah, certainly the late stage private markets have been so robust that it did give access to capital that was unprecedented.

5:07And so there was less of a need to go public. And in my era, you really raised, you know, and we weren't alone. I mean, we were a little bit lower at 70 million, but Microsoft, Amazon, NVIDIA, all went public around 500 million. And so these rises to the trillion-dollar-plus level, again, happen in the public markets. I do think the IPO market window, if you will, is opening. There are clearly dozens of companies, some of which we're involved in, that are confidentially filed to go public. And so I think you'll see a pretty robust IPO market over the next 6, 12 months, assuming these big, big IPOs hold.

5:46So going to the early days of AOL, you were really ahead of the wave. How did you in those early days distinguish from when it wasn't necessarily so easy from being too early or whether you were right on the money? Well, we were definitely early at the time. As I said, a small market. There weren't too many competitors. Most people didn't see it as being that big a market. I remember having a big debate with the personal computer manufacturers at the time, the IBMs, the Apples of the world. because when we started, in order to get online, you needed to have a modem in your computer. And modems shipped as a peripheral device.

6:26For the first decade, you had to buy a computer and then decide, I want a modem and go buy a modem and plug it in and figure out how to make it work. Otherwise, that was not a connected computer and you couldn't access, obviously, the internet. And you had some quite creative ways of trying to get people connected, right? From a marketing standpoint. Well, the first time, we're trying to get those modems built in. And so we'd be debating this with the PC manufacturers, build the modem. Then they said, why would we build the modem in? Only like 20 % of people who buy computers end up buying modems.

6:54So why would we make it, you know, raise the cost to everybody when only a few want? I said, well, we actually think that's the killer app of the personal computer. And eventually they did it. And eventually that's when things started accelerating. We also, as you know, were very aggressive in trying to get our free trial disk. At the time we launched, most of our competitors were charging for the software, charging upfront fee to join the service. We said we're going to make the software free and give people a free month because we believed that they actually took the time to try our service.

7:23They'd fall in love with it and become ongoing subscribers. And that worked well. We distributed a gazillion free trial disks and really kind of slammed their foot in the accelerator trying to drive adoption. And you were 26 at the time, right? Going up against the balance. Yeah, when we started, I was 26. Yeah. What gave you the confidence to do that? You've said, I think, many times that confidence is a key criteria of successful entrepreneurship. Take us back to 26-year-old Steve Kaye saying, I'm going to take on these titans. Well, I think some of it was probably youthful naivete, which I think is sometimes healthy.

7:56I think I thought it'd be easier that it turned out to be. But I really did believe in the idea of the internet, which, again, of course, seems obvious now, but the time seemed kind of crazy, quixotic. And so I just couldn't get it. I didn't know exactly how it was going to play. I didn't know exactly how our company would work, whether we would even survive. But I believed in the idea of people getting connected. I believed in the idea of communicating in new ways with texting and message boards and chat rooms. I believed that content would eventually be distributed in different ways. I believed e-commerce would eventually happen.

8:33So I just fundamentally believed, which I think gave me on the team we had, that sort of the, you know, the grit, this, you know, the kind of stick-to-itiveness to stick with it because, you know, it seemed like that idea eventually was going to happen. Sometimes it felt like the light was in the tunnel, into the tunnel, it was flickering, and sometimes people were adding more tunnel because it just seemed like it was hard to really break out, but fundamentally believed eventually it would happen. And so I think it was a combination of that, But, you know, kind of just 26, you know, kind of being willing to take the risk, able to take the, you know, the risk coupled with really fundamentally believing that the idea was a sound idea.

9:15And somehow, some way we would, you know, get the world online. That core insight and that belief in the Internet that allowed you, I guess, to outmaneuver the incumbents who, I guess, perhaps were a bit slower to seeing the value of it. or yeah, I'm just trying to figure out how you just bit, maybe a bit more tactical, how you outgun these guys with so much less capital. Well, I think the main thing was there was a few other venture-backed startups, but not that many. Most of the big players were, were, as you say, the incumbents, a big force like AT &T, the largest, you know, phone company or CompuServe and the source for, you know, two of the early, early pioneers.

9:52One of them was owned by H &R Block. GE, General Electric, was launching a service called Genie. Microsoft was planning to enter the market with their own service. So there were kind of big companies trying to figure out what to do about this emerging opportunity, but they didn't see it as that big an opportunity. They didn't necessarily put the A-team on it. They didn't necessarily kind of devote the time to it, which is always a challenge with large companies. They have a lot of priorities. And for us, there was one priority, which is staying alive and trying to figure out some path to thrive for others.

10:26There's a bunch of things on their agenda. So they should have prevailed. They had great brand names. They had obviously unlimited capital compared to what we had, but they just didn't have the same passion. They didn't have the same focus. It also helped, though, because in retrospect, I think it helped because it was growing so slowly. It wasn't like everybody was trying to get into it. People just thought it was sort of this niche thing. I'd go to personal computer conferences. some of the PC forum and agenda and things like that in the 80s, even the early 90s. There'd be hundreds of people there, all of them focused on hardware and software and, you know, chips.

11:05You know, like I was a guy focused on the Internet for many of those years. So it was kind of lonely at one level, but also that was not as hyper competitive as it became, you know, 10 years later when suddenly there was a gold rush mentality around the Internet. So, you know, if you're early, I think the lesson is sometimes revolutions happen in more evolutionary ways and you really have to be patient and be a little bit of a contrarian. But that also means that you might have the opportunity to build some capabilities before everybody else piles in. Well, history doesn't repeat, but it rhymes.

11:38But we're back to chips these days now. That's the focus. But I think one thing that has changed is, you know, you were up against maybe sleepy or slower incumbents. But the incumbents today, the Googles, the Metas, the Navidias, the Amazons, they are so on the ball, right, for every kind of technological transformation. They're at the forefront, again, of this AI one. So in some ways, I think there's stiffer competition than 40 years ago from the incumbent leaders. So what do you think applies today from some of the lessons from AOL? And what do you think people maybe misunderstand about AI where there might be an opening?

12:11Well, I'd say it's hard to take on the big boys in sort of the core platform AI, sort of the LLM side of things, because that's really, you know, kind of like$100 billion plus ante to play. So that one is basically, you know, whether it be the Googles or the Microsoft or others have really been the leaders there. Thankfully, they have some new companies, obviously Anthropic and OpenAI in particular, But OpenAI largely, I think, because of the partnership and the money from Microsoft that really fueled their growth. So on that side of things, I think definitely the big tech incumbents have a big structural advantage and does result in essentially big tech getting bigger.

12:57Where it's now shifting quite rapidly is what I think is more like vertical AI as opposed to more platform AI. And that's where the technology meets the real world. And that's where it's not just about what you're building. It's how you then integrate it into these industries, health care and transportation and agriculture, big, big sectors, big, big important aspects of our lives. And the incumbents there are a little bit different, not just the tech giants in places like Silicon Valley. It's also the leaders in health care like UnitedHealth in Minnesota. And so how do you work with those incumbents as an entrepreneur?

13:35I think partnerships are going to become much more important in this next phase, what I've called the Internet's third wave. And you're seeing that kind of take hold where the incumbents recognize things are happening, recognize they need to move, don't necessarily have the team in place. and the agility to move. So see the value of partnerships and the younger companies see the value of those partnerships as well as accelerating their growth and their ability to kind of enter markets more quickly with more credibility. Now, partnerships are hard, so it's tricky to form those. But I think you're seeing more and more of that.

14:09Some of the companies we back, like Clear, the biometric technology now, a public company that allows you to move through airports more quickly, kind of a fast pass. that, you know, that biometric technology is interesting, but it was the partnerships they formed with the airports, the airlines, with the transportation authorities that really resulted in the value creation. Similar back to company, also public now called Tempest, using AI focused on oncology and other kinds of things. Again, the core technology they built was terrific, but the partnerships they formed with the leading cancer hospitals, so that in data they're able to ingest is what really makes that company kind of work.

14:46And that dynamic of partnerships, I think, becomes much more important. So as entrepreneurs, I think part of this is saying, okay, who are you competing with? And is there an opportunity for some co-opetition? Rather than assume they're going to be a competitor, is there some way to align with them? And that was a philosophy I had in the early days of AOL. I said, everybody's a potential competitor until they start shooting at us and then we'll say, okay, they're a potential partner until they start shooting us and then we'll have to redefine them as a competitor. But leaning into this and trying to kind of co-opt big, big players and have them on your side, I think is very important.

15:23Okay. So going back again in history to a moment, which in many ways marked the top of the kind of first, I guess, internet bubble, your merger with Time Warner. It has been described as the worst business deal or merger of all time, which I think is perhaps not fair, but looking back on it, what do you think people misunderstood? Do you regret it? Any lessons for entrepreneurs listening to this today? Well, I think it's fair to say it was the worst merger because it didn't work. Ultimately, it had to be unwound. It wasn't the worst merger, I'd say, for AOL shareholders, which was my job. If I recall the deal, it was over 25 years ago, but our shareholders got 55 % of the combined company and our valuation had soared from, I mentioned 70 million when we went public and 160 billion when we did the merger.

16:13I think a year or two before the merger was like 20 billion. So it gone up dramatically. And so we really felt it was strategically important to use that currency, if you will, to have a more diversified set of businesses. And we also believed it was strategically critical that we were the leader, AOL was the leader of narrowband dial-up internet, but we didn't have a real path to broadband. So merging with the largest cable company in the United States, which also had these content brands and had a much more diversified business, I think we had$30 billion of revenue, and we were like$5 billion of revenue, something like that, it strategically made a lot of sense.

16:47And to this day, I still think strategically makes a lot of sense. And some of the things we said we could do 25 years ago have become companies like Spotify and Netflix and other things that absolutely could have been part of AOL Time Warner. But the lesson really is about execution. You know, the vision of what these companies could do together, the vision of convergence of technologies, I think now is pretty obvious. The fact that the company wasn't able to capitalize on its assets and its lead ultimately came down to people and priorities. There was a culture clash between the old and the new and sort of the more traditional business models and new business models.

17:27It never really came together as one company, never really had much collaboration, never had much integration, and as a result, ultimately had to be unwound. And so to me, that was a rather searing lesson that kind of knowing where you want to go is important. But having a path to get there with the right people on the bus and the right seats working together in the right way is really where the rubber meets the road. And I've tried to carry that lesson forward in the things we've done more recently. Would you do it again? Yeah, we'll do it again. Just from an AOL standpoint, as CEO of AOL and representing shareholders, it was strategically the right thing to do, even if it didn't work out the way, obviously, I and others were hoping.

18:07And you've been in a previous bubble, the internet bubble. Is your kind of pattern-matching antenna going off at this moment in time? Yeah, no, obviously, things have changed, and the scale of the revenues that companies like Anthropica are achieving is staggering. There are a lot of companies going public around 2000 that essentially had no revenues. It was more kind of an idea on a napkin or talking about how many people were using their product, but they hadn't figured out a path to monetize it. So that is quite different. The scale of the revenues are really quite extraordinary now, and the growth rates are quite extraordinary.

18:42That said, as I said earlier, the valuations are up there. And so there is likely at some point to be a correction and a sorting out. And that's like a healthy process. Having more things funded, more things form, more things scaling, I think is great. But eventually there is a winnowing process. And I think we'll inevitably see that in AI and probably in the next year or two, three. But that doesn't mean that, as I said before, the continued pace and arc and momentum around innovation won't continue. And that happened with the Internet. When the dot-com crashed, some people said, ah, the Internet's a fad.

19:21I guess we should pull back and stop investing. That was exactly the time to double down because the Internet wasn't a fad. And what's happened since that, you know, the last 25 years has been staggering. And so I think there's a difference between how markets evolve and some of the cycles of those markets, how consumers and enterprises adopt, you know, kind of technologies and how investors, you know, kind of underwrite that, whether as private investors or public investors. And, you know, you shouldn't confuse the two. They're really two separate things happening and you have to kind of take a step back to make sure you understand that.

19:55How has it been for you as both an entrepreneur and investor living through the 90s and then living through this current era? How would you describe the cultures between those two decades? Well, it's obviously venture capital has grown up. Entrepreneurship has grown up. When I was starting AOL and I was 26, it was viewed as kind of weird and kind of risky. Most people were working for big companies or big consulting firms or big banks or what have you. Entrepreneurship was more fringy. Now it's more mainstream. More people take that path when they graduate. And obviously, there are a lot more investors as well.

20:29So it's matured in a significant way. At the same time, some of the core fundamentals about being curious, kind of peeking around corners, getting a sense of what you think might happen next and deciding, Is it something you so, you know, have so much conviction about, so much passion about that you want to be part of making it happen when jumping in either as an entrepreneur or as an investor to try to kind of steer it? So that dynamic, I think, remains the same. And I think there are opportunities, as we were talking about, because of the fact that these new sectors, the biggest industries in the world, the most important aspects of our lives are now up for grabs.

21:07That creates an unprecedented level of innovation disruption. And so the opportunity of the next 10, 20 years are going to be just phenomenal. Yeah, one thing I would observe is that, I mean, technology entrepreneurs have always been, I think, at the forefront of culture over the last 20 years. you were on, I think, the cover of quite a few magazines back in the day. But the centrality of technology to culture, both the economy, but also kind of softer culture, I think, is really accelerated over the last decade, I'd say. I'd say that's true. But it's also, I think, a growing backlash against technology and particularly focused on around AI.

21:43I think we need to be a little careful and bring some humility to this, because sometimes when we all are talking, as we just were talking about, disruption is a good thing. Well, for a lot of people, disruption is a bad thing. It means job loss for their family, job loss for their community. And there's a growing backlash around technology, use of smartphones and social media, AI, what the impact is going to be, robotics, what's the impact going to be? Is it sort of going to be more of this dystopian world where there's a lot of job loss and so forth? And that's starting to bubble up. Even this recently, last month or so, a number of people making commencement speeches when they mentioned AI got booed.

22:22And I think you're going to see this as a growing political issue, maybe even one of the beyond affordability, one of the core issues in the next, you know, in the United States, the next presidential kind of campaign. Because there is a dynamic here that is building. That's part of the reason why we've been so passionate over the last decade in arguing for the disperse of innovation. don't just back companies in Silicon Valley, back companies all across the country, what we call rise to the rest. Now we've made over 200 investments in 100 different cities. That's partly an investment thesis where there are great entrepreneurs building great companies and valuations tend to be lower so we can generate great returns.

22:57But there's also a broader purpose to it, which is the biggest job creators are young companies, the innovators, you know, the startups under five years old. And so backing more of them in more places, creating more jobs in more of those places will offset, at least in part, at the job loss, it's inevitable from disruption, including from AI. And so we've got to make sure people all across the country, all across the world, see the benefits in their own lives, in their own families, in their own communities of what's happening with technology. Otherwise, you're going to see a growing and potentially very significant backlash that could hobble the development of some of these technologies just as they're starting to take flights.

23:36I think we all need to celebrate what's happening and, you know, cheer on what's happening in terms of the innovators, you know, kind of, you know, taking these risks and taking these shots on goal and trying to figure out better ways to deliver health care, better ways to think about farming, better ways to, you know, manage money, whatever it might be, but also recognize that, you know, with that disruption, it creates, you know, dislocation and frustration and anger. And, you know, we just need to figure out a balanced way as a society to get the benefits of innovation, but make sure there is a more inclusive innovation economy, not just a few people on the coast benefiting and everybody in the middle of the country, you know, feeling left out and left behind.

24:15Otherwise, we're going to have a real political revolution in this country and around the world that could set back the pace of technology innovation quite a bit. So it's just about, you know, I think it's about balance and nuance and, as I said, maybe a bit of humility as well. Yeah, you've been pretty consistent that you think AI is a long-term benefit, but in the short term, perhaps pretty destructive to jobs. And I guess that is another cultural kind of difference maybe from the 90s. I would say technology perhaps had a slightly more idealistic kind of, yeah, view on things than maybe it does now.