The Third Wave – Steve Case

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Entrepreneur and America Online (AOL) founder Steve Case urges corporate America to embrace the Internet’s “Third Wave.” Using terms drawn from futurist Alvin Toffler, Case explains the current wave as the successor to the “First Wave” of infrastructure development and the work of pioneering companies like AOL. He says the “Second Wave” saw timely leveraging by early movers such as Google and Amazon. Case interweaves his story of business success with the saga of AOL, a faltering tech start-up that became a corporate giant. Case details the machinations of AOL’s merger with Time Warner and the rifts and errors that led to its decline. And, yes, it’s still really interesting.

In this summary, you will learn

  • How Steve Case took AOL from a small start-up to its multibillion-dollar merger with Time Warner,
  • What the Third Wave of the Internet portends and
  • How entrepreneurs can thrive in this disruptive technological era.

Take-Aways

  • The Internet’s “First Wave” was infrastructure development; it featured the pioneering work of early movers such as America Online (AOL).
  • The “Second Wave” began around 2000 as companies like Google and Amazon leveraged the established infrastructure.
  • The “Third Wave” brings a new level of integration – including the Internet of Things – and opportunities for both start-ups and “incumbents.”
  • Third Wave companies must persevere and collaborate. Even long-established corporations must “disrupt” their thinking and take innovative technological leaps.
  • Expect a major shift away from Silicon Valley’s centralization of tech companies, as other areas of the US invest heavily in Third Wave start-ups that fit their locations.
  • Steve Case took AOL from a start-up to its 2000 merger with the giant Time Warner.
  • The dot-com crash and a blame culture blighted the “biggest merger in history” from the start.
  • Entrepreneurs should work with government as an innovator and potential customer.
  • The US needs a “Start-Up Visa” program to enable the best talent to come, work and stay.
  • Act decisively and work with others to create a radical, world-beating product or service using Third Wave technological tools.

Summary

America Online (AOL)

Influenced by futurist Alvin Toffler’s book The Third Wave, Steve Case decided to become a tech entrepreneur. Confident in Toffler’s vision of “an electronic global village,” Case worked his way up through various start-ups (and also spent a year as “Director of New Pizza Development” at Pizza Hut) to a central role in the dawning “digital age.” Early in his career, Case joined engineer Marc Seriff and entrepreneur Bill von Meister at the gaming start-up, Control Video Corporation (CVC), but their Atari-based “GameLine” service flopped.

“The Third Wave of the Internet is coming, the moment where the Internet transforms from something we interact with to something that interacts with everything around us.”

In 1985, working with Seriff and others, Case launched Quantum Computer Service (the firm that would become America Online). At the time, only 3% of Americans had Internet access. Case recognized that people wanted to connect and communicate online. He cut deals with IBM, Radio Shack and Commodore to provide downloadable gaming, information and education services. Quantum’s later deal with Apple to provide its “AppleLink Personal Edition” customer service foundered. With a $3 million settlement from Apple, Quantum repackaged its separate services – “Q-Link, PC-Link, AppleLink and Promenade” – into one. Rebranded, the company became AOL. It gave a human voice to email service with its signature “Welcome…You’ve got mail” greeting, and it quickly gained customers.

“In the Third Wave, disruption cannot be a mantra; it has to be a strategy. And while your product has to be great, your partnership skills may end up determining your success or failure.”

Case made AOL an accessible, inclusive portal into the burgeoning Internet. In 1991, Case became its CEO. In 1992, with a “$70 million valuation,” the company went public. It was the first Internet business to do so. Despite having a dominant competitor in Prodigy, AOL prospered, making key acquisitions and growing to a base of 25 million users by the end of the 1990s.

“AOL was, for its time, Google, Facebook, Twitter, Amazon, Spotify, YouTube and Instagram combined.”

“The Third Wave”

The Internet evolves in “waves” analogous to the stages of human progress Toffler outlined. The “First Wave” saw the building of the web’s hardware infrastructure based on an initial foundation of established telecom technology. Companies like Sun Microsystems, Cisco Systems and IBM developed the interconnecting hardware and software onto which AOL overlaid its services.

“AOL wasn’t limiting social interaction; it was magnifying it, making it possible to communicate to more people in more ways than at any time in human history.”

The “Second Wave” began around 2000 as companies like Google and Amazon leveraged the established infrastructure to provide new search and customer-centric services. Then came the “dot-com bubble” and the sector’s subsequent collapse. Surviving companies consolidated and innovated with mobile products and services, such as Apple’s iPhone and Google’s Android. Second Wave social networking saw the emergence of Facebook and Twitter. The Internet became an essential part of everyday life for billions of people.

“Amazon recognized that the e-book industry would rule the future. So they built it themselves – the hardware and software – and now they own the past and the future.”

In the “Third Wave,” the Internet of Things connects electrical devices in a vast, data-exchanging network. The Internet of Everything will have even greater impact. Partnership-savvy entrepreneurs who embrace disruptive thinking and use technological innovation to overcome barriers to entry will prosper. The Third Wave will disrupt the error-prone, tech-challenged US health care system, the one-size-fits-all education system, the unhealthy aspects of the food industry, and all other sectors. To catch The Third Wave, learn to understand it and act now.

“The Third Wave of the Internet…will be defined by the Internet of Everything.”

The “800-Pound Gorilla in Seattle”

Case resisted early calls from AOL executives to sell to a big competitor such as CompuServe. His main worry was Microsoft, since a “hostile takeover” bid looked likely. Case met with Bill Gates, who told him about the coming launch of Microsoft’s competing MSN portal service – and of his interest in acquiring some or all of AOL. Case rebuffed Microsoft. MSN launched with Windows 95 for a flat fee. AOL matched MSN’s price point, but revenues took a hit. AOL introduced in-portal advertising. And MSN failed to break through as a strong competitive portal.

“We would not have had the Internet itself if not for government.”

“Comfort Zone”

If those who rode out the Second Wave think they’re safe in the Third, they’re wrong. Incumbents cannot take a “wait and see” approach. Many long-established companies are innovators vested in R&D. For example, John Deere developed self-driving tech for its tractors some time ago. But, perhaps due to its self-view as an agricultural machinery company, it did not offer its innovations into the car industry.

“Figure out how to work with government – and how to get government to work with you.”

Shape your organization’s approach to the Third Wave by “articulating” its importance. Taking a somewhat “paranoid” view will help you remember the competition at your heels, just as constant “curiosity” will drive you to adapt and innovate. Break the corporate “bias toward ‘no’” and nurture innovators. Disruptive companies should never bracket themselves too strongly within one sector. “Self-disruption” fuels innovation. Amazon was huge in the physical books industry, but it took a calculated risk on e-books. It disrupted itself by creating tech instead of waiting for the relevant technology to mature. Kodak, by contrast, went bankrupt because it failed to invest in its in-house-developed digital camera technology. If you lack relevant in-house R&D capacity, invest in partnerships and “internal venture funds.” Leverage your scale to attain “global reach.”

“To corporate leaders, it’s time to develop a perpetual sense of paranoia and curiosity.”

New Tech Centers

Columnist and author Fareed Zakaria’s phrase, “the rise of the rest,” refers to the economies of India and China. A similar emergence is taking place in the US, as formerly low-ranking states and cities develop economic stature through the Third Wave. The tech “brain drain” pulling talent to Silicon Valley will slow as new tech centers – like Buffalo, New York, with its SolarCity manufacturing plant – emerge.

“We will see more people starting more companies to solve more problems and seize more opportunities – many of which will never land on Silicon Valley’s radar.”

New firms – such as Shinola, which produces handcrafted goods in Detroit – will rejuvenate stale economies in old industrial cities. Entrepreneurs will move there to access talent and market opportunities, using technology to gain a competitive advantage. The Midwest will nurture agricultural start-ups; Baltimore, health care start-ups; and Pittsburgh, robotics start-ups. Investment after Hurricane Katrina helped New Orleans flourish in education technology. Employees will decide to work where they grew up or in places with lower living costs or with proximity to family and friends. Getting start-up funds in such towns may be hard, but that will change in time.

“Build something that makes you proud – but not satisfied enough to stop dreaming about what comes next. Enter the arena. Topple an empire and build your own from the ground up.”

“Social Good”

The corporate world understands that having a mission statement that commits to social good benefits a company and its community. Executives run new corporations to achieve “social impact” or benefit. Millennials respond warmly to “B corporations,” such as Etsy, Patagonia and Kickstarter. Steve and his wife Jean Case started The Case Foundation in 1997; she is its CEO. The foundation invests in organizations that make a difference to society, such as Habitat for Humanity and the Special Olympics. It lobbies for beneficial changes in investment policy.

“The entrepreneurs of this era are going to challenge the biggest industries in the world, and those that most affect our daily lives.”

The healthful food business Revolution Foods takes its social responsibilities seriously. Its goal is to provide nutritious, affordable food that children will want to eat – thus combating obesity. Case’s Revolution Growth fund (not related to Revolution Foods) invested $30 million and then another $15 million in the food company. As healthful dining “converges” with the Third Wave, expect rapid growth in this arena to “more than $1 trillion” as big “players” move in by 2020.

“Our future is going to rise and fall with the dreamers and doers, the builders of new technologies and the breakers of old orthodoxies.”

An Unbalanced Merger

By late 1999, AOL had 22 million subscribers. When it announced its merger with Time Warner in 2000, AOL’s valuation hit $163 billion. AOL had recently used its financial muscle to acquire Netscape for $4.2 billion, and had other acquisition options in the pipeline – including, potentially Disney or eBay – if the merger with Time Warner didn’t work out. But AOL wanted that merger above others. Time Warner’s premium “content brands” – HBO, CNN and Warner Music – made it hugely attractive. Since it owned Time Warner Cable, it offered access that would be a boon to AOL in an era when cable companies had no obligation to share capacity.

During the merger negotiations, Case agreed to step down as AOL’s CEO and to let Time Warner CEO Jerry Levin take the reins in the “biggest merger” up until that time. But, although AOL had the higher valuation, Time Warner’s establishment profile meant that the marriage wasn’t a “merger of equals.” Tensions plagued AOL Time Warner from the outset – and then came the dot-com crash. Brands within the company competed, blocking AOL’s access to the broadband network. Time Warner executives blamed AOL for the company’s diving valuation.

As it turned out, the dot-com crash and the blame culture had blighted the “biggest merger in history” from the start. Board members ousted Levin in a corporate “coup,” and Dick Parsons became CEO. He restructured, but he wasn’t interested in the Internet. AOL became “orphaned.” Other execs ignored Case’s suggestions to buy pre-flotation Google or, perhaps, Apple. The media pounced on AOL Time Warner’s troubles and without foundation suggested impropriety over the merger. Case made the tough decision to leave. Family issues – including his brother’s fight with terminal brain cancer – fueled his decision.

“The Three P’s”

To succeed in the Third Wave, focus on the three P’s – “partnership, policy and perseverance.” To gain ground quickly, establish trusting, mutually beneficial partnerships. Your ability to collaborate in a way that makes your firm more than the sum of its parts will convince skeptical “industry gatekeepers” of your credibility. Although he had a great team and an excellent product, Case’s new company Revolution Health, the personal health management firm he launched in 2005 after he left AOL, failed because it lacked strong partnerships.

Working With Government

Government is a key partner in the Third Wave, where success requires policy “fluency” and a willingness to work out business issues. Perseverance and “adaptability” drive Third Wave corporate success. Along with the guts to endure the start-up “slog,” new entrepreneurs and forward-thinking “incumbents” must embrace a “disruptive mind-set” and temper their self-starter tendencies with diplomacy. Third Wave success depends on working with the government, which makes the rules that Third Wave operations follow. In the tech era, government innovates; consider ARPA, the government agency that created the Internet. The White House now has a Digital Service, the USDS, that hires outstanding software engineers. Government both regulates Third Wave firms and buys from them. President Barack Obama’s administration asked Case to participate in initiatives on innovation, entrepreneurship and jobs – including the 2012 JOBS Act.

Those who don’t see a need to work with government cite Uber as an example of a company that ignored regulations. Its confrontational approach won’t work for most Third Wave start-ups. Some Silicon Valley successes view government as a hindrance, but that view is not constructive. For its part, the US government must help start-up entrepreneurs and freelancers. Officials in this area must understand Third Wave technologies. The government should increase R&D spending and appoint a “Third Wave czar” to cut bureaucracy. The US also should launch a “Start-Up Visa” program so the best talent from other nations can come, work and stay in America.

“Ride the Wave”

The US can stay on top, but it must adapt. Entrepreneurs, government and corporate America must get on top of the Third Wave. “Profit plus purpose” entrepreneurs will forge ahead. Health care, education, transport and other industries need fixing. Think big, and collaborate with others. Corporate America also needs to be more open to wilder ideas. Companies like Airbnb and Uber overtook long-established firms. As they indicate, the Third Wave demands radical flexibility. To catch the wave of technological progress and shine, try to build revolutionary new businesses, going from imagination, to realization, to global scale.

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