Steve Case Is Bullish on Tech’s “Third Wave,” Even If It’s Kind of a Bummer.
The former head of AOL talks about the future of startups, what went wrong in the merger, and what Donald Trump told him.
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When I headed up to Steve Case’s New York City hotel room to interview him about his new book, I wondered if he was still steamed about a Newsweek column I wrote in 1996. It was called “Dead Men Walking,” and I predicted that the rise of the open web would hasten the demise of the walled-in major online services, including Case’s AOL. Clearly it bugged him. For years afterward, every time I ran into him he’d needle me about it, at first because his company was soaring in value, despite my dim views on its future. But then came the disastrous merger with Time-Warner in 2000 (frequently referred to as “the worst in history”), and although AOL survived as a fully owned subsidiary of Verizon, it hardly resembles the household-name behemoth that Case built.
Steve Case, on the other hand, is thriving. He survived the bad press of the Time-Warner merger era, and has established a reputation as a savvy tech funder who heads Revolution, a DC-based investment firm. With his wife, Jean, he operates The Case Foundation, which, among other things, builds support for impact investing. He serves on government initiatives, traveled to Africa with Obama, and helped push Congress to pass the JOBS Act in 2012.
Now he has written a book about his views of the entrepreneurial future: The Third Wave. As he explains it, the first wave was companies like AOL that built the hardware and software foundation for the connected world. The second wave was built on top of the internet — web services companies like Google, social media operations like Facebook, and those producing mobile technology like Apple. This third wave is the stage where all companies are internet-powered tech companies, and any newcomers will have to challenge the biggest incumbent industries in the world (Uber vs. taxis, Airbnb’s run on hotels). Therefore, instead of working in a Wild West atmosphere where upstarts can strike upon meteoric success, new companies will have to join forces with third parties, like established firms and especially government regulators. And they should lock themselves in for a long haul. The three rules of the Third Wave, he writes, are partnerships, policy and perseverance.
But in Case’s first book effort (Case tells me, yes, he wrote the book himself), he felt compelled to go back to the beginning and tell the story about AOL in his own words. He explains why in our interview, as well as talking Facebook, Donald Trump, and that column where I called him a dead man.
The interview has been edited for length and clarity.
Steven Levy: I can’t believe you’re still griping about that column!
Steve Case: I actually should’ve re-read it this morning, although it would give me post-traumatic stress. What you were saying, as I recall, was that the internet was going to crush us. I think where we proved you wrong is we were able to do a lot more: an on-ramp, plus other stuff. But ultimately you were proven right because of some of the things that happened later.
But I’m not that hurt. I’m talking to you. I’m moving on.
And now you’ve written a book. It’s certainly not a tell-all. I would describe it as candid but very diplomatic.
That’s fair. Mission accomplished.
If you were able to roll the tape back to the AOL merger, what could you have done to avert the disaster?
Two years before the merger, AOL was valued at $20 billion. At the time of the merger, it was at $160 billion. At that stage, there was more risk it was going to go down than go up, and having a more diversified mix of businesses made sense. So whether you look at strategic possibilities in terms of broadband or financial diversification or brands or content, hedging a little bit made sense.
Also, in retrospect, the decision strategically to merge with Time Warner versus double down on the internet [was wrong]. We could’ve acquired eBay, could’ve acquired Electronic Arts, we were in discussions with both of them. That would certainly have been easier to manage and probably would have created more long-run growth, and strengthened, or at least preserved, AOL’s position.
I wish AOL was still here, not where it is. But there is not a lot of woulda-coulda-shoulda because when I think about each of those decisions, it seemed like it was the right decision [at the time].
You write that in its heyday, AOL was like Snapchat, iTunes, Facebook all in one — the front door to the online world. These days, Facebook is trying to do all that. Can one company be all those things?
Facebook is doing a lot of things really, really well. AOL was even broader than that because we were providing the access, the on ramp, the software, and a whole host of communications features. Facebook is not the on ramp: they don’t need to be at this point. At the same time there are some things that they would like to have done that they haven’t. Despite Facebook’s brand and platform and audience, they were unsuccessful doing things like photos, which is why they bought Instagram. They didn’t have everything for communications, which is why they bought WhatsApp. So they have used, as we did, their currency to acquire other things. I would imagine that they would continue to do that.
Let’s talk about the Third Wave. As you describe it, the Third Wave ends the era of giant businesses getting founded in dorm rooms.
That’s a little strong. I’m not saying that. There will continue to be some successes [in the model of] Facebook or Snapchat, but the center of gravity will shift to not just creating apps, but how you integrate software and the internet in other aspects of our lives: like health and learning and things like that. And I wouldn’t be surprised if the average age of a third-wave entrepreneur CEO is older. Not necessarily as old as I am [57], but maybe a 40-something and not a 20-something because they’ll have some history in different industries, some credibility to establish partnerships and to deal with government. The center of the third wave is integrating [technology] in education and health, leveraging things like sensors around smart cities.
You also say that a big part of the Third Wave is dealing with gatekeepers. That’s disheartening. The original excitement of the Net was about bypassing gatekeepers.
Well actually, to some degree, all three things I’m describing — partnerships, policy, and perseverance — are disheartening. It’s like, “Oh bummer.” Partnerships are harder because you have to figure out a way to align interests. Policy is harder: most entrepreneurs don’t want to spend time with government regulators. And perseverance is harder. Having a ten-year slog like we did with AOL before you finally broke through is not nearly as interesting as having an overnight success. So I understand that people are reading my book and saying. “Oh, I kind of like the second wave. I want more of that.” Some entrepreneurs and investors will do that. But those opportunities will diminish.
What’s the effect of the third wave on income inequality among the owners and workers?
Unclear. There is an income inequality problem, and it’s getting worse, not better. The bearish case is that more technology that’s focused on productivity gains will continue to hollow out jobs — particularly middle class jobs — and leave more people on the side lines, disenfranchised and frustrated. I’m already seeing the impact on this current election about people that are disenfranchised.
The positive side is these new capabilities will level the playing field, giving more people opportunity, in terms of being an entrepreneur, accessing learning opportunities, and having more choice and more flexibility around health or other aspects of their lives. Even in the financial service area some startups are trying to make it easier for the left-behind un-banked people to borrow money without having to go to payday lenders who really rip them off.
You emphasize the importance of regulation, but Congress is moribund, and it’s hard to imagine smart regulation of these complex new areas.
It worries me. That’s partly why I wrote this book. It isn’t just a playbook for entrepreneurs, a little bit of a manifesto for the country. I’m not saying “Awesome, the government is going be more involved, we’re gonna have more regulation.” I think it will slow innovation, it will frustrate a lot of entrepreneurs. I’m just saying the Third Wave will impact things that will continue to be regulated.
You discuss the “Gig Economy” in the book. Should there be a special classification of workers in the on-demand world — something between a freelancer and an employee, to insure benefits and fair pay?
Yeah. There should be a third definition of work [beyond a employee and contractor]. My guess is over the next year or two there will be. We have proposed this on the National Advisory Council on Innovation and Entrepreneurship. It still hasn’t been crystallized completely, but the sense is there needs to be a new definition.
In the book you include a very prescient statement you made after graduating college in the early 1980s about how technology would affect our lives. We have been transformed by all sorts of gadgets and networks that augment our powers. But judging from the current election process, it doesn’t seem to have made people smarter. You could even make a case for the opposite, saying people are dumber — anti-science, and more susceptible to mob thinking than they used to be.
That’s fair. One of the things we felt passionate about 30 years ago was leveling the playing field so that everybody can have a voice. Back then when there were three television networks, unless you were rich and owned a printing press, you didn’t really have the opportunity to have your voice heard. Having millions of voices heard is awesome, but it gets noisy and some people are saying things that are inaccurate and not constructive and worse. There is absolutely this dynamic, of people living in a filtered bubble, hearing voices that reinforce their views and not really being exposed to the views of other people. That drives this hyper partisanship. I’m very concerned about it. We need to figure how to rebuild a center. Compromise should become a good word, not a bad word.
Has technology made it harder to find compromise?
It is. In high school I wouldn’t have said this, but also sometimes to reach compromise you have to have a quiet discussion and cut a deal. When you have to have those negotiations, essentially in public, and talking points and sound bites on two-minute cable TV, things get noisier and it gets less constructive. With the current election, it is noisy and a little uncomfortable. The political process is getting disrupted. Bernie Sanders is giving Hillary Clinton — a pretty big brand with a pretty big fundraising operation — a real run for the money. That’s possible because the internet helps him get the message out. Millions of small donors have made that possible.
And Donald Trump has figured out a way to reach audiences partly through television, but also through Twitter and other tools. A year ago, most people did not think Donald Trump or Bernie Sanders would still be in the election at this point. It shows some disruption for new people and new ideas with a different process, even if you do not necessarily like some of those people or some of those ideas.
Have you met Trump?
I’ve met him four or five times. He has told me several times that while some are critical of the AOL/Time Warner merger, he — as Mr. Art of the Deal — thought it made great sense. At least on the AOL side of the equation.
Do you think that Trump has any grasp of the issues you write about in The Third Wave? You think he’ll read the book?
I hope so. I hope all the candidates do. It’s an easy read. It takes three or four hours to read. I think Trump can do it.
When’s the last time you think he spent three or four hours reading a book?
I do not know. But hopefully he’ll read this one or at least scan it. He’s on planes a lot. We’ll send him the Audible file.
You describe how major industries must be careful to avoid disruption in the Third Wave. The classic example is how the hotel industry has been disrupted by Airbnb. What could Marriott have done to stop Airbnb?
Two things. One would have been to leverage some of their skill sets to try to participate in that business as well. And the second, which they are actually doing, is saying, “Okay, how do we differentiate and create a higher level of service than the Airbnbs?” But you can’t just say, “Oh I’m going to do nothing.” The market changes, the consumer expectations change, so you either move up-market or figure out a way to provide a higher level of service that you don’t think will come from some of the other marketplace providers.
Do you think Marriott could actually compete with Airbnb?
I don’t think at this point they could. But six or seven years ago, when Airbnb was getting going, if it had been offered an opportunity for Marriott or Hilton to be a partner and buy 20 percent of the company, they probably would have been interested. Now Airbnb doesn’t need it.
Your comments on Uber in the book seem to reflect mixed feelings on the company. Obviously it’s a third wave company, right?
It’s a late second-wave, early third-wave company. They started as an app and they quickly figured the battle was not just about technology, the battle was also about policy.
So where do you come down on Uber?
I have tremendous respect for what they’ve built and how quickly they’ve scaled it to a global enterprise and a hugely valuable enterprise, full stop. And I give them credit in the last couple of years [for belatedly dealing with government], and you saw this when they hired David Plouffe, one of the president’s key advisors. They now have two floors of office space in our building in DC, for example. They are trying to figure out a way to have a dialogue with different governments, either at a local, state or national level. I think that’s all positive.
Another part makes me a little nervous. The lesson that a lot of entrepreneurs took away from [Uber’s early success], is if you ignore the rules and just jump into the marketplace to build momentum, that’s a winning strategy — because it was for Uber. I hope entrepreneurs don’t take away the lesson that to be successful in the third wave, you should ignore the laws and almost flaunt your disdain for government, because I don’t think that’s a winning strategy. For the same reason, I think an unfortunate byproduct of Walter Isaacson’s Steve Jobs book is there are a lot of people (entrepreneurs and wannabe entrepreneurs), that said in order to be successful you have to be a jerk.
I worked with Steve, and I didn’t consider him a jerk.
Is there any business idea that would make you return to being the CEO of a startup like AOL again?
I am the CEO of a company — Revolution. I want it to be one of the leading venture firms for entrepreneurs in the country, particularly in the Third Wave. And I like having the ability to have some impact on the policy side and being viewed by most people in Washington as an independent, bipartisan bridge builder. I have a pretty good life, and a pretty good opportunity to have my views heard and put some of those ideas into motion.
So I don’t have a lot to complain about. Other than your article from twenty years ago.
