Bursting The Bubble

Every single time I look up the value of the AOL Time Warner merger it shocks me. And I’ve covered this industry for nearly 20 years. $350 billion. The biggest merger in history, at the time. Steve Case– the man who was the architect of it, who stepped aside from his CEO job in order to make the deal happen– is not surprisingly a man who got used to be considered crazy.

It took AOL seven years of evangelism and partnerships to get to some 200,000 customers and an IPO of some $70 million. When the company started, it was illegal for commercial entities to be hooked up to the Internet, only 3% of the country was online, and Sears was one of the most innovative Internet pioneers. Sears!

The story of the early days of AOL as told to us by Steve Case is one of the most fascinating in our trove of hundreds of hours of interview footage.

And, yes, he still believes the merger was a good idea.

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Sarah Lacy: Tell me the most interesting story about your childhood.

Steve Case: I was born and raised in Hawaii, so that’s interesting. Both my parents were born and raised in Hawaii, which is probably more interesting, because Hawaii has a reputation of being a place that people come for the military or some other reason. But our family goes back a hundred-plus years.

Growing up on an island you don’t get the sense of four seasons, because there’s really one season. But you do get a sense of how a community works together. It is a melting pot, because people like me going to school were in the minority.

There was mostly Asians, Hawaiians, Samoans, Philippians, people from all kinds of different parts of the world that had gathered together in Hawaii. I didn’t really appreciate it at the time, frankly, because I thought everybody lived in places where there’s like one season and everybody lived in these multicultural communities.

In retrospect, I realize it was a unique upbringing. As a kid even when I was 9, 10, 11, I realized I liked start businesses. I didn’t know what an entrepreneur was. I don’t think I heard that word till later. I always liked that idea.

Sarah Lacy: Did you like technology?

Steve Case: No, not really. No. In fairness, I graduated from high school in 1976, so this was still the era of punch cards and mainframes.

I was not particularly focused on technology. I never really had an engineering background. I went to a liberal arts school and tried to learn a little bit about a lot of different things. I did take a computer class. I hated it. It was really boring.

Partly because it was still that punch card era. But I think in retrospect, some of that background of not having a kind of technology orientation, engineering orientation probably was helpful.

Because I was able to look at the problem of, “How do you get the world online?” through the prism of somebody who didn’t really appreciate the detail of technology and recognized that most people are like that.

Sarah Lacy:  When AOL was one of the most valuable companies in the world, what did people that you grew up down the street from think about the fact that you were doing that? Because you weren’t particularly technical.

It doesn’t sound like you were the guy they thought you were voted most likely to run one of the most valuable tech companies in the world.

Steve Case: I think they probably were a little surprised. I think they were proud. For actually a few short years, the school I went to, Punahou, which was founded in 1842, so it was one of the oldest, one largest schools west of the Mississippi and for a brief few years, I actually was the most famous person who had gone to Punahou. President Obama happened to be a classmate. When he gave that speech at the Democratic Convention and ran for Senate, I told him, “I think the baton has been passed and it got passed quickly, and nobody has ever looked back.”

Sarah Lacy: Let’s talk about the early days of AOL, because frankly I’ve now become an old person in Silicon Valley and yet I was not even in high school when AOL started. It was 1985.

Steve Case: The backstory is when I graduated from college in 1980, I remember reading a book, it wasn’t part of the college curriculum, I just heard about and read it, by Alvin Toffler called “The Third Wave.” He basically predicted that there’s this new wave that would come. The first wave being the agricultural revolution, the agricultural and industrial, and this third wave was a digital revolution.

He wrote this in the late ’70s, when none of this really had happened. I read that and said, “It’s so obvious that’s going to happen.” I was inspired by that vision. At the same time, in 1980, when I graduated, there were no companies to go to that were doing this. It was still much more of a concept than a reality.

In 1983, moved to the Washington, DC area to join a company that had a cool product called GameLine. Basically, at the time virtually nobody had personal computers in the home, but a lot of people had Atari game machines.

Their idea was plug this GameLine cartridge in, plug it into the phone. It essentially was a modem built-in as a game cartridge. You could then download games, but also, over time, could download stock quotes, or email, or encyclopedia.

“Maybe this is a way to break through and create a consumer market around this idea,” [I thought at the time.]

I moved to DC to do that, but it failed. I remember going to a board meeting. It was the first board meeting I ever attended. It must have been the fall of ’83. I must have, at the time, been 25 years old, something like that.

One of the board members, actually, Frank Caufield, one of the founders of Kleiner Perkins Caufield Byers, still one of the great venture firms, looked at the sales for the holiday season and said, “You would have thought they would have shoplifted more than that.”

That’s how terrible the sales were. Basically, the company was in freefall, ran out of cash, and almost hit the wall. That was, to me was a recognition that the startup thing is tough. Even if you’re there, you thought it was a great idea, executing against the idea is where it really matters.

Thankfully, we rebounded, did some partnerships. Eventually I and two other people, Jim Kimsey and Marc Seriff, decided to leave two years later, 1985, and that’s when we started what became AOL.

At the time only three percent of people were online. The people that were online only spent about an hour a week online. When we said we wanted to get America online, we were serious. We wanted to get America online.

Sarah Lacy: It’s such a bold name, when there were three percent of people online.

Steve Case: Part of the reason for that is because we had very little capital. We had a couple million dollars of initial funding, which at the time was not much money.

We’re competing against incumbents like CompuServe, which is owned by H&R Block. Prodigy was a joint venture from IBM and Sears and they’d committed to spend a billion dollars in this market. We were like the little guy without much capital.

Nobody knew what a Prodigy was, but if they spent $100 million, they would educate people. We didn’t have much money to spend, so we said, “Let’s pick a name that was more descriptive.” That worked well.

Sarah Lacy: It was a hard concept to understand. I remember when I was first hearing about Prodigy, I was like, “Now what does it allow you to do?” For you, why was it so important for America to be online?

Steve Case: It goes back to the sense I had after reading that Toffler book.

Which was that it would be a way, eventually, for people to get information that they otherwise couldn’t get, to connect with people they otherwise wouldn’t connect with, to be able to buy things over time and take control of how they were consuming information, given the opportunity to create information and create this platform of exchange.

It was clear even at the earliest. In fact, we launched our first service in the fall of 1985. The core of it was community, what we now think of as social media. It was things like chat rooms, people connection. Things like instant messaging that then became AIM and led to texting and other kinds of things.

We just knew that the killer app of this new medium would be people. Our bet early on was around these communities. We also had a lot of content, commerce, and connectivity. We called it the four Cs and tried to knit it all together, but we knew the core of it was going to be a community.

Even though we had some tough times, it took us really 10 years before we really got traction, that eventually we’d get traction. We went public, I remember, in 1992, actually.

We were evangelizing the concept. We had been at it for seven years, 1985 to 1992, we had less than 200,000 customers after seven years. $30 million in revenue, and the market value was $70 million the day we went public. We raised $10 million, and most people thought, “Another ‘nichey’ little company.” The road show, talking to investors, was someday we thought everybody was going to get online.

Very few people believed, and the few that did believe in the idea, few believed that our little AOL was going to be able to survive against the big guy. Prodigy, Microsoft was doing some things, AT&T was doing some things. People were pretty skeptical, even my family.

I remember my parents and some friends in the late ’80s were like, “Seemed like a good idea. We know you’re passionate about it, but it doesn’t seem to be working. Maybe you should think of another idea.”

I just never doubted that someday this medium was going to change the world. I had my moments where I doubted whether AOL would survive to be there when the market developed, but I never doubted the idea.

In retrospect the reason it took so long, I think there’s some lessons to be learned for people and entrepreneurs focusing on reimagining and disrupting big industries like education, healthcare, and things like that, is it takes a while to put the foundation in place to enable the revolution to happen.

Revolutions often happen in an evolutionary way. You’ve got to have the passion and the perseverance to stick it through. Why were so few people connected in 1985 with just the three percent? Number one, was virtually nobody had computers. Number two, only about a third of the people who had a computer had a communications capability.

Those were the days when you actually went to the peripheral section of the computer store to buy a modem to plug it in. It took us five years to convince the PC manufacturers, “Wouldn’t it be nice to actually build this modem in so everybody could have access?”

It was like, “Well, why would we do that? Most people don’t have any interest in this. Why would we add that as a core part of every computer and add cost to every computer when so few people are interested?” The communications networks at the time were extremely expensive. You’d spend $5 or $10 an hour to be online.

The software wasn’t very easy to use. The services weren’t that compelling. There actually was a reason why it took a while. Eventually, people bought PCs. Eventually, we were able to get every PC manufacturer to bundle modems as standard, and, of course, by the way, AOL software as well.

Eventually, communications costs came down to the point that you could offer a flat-rate unlimited service. Eventually, the software got better, particularly as computers had more capabilities. Eventually, the content got better. The community features got more interesting, because there were more people to talk to.

The day we launched our first service there was actually nobody to talk to, which actually is what forced us to create the Buddy List. People would sign on, use instant message and say, “Is Sarah on?” 9 times out of 10, Sarah wasn’t on, because they were only on an hour a week.

We said, “Why don’t we put this Buddy List thing? When you sign on you’ll basically identify who your friends are, and they’ll tell you which of your friends were online,” which, of course, seems obvious. It took us a little while to figure that one out.

Suddenly people started using it more because they suddenly felt that sense of community, “Ah, my friends are out there, and I have somebody to talk to.” It takes a while for these things to happen. It took a while for us to get traction.

Sarah Lacy: That’s a lot of parallel chicken and eggs. There must have been points when you felt like, “We should just give up. We’re just too early to the market,” even if you didn’t doubt that the market would develop.

Steve Case: No, I never felt that. Perhaps I should have, but I never felt that. I believed in the idea. I believed in our team. I believed that if we just were able to figure out some way to persevere that at some point the light at the end of the tunnel would actually get closer and closer. I actually never really gave up. I believed too much in the idea.

I think that’s important for entrepreneurs. I think entrepreneurs who are really trying to change the world need to have a big idea. Big ideas, maybe you get lucky, but most of the time you don’t. It takes a while. Unless you’re really passionate about it, you probably won’t persevere.

I think that was one of the key takeaways for me, the passion, the perseverance, the people, the team. Getting that alignment is really critical if you’re really trying to take on one of these big problems.

Sarah Lacy: What was unique about the AOL team where you guys were the ones to become so successful in the wake of all these big companies who were trying to do something similar?

Steve Case: I think we had a great team that really was passionate about the idea. We recognized early on that we couldn’t do it on our own that it would require strategic partnerships. I mentioned some of the ones we had on the PC side.

We also established partnerships with content companies and communications companies. We were really knitting together a tapestry of alliances to do something together that we couldn’t do ourselves. It reminds me of a great African proverb that if you want to go quickly you can go alone, but if you want to go far you must go together.

We had that go-together tapestry of alliances partnership strategy. Frankly, we also benefited from some luck in that some of our competitors were larger companies that were more corporate in their mentality.

CompuServe, being owned by H&R Block, was more focused on predictable revenue growth. When we really slammed down the accelerator to grow fast, they didn’t really respond. Prodigy was a joint venture of IBM and Sears. A lot of people came from IBM. A lot of people came from Sears.

Those are both great companies, but didn’t necessarily have that entrepreneurial kind of environment. They were more corporate and it was more of a corporate joint venture. Even Microsoft, which is a great company and scared us for many years because of the power of their franchise, for them, the main event really was Windows enterprise software.

I’m sure if Bill Gates spent every waking hour for a few years just focusing on our online space they would have crushed us, but he didn’t. He spent like one percent of his time, and we spent a hundred percent of his time.

The last piece was, I think we made the right bet that it was all about people. It was all about community. It was all about social, while other people…CompuServe, essentially viewed this opportunity through the prism of content. That was their bias. Prodigy essentially viewed this through the prism of commerce. That was their bet.

AT&T, connectivity. That was their bet. Our bet was community. Our bet was people. That was always the core, the guiding principle of what we did. It always was more than half of our use. Today it’s still more than half the use of the Internet, is community-related functions.

Now it’s Facebook, or Twitter, or Snapchat, or other kinds of things, but this community aspect, people connecting to each other is the soul of the medium, and we sensed that pretty early.

I decided partly to create a friendly human face to this technology, to not just be the president of AOL, but kind of the mayor of the community.

One way to do that was every new member I sent an email welcoming them to AOL and kind of giving them a little bit of a guiding tour, and I signed them. That was steve@aol.com, which in the first couple of years I got a bunch of responses and I read every response. When we started adding millions of new customers every year, I at one point had 30 people, basically, manning steve@aol.mail. I stopped using that because we were getting thousands and thousands of emails.

Sarah Lacy: I’m curious. What was it like to be doing a startup back then? Did people want to work at a startup? Was it hard to get funding for start-ups? Were there the same natural advantages and people just didn’t know about it? When you told your family and friends you were doing a start-up, did you even use the word start-up?

Steve Case: I don’t remember, but I think, in general, the environment was not particularly conducive or supportive to startups. That was particularly true in the Washington, DC area, where we decided to base.

The DC area, at the time, it’s changed quite dramatically, was really a government town. It was government contractors and lobbyists, and there was not much of an entrepreneurial community there. We actually went to New York, Toronto, Chicago, and San Francisco to get venture capital. None of it came from the DC area.

Even our law firm was in Boston, because law firms in the DC area at the time, again, it’s changed, didn’t really have a sense of start-ups and the way you partner with different companies, and things like that. I think the other big change, versus today, is it was really hard to raise money. The bar was pretty high.

There weren’t that many venture firms, and so figuring out a way to get the capital or get started really was critical. The venture firms essentially played a filtering, curating role there because the ones who didn’t get funded just didn’t get a shot. The first test really was getting that funding.

Now the battle shifted. The battle for capital, because capital’s more easy to access, not as easy as across the country as people might think, in New York or San Francisco, there are a lot of parts to the country that are underserved, but it’s easier than it was.

Now the battle has really shifted to a battle for attention. How do you get noticed in a world that’s noisier, because the barriers to entry to start companies have gone down? The access to capital has gone up, so more companies get started and then how do you figure out a way to break through the clutter and be the one, or one of the few that really ends up being the leader in that particular sector?

Sarah Lacy: You talked about the struggle with AOL. At what point did you think, “We’re actually doing this, we’re actually going to make this”? Was there a moment when you felt that?

Steve Case: I’d say there were several moments. I think one was when we went public. Because it was the first Internet company to go public, I think it was a defining moment. The other was a difficult moment, frankly, but it was two or three years later. I think in probably 1995, maybe 1996, when we had shifted from hourly pricing to monthly pricing and usage skyrocketed.

We knew it would, but the usage skyrocketed even more than we could and we had problems, busy signals. At one point, I think all our systems were down, I think for 23 hours, which was a problem, because we had asked people to trust us and be part of this new medium, use our email, and rely on us for buying stocks and things like that. Suddenly, we were not available, and had let them down.

That was the negative side. But the thing that was shocking was it was the lead story of every network news and the headline on the first page of almost every newspaper in the country. Even five years before, nobody knew or cared what we did.

It went from an idea nobody even paid attention to, and the few who did pooh-poohed as you said, “It’s a bunch of hobbyists or something, it’s never going to be a big market,” to suddenly being viewed as such an essential part of everyday life. It was almost like the entire country’s electricity infrastructure or water infrastructure had shut down for 23 hours.

Like I said, we felt terrible about it because we really let people down, but it was also a moment saying, “I guess this now really is becoming the phenomena we always were, for more than a decade, hoping for.”

There were some times where it was a little bit lonely, just because we were off on doing something. Even in the technology conference, I remember going to a conference that I think it was an Esther Dyson conference PC forum, in probably the late ’80s, maybe the early ’90s, and there was 400 people there. I was the only one that was focused on the Internet.

Everybody else was semi-conductor companies. It was software companies, hardware companies. I was like, “I think I have like the best idea here, but nobody could care less.”

They were like, “Oh, you’re like bulletin boards. What are you guys doing?” The view was it was completely irrelevant, so I think there was some of that aspect. But I think it helped that, as I said before, I really believed in the idea, and our team really believed in the idea. That girded us for the battle.

I also think I learned over the years that there are cycles to these things, that there’s ups and there’s downs. I think the challenge for any leader of any organization, but certainly true of an entrepreneur leading a start-up, is try to create a little bit more stability there.

When things were going great then everybody says, “Well, you guys are going to take over the world, you’re going to be the most valuable company in the world, you’re on the cover of every magazine, everybody thinks you’re brilliant,” I used to point to things lurking on the horizon that could be problems. I used to call it “delegating paranoia.” How do you get people instead of thinking they’re going to be taking over the world, getting more anxious?

Conversely, when the chips were down and people were saying, “Oh, these guys are morons, they’re going to go out of business tomorrow,” particularly when we’re a public company, there really were these huge gyrations, remind people of the journey we’re on.

Instead of having these wild swings, try to be a little bit more centered, almost be the shock absorber for the company.

Sarah Lacy: When Netscape started, I guess when it was spinning out of Mosaic and becoming a company, I remember interviewing Andreessen, and him talking about those early meetings where he and Jim Clark went around and talked to every major ISP and every major media company. They were at Time-Life Building and all this, and were talking about the Internet.

Everyone was like, “AOL’s already won that. It’s not going to be this open Internet.” You went from being the cutting edge vanguard, to then once the Internet was coming about, AOL was called “the Internet with training wheels.” What was that transition like for you?

Steve Case: We loved that actually. Some people said that pejoratively, but we wanted to get everybody online. We wanted to be the easiest way to get online, so having the easiest software, the easiest set of services, the cheapest price. That was our goal.

We wanted to get America online, so of course, we wanted to make it easy for people who were novices to get into the whirl, and make it free trials, and whatever it took to get everybody connected to it. What we saw, not surprisingly, was the Internet coming.

It’s worth pointing out it wasn’t until 1991, six years after we started, it even became legal to connect a commercial service to the Internet. Up until 1991, it was illegal. If we had connected our service, AOL, to the Internet, I would have gone to jail because the Internet at the time was limited by law to educational institutions and government organizations.

That’s the only people who could use the Internet. We were building everything on our own, our own email system, our own everything because we couldn’t really be part of that.

When they changed that and said, “We’re going to basically allow commercial access to the Internet,” we started acquiring technologies and companies to basically try to position ourselves as access to the Internet in the easiest, cheapest, fastest way, as well as a set of services that were exclusive to AOL. It was a superset strategy. It was the Internet and a whole lot more.

Rather than go to this ISP and just get access to the Internet, why don’t you get access to the Internet plus all these things, including the Instant Messaging, Buddy List? Things, which at the time were uniquely AOL’s. That was a differentiator.

When the Internet, became commercial, the World Wide Web emerged. Mosaic and then Netscape emerged as a browser, that’s really when AOL’s growth accelerated. We went from, like I said when we went public having 200,000 customers after seven years, seven years later, I think we had 20 million customers. That’s when things really took off.

The Internet came of age. When people started hearing about the Internet, for most people, AOL was the choice. At our peak, over half of all Internet traffic flowed through AOL. The Internet, while being a threat at one level, was an enormous opportunity, because we embraced it and said, “We’re going to take this idea and make it more accessible to the mass audience.”

Sarah Lacy: Now, for you, when did things start getting insane? When did the bubble start?

Steve Case: I’m not sure I’d use the “bubble” word. I would say, “In the late ’90s, things started getting crazy.” I wouldn’t say just on the valuation side. Although when we went public, as I said, we were valued at $70 million. Less than a decade later when we merged with Time Warner, it was $150 billion. It was the best performing stock of the decade more than Microsoft or Cisco or what have you.

As that accelerated, that in and of itself was interesting. Also, as the medium came of age, and people realized how important the Internet could be, it just required me to do a lot of other things other than just focusing on the day-to-day operations of the company, including trying to figure out what the right policies were for the Internet.

How do you protect kids in the online environment? How do you make sure there isn’t a digital divide, so people who can afford access to computers and Internet had even more of an advantage in the future than they had had in the past, versus people who couldn’t afford it?

I started spending more time on some of those policy issues. It was the late ’90s when things really skyrocketed.

Sarah Lacy: Let’s talk about the merger. I’ve been conducting an informal poll around not only other reporters but people in our industry and saying, “Do you remember how big the AOL Time Warner acquisition was?”

People have said, “No.” I said, “What would you guess, knowing it was crazy, it got headlines, people freaked out about it, and that it was in the ’90s? What would you guess?” The highest guess I’ve heard is $10 billion. Most people were like, “Was it half a million? Was it a billion?” No one remembers how gargantuan this acquisition was. You probably remember.

Steve Case: I remember, yes. $350 billion, but thanks for asking.

Sarah Lacy: What happened? How did it happen? Did it seem normal?

Steve Case: What’s “normal”? Here’s what happened. Basically, from the AOL’s perspective, we had gone from this little start-up with dozens of people, to hundreds of people, to thousands of people, and from this company with not many customers, to a lot of customers, to more customers, and from a pretty modest market value to pretty significant market value. Things were working pretty well.

As I said, at the peak, we had over half all the Internet traffic. But there were some clouds on the horizon. One was our transition to broadband. We were dominant in the narrowband world, which was a world, essentially, of open access where the federal laws around telecommunications required phone companies to open up their phone lines, so anybody can essentially create a network on that.

We lobbied to have similar rules put in place in a broadband world, and they were not put in place. There were some risks we would be locked out of that future world, and we saw it coming.

We also believed that while we felt good about what we were doing, that the valuation of the company, at the time I think it was about $150 billion, it was easier to see how it might go down to 100 than how it gets to 200. There was some risk associated with that. Merging to have a more diversified set of revenue streams, a broader mix of things became strategically interesting.

We considered a variety of different options, but always felt Time Warner was the best path, because it was the largest cable company, Time Warner Cable, so it gave us that path to broadband and also, it had this treasure trove of brands, including brands that would be hugely valuable in the multimedia world.

Obviously, Time, Inc. in the magazine side but HBO, and Warner Bros., and Warner Music, and Turner Broadcasting, and CNN. Huge brands and we said, “These are going to be really interesting assets in this broadband world. Time Warner Cable has the largest cable distribution, so we basically marry our digital capability and our brand and presence with this large diversified media and communications company that really would give us the perfect set of assets.”

We early on thought they were the right ones to try to put a deal together. On their side, they were struggling to figure out how to be as relevant in the future as they had been in the past. Some of the initiatives to move into the digital world had not really worked very well.

I think they were a little nervous about their future. The discussions we had, there was some strategic value, both companies should have been more valuable together than they were apart, but it took a while. I think it was many months before we finally figured out a construct, an exchange ratio that we both could get comfortable with. That’s when we ended up doing the deal.

Sarah Lacy: Who first suggested it? When it was first brought up, did you think it was crazy?

Steve Case: No. I always thought it was perfect. I don’t remember exactly, but we considered a variety of different paths we could go down, but they had a choice. At one point, I had gotten to know Jerry Levin, the CEO at the time of Time Warner, and I just called him and said, “I think we should put our companies together and here’s why.”

I also said in that first call that, “If we were able to facilitate this deal, I would step aside as CEO and let you run the combined company.” I just knew that that would be a key thing he would need to hear to be supportive of having a discussion. He said, “Let me think about it and talk about it.” A few weeks later, we met. Again, it took a few months, but it was my belief that even though I loved running AOL, that it would be better for me to step aside from running this and give up my baby, if you will. Because it strategically was more valuable to AOL and its shareholders to be part of this larger entity that had this path to broadband and these diversified revenues.

The financial calculation was also pretty clear that we essentially decided to trade a hundred percent of a company that had, I can’t remember the exact number at the time, but $10 billion of revenue and $1 billion of profit to own, instead 55 percent of a company that had $40 billion of revenue and $10 billion of profit. We felt that was a good trade, if you will, for our shareholders, and that coupled with the strategic benefits, particularly this path to broadband, let me to say, “It’s the right thing to do, and it’s so much the right thing to do I will step aside as CEO to allow it to happen.”

Sarah Lacy: It’s interesting. In the last 10 years, I feel like there’s been such a reaction against sales or bus-dev oriented founder CEOs in the Valley and such an embrace of this cult of the program or product CEO. It strikes me that so much of AOL’s success was really due to your ability to get strategic deals done. Even in the early days of convincing manufacturers to put modems and computers. Do you think that was a core thing you needed at that time?

Steve Case: Yeah, I do and I actually think those skill sets become more important in the future. The way I look at this is we had two waves of the Internet, we’re about to have the third wave.

The first wave, which obviously I was a part of, was really building the idea of the Internet, popularizing it, building the core technologies, not just AOL but Cisco and a lot of other people that were building that infrastructure, WorldCom, people building the communication network. A lot of people were investing to create the infrastructure to make it possible and then create the on-ramps to make it possible. That really was that first wave, basically a 15-year wave. The last 15 years has really been building on top of the Internet. It’s products and services that leverage the fact that everybody is now connected and creates things on top of that.

Google being the most obvious example, but Facebook and Twitter and others essentially are writing on that infrastructure. They are Internet companies riding on top of what already was built, which is why it’s the second wave.

I think the third wave goes from building the Internet, to building on top of the Internet, to integrating the Internet into our everyday lives in ways it will become increasingly seamless. That’s where things like the Internet of Things comes in. That’s where the reinvention of education and healthcare and a lot of different industries will come. That’s a huge opportunity, both because a lot of those industries that have not yet disrupted are huge parts of our economy, healthcare alone is one-sixth of our economy, so they’re huge opportunities. But it’s going to require a different skill set with more partnerships, more understanding of government and policy to be able to knit together this tapestry of alliances necessary to really have transformative impact in those sectors. The big breakthrough companies in the next 15 years will be part of this third wave and it’s not just about what you do alone, it’s about what you do in partnership with others.

Many of those industries are more enterprise-driven than consumer-driven, because there are decision-makers at a school district or at a hospital that need to be part of that decision. It’s a different kind of mentality. To really have this significant impact, you’re going to have to figure out ways to partner with them. You’re also going to need to understand that government’s going to play a role more than you’d like. There is clearly a libertarian mindset in the entrepreneurial community, particularly in the Silicon Valley world, which is fine. But if you’re going to attack their problem of learning or attack the problem of health, you should recognize the government is not just the principal regulator and will continue to be but also the principal customer.

The government spends more on healthcare than anybody else. For revolutionized healthcare, you probably need to be engaged with your major customer, which happens to be the government. I think that that, too, will require a different skill set. I wouldn’t be surprised if we didn’t see an evolution of how companies are architected and how teams are built to recognize this third wave. It’s a different mentality, a different skill set than we see in the second wave.

Sarah Lacy: It seems this cult of disruption is either something companies grow out of or it’s a convenient marketing message early on. Then when they get bigger and they have a multibillion-dollar valuation, they realize suddenly they can’t be disruptors. What is your view of that cult of disruption and how healthy or good it is?

Steve Case: That’s true and I think it’s somewhat inevitable. I saw this evolution with AOL even before we merged with Time Warner but certainly after. We shifted subtly from being an attacker to being a defender. I realized that the world really is divided into these two camps, and the mentality that you have to attack, disrupt, challenge the status quo and take them out, anything is possible, which is the entrepreneurial mindset, is different than the mindset required to operate a large complex organization. It’s not surprising to me that the people running Fortune 500 companies almost always have MBAs, but in the entrepreneurial world, it’s not only not essential, it’s sometimes not even helpful, because it forces you to analyze risk.

If you really analyze risk of almost every start-up accurately, you’d never do anything, because they’re all so risky. You’ve got to take this leap of faith. Similarly, managing these complex organizations, it’s, “How do you de-risk?” How do you grow the revenues, but also how do you make sure you don’t lose what you’ve got? They’re just as focused on, in fact, more focused on protecting the downside, hedging the downside as they are optimizing the upside. In the sports world, they call it the “protect defense.” That is the mentality for most large companies. Not all, there are some exceptions, but most large companies. There is a difference between attackers and defenders. The great battle as you attack these new opportunities is how the attackers attack and how the defenders defend. Sometimes, it will be attackers co-opting defenders or vice versa.

At some point, they will get to the point where they are now trying to defend what they’ve built, not trying from the new entrants who are trying to attack them on the fringe. It’s an inevitable cycle. Now, there are some exceptions. There are few companies that have done a remarkable job given their scale of still having a largely attacker mindset. Google has done that, not just protecting its core business quite effectively but moving into android and many other spaces. Amazon, similarly, their core business continues to be strengthened. AWS, some of the other initiatives they’re doing, Kindle, is really remarkable. They’ve been able to do that in scale, and Apple.

There are some companies with huge, a couple of hundred billion-dollar market caps that still are pretty nimble and pretty adaptive and pretty fiery, and have some of that attacker mindset. But there many others, in fact, most others, that lose that edge. The positive about that is that creates enormous opportunities for entrepreneurs.

Even though you look at some of these new sectors and think that, “Wow, that seems really hard,” if you recognize that the people that now are in that space are more focused on defending the status quo than they are ushering a new way, that does give you an advantage because they’re going to be playing a different game. You have to be smart about it, but they’re playing a different game.

Sarah Lacy: Getting back to the merger, it’s widely regarded as a failure. Do you regard it as a failure?

Steve Case: It’s mixed. If you view it as what’s happened to the stock since or you view it as what’s happened to AOL franchise since, it’s clearly been a disappointment. At the same time, my job as CEO was to figure out what the right future was for the company. I do not regret doing the merger, because given the facts that I just mentioned, it was the right thing to do. It was better to own 55 percent of this larger company than a hundred percent of our standalone company. Even today, if AOL shareholders kept their shares, I don’t know what the current numbers are, but if you look at what AOL’s worth and what Time Warner’s worth, and what Time Warner Cable is worth, and what Time Inc.’s worth, many of whom have been spun off as independent companies, I think it adds up to like 60, 70 billion dollars.

That AOL shareholder, that 55 percent ownership of these companies, still has significant value. I’m disappointed and frustrated and sometimes even a little bit angry that what we spent so many years building has lost its way and lost some of that excitement, some of that momentum, some of the leadership position it had. But I don’t regret doing the merger.

One of the great American inventors and entrepreneurs was Thomas Edison. He said over a hundred years ago, “Vision without execution is hallucination.” That is the story of the AOL-Time Warner merger. As you say, the vision of it…If you read the original press release put out in January of 2000, it basically predicted most of what has happened. This again was before Facebook was started, before YouTube was started, before Apple launched the iPod.There was a lot of things before Twitter existed. There are a lot of things that we talked about in terms of how we saw these worlds coming together that we knew were right and have proven to be right. It really was about execution that those opportunities, for the most part, ended up not being things that were captured by this combined company. Now, some of that is just, in retrospect, the risk of having this large-scale company, the defender mentality versus the attacker mentality.

Clearly, there was a culture clash. There were people on a Time Warner side that were resentful that this little upstart that came out of nowhere suddenly owned 55 percent of the company. There were similarly people on the AOL side that probably had sharp elbows and should’ve been more respectful of the people in the businesses that had been built, in some cases, over half a century.

There was this tension at the outset. Then it was exacerbated, because that’s when the stock market imploded and the Internet companies, many went out of business. Some lost 99 percent of their value. Suddenly the people who initially thought this would be a good idea were seeing their own life savings based on their 401(k) or what have you, depleted. They got mad. They got frustrated. You can understand that. It really was, I still think, a good idea, but having the idea is one thing, executing against that idea is another thing. We just didn’t execute well against it.

Some would say my mistake was doing the deal and then largely walking away. I was still chairman of the board but even AOL no longer reported to me. Maybe. But it’s hard to say what would have been different if I was playing more of a day-to-day role. I’m pretty sure if I had said I wanted to be CEO, the deal never would have happened. It was just part of facilitating that deal. In retrospect, when we did the deal, I said, “Not only is there going to be only one CEO. We need to be really careful because we have a lot of personalities.”

There wasn’t just me but Jerry Levin, also Ted Turner, and others, “We need to make sure that there’s not confusion about what’s happening day-to-day,” so I pulled back. I had an office in New York where I came in, maybe one day a week, because I said, “We don’t really want confuse people.” That, which I thought was stepping back to make sure there’s not a perception of meddling, was viewed almost as indifference or arrogance like, “Well, doesn’t he care about this thing?” That was a mistake.

When we did the merger, the day we announced it was $250 billion. I think the next day it was $350 billion. It was the largest merger in history. Yeah, I would say, in retrospect, “The values were high and pretty hard to sustain.” I will grant you that major concession. But I never lost my belief in the Internet and the power of the Internet and how it was going to change the world. How it was going to allow people to do things in new ways and level the playing field in a lot of industries. I never did that. It really was a debate…There’s a difference between an idea in terms of building the Internet and specific companies.

Sarah Lacy: Did you think about starting another company?

Steve Case: No. Probably because I’m curious and there was interest in a lot of different things. The idea of doing just one thing versus trying to be part of many things at that point, it felt like the right thing to do and it proven to be the right thing.

Sarah Lacy: I want to talk about philanthropy, your work with the government and politics, and also, obviously, you’re investing. Let’s talk about investing first. I think one of the real interesting things about Revolution is that, by design, as I understand it, 90 percent of your investments you want to be outside of Silicon Valley. Do you view the mission of Revolution as more of a social empowerment job-related mission, or do you view it as that’s where you think you’re going to get the best return?

Steve Case: Both. It’s definitely where, I think, we’re going to get the best returns, but also we feel better about spending our days doing that because it’s helping to build companies in regions that will have a broader, more pervasive, more positive impact on the country. It’s, in that sense, a twofer. The reason we think it’s a great investment thesis is, while there are a lot of great entrepreneurs in Silicon Valley, and also a lot of great entrepreneurs in New York City, there’s also a lot of great entrepreneurs in Detroit, and Cleveland, Houston, and Denver, and Nashville, and all kinds of places around the country. There’s not a lot of investors focusing on them.

If you find those great companies…It’s now easier to be in those places than it was 10 years ago because it’s easier and cheaper to start a company. You need fewer people. You need less capital.

If you want to, for a lifestyle reason, you grew up in Detroit and you want to go back to Detroit and be part of the resurgence of Detroit, you can do that. There’s now a start-up community in the downtown area that’s really vibrant and exciting.

People now can decide where they want to be as opposed to feeling like they have to be in a particular place. Then, as an investor, because there is less competition for those companies, we are able to invest in companies in some of these off the beaten track places and lower valuations of those same companies if they were in Silicon Valley.

Those people really value the kind of help we can provide and the network we can provide because sometimes, almost always, they don’t have that same network value locally. It is both. I think we’ll do really well in terms of our investments and have a top-tier performance compared to other investment firms.

There also is a broader benefit that we feel good about that we’re able to play a role in lifting up some of these regions. It’s worth remembering that the story of America is around regional entrepreneurship. 250 years ago, America itself was a start-up. It was just an idea. It grew into the leading economy and the leader of the free world because of the work of the entrepreneurs.

Different sectors, as we talked about earlier, first in the agricultural revolution and industrial revolution, now the digital revolution, those companies grew up in different places. New York was known for financial services. Detroit was known for automobiles.

That drove our economy. That drove the development of these regions. But then, some of those industries subsided in importance and those regions were left holding the bag. Creating ways to reinvest in those regions and rebuild those regions I think is really important.

Detroit is a particularly good a story because 60 years ago, Detroit was Silicon Valley. It was the most innovative region in the world for what was the hot technology of the day, the car. It was growing like crazy.

There were supply chains, thousands of companies, libraries being built, and schools were being built. It was like, “Go, go, go Detroit.” Nothing can stop it. Something did stop it. It lost its entrepreneurial mojo in a world that was increasingly competitive with global competition. In the last 60 years, Detroit’s lost 60 percent of its population and is now bankrupt. It was Silicon Valley 60 years ago. It lost its way.

I think it can be rebuilt based on what’s happening with start-ups in the downtown area. I think that’s important to rebuild that region. It’s not going to happen, unless we build a strong start-up communities in regions like Detroit.

I’ve not seen an idea or an entrepreneur and said, “The only way this can be successful is in the Valley.” The Valley, again, I want to be careful here. There’s no bigger fan of Silicon Valley. I talk about it all the time and celebrate it. It’s the pride of America, the envy of the world. It will continue to be. What’s happening there is vibrant, and exciting, and hugely positive.

A lot of great companies are going to continue to be started there. Obviously, a lot of investment will continue to be focused there. The story of American entrepreneurship, even the technology entrepreneurship, is much broader. That story does not get told as much, and those entrepreneurs in other places don’t get focused on enough, and investors don’t pay attention enough.

It’s more, “How do you help this rise of the rest phenomenon, lifting up these other regions and create the environment where they can be successful?” Sometimes by providing capital, but in many cases by helping facilitate partnerships or other things that are necessary to be successful.

My hope, a decade from now, is we’ll see this momentum in this third wave of Internet companies. Silicon Valley will continue to be very strong. New York will continue to build and to be even stronger than it is today, but you’ll see in many other parts of the country really strong ecosystems also developing.

We’ll have a broader, more evenly distributed innovation economy, which will then create more jobs, drive more economic growth, and make sure we’re competitive as a nation globally. That’s the bet. It’s not about, in any way, being anti-Silicon Valley, it’s about pro being the rest of the country which is the majority of the country.

Sarah Lacy: Do you think that people in your position need to be aware of unintended consequences? We are trying to do something like alleviate poverty or solve world hunger, and you’re going in, and you’re dropping a bunch of money in a place, and then leaving. Does that worry you?

Steve Case: Oh, it does worry me. We’ve done some of it too. Everybody makes mistakes as they’re on this journey. The lesson we’ve learned, my wife Jean runs our foundation, I run Revolution, she runs the foundation, she has a way harder job than I do. It’s actually much harder to give away money smartly than it is to make money, whatever, as an investor or an entrepreneur. It’s just the reality.

There are things that there could be unintended consequences. That requires a kind of understanding, listening well, and some nuances and a deft touch. But there’s no question that there are risks. Getting people engaged and try to give back, and be responsible in their community, however they define the community, whether it’s local, or regional, or national, or global, it’s very important.

The innovative thinking that they can bring can be a catalyst for thinking about problems in new ways, and the innovation that can happen there is very important. At the same time, we have to recognize that there are some difficult problems out there that a lot of people have tried to solve over a long period of time, and for the most part haven’t.

The reason is because it’s hard, and simple solutions, the fly-by philanthropy approach you alluded to, it generally won’t work, and generally won’t be helpful. It requires constructive engagement over a sustained period of time.

It’s great that more and more people are saying, “We would like to give back,” or, “We have a responsibility to give back,” and new models and new thinking is needed, because we need to think out of the box. At the same time, we need to be careful not to presume we have the answers when we haven’t yet even potentially appropriately framed the questions. We need to be talking less and listening more.

One example, one mistake we made is probably, eight or nine years ago, we became convinced that one of the great problems in Africa was around clean water, which it is, and stumbled onto a solution intervention called Playpumps. It basically was a children’s merry-go-round that was connected to water.

As the kids spun the playground, it basically pumped the water, then the water was stored. As a result the community would have water that otherwise wouldn’t, powered by kids playing. We said, “Well, this is awesome.” We made a big investment in that, got a lot of people to partner around that, and after two or three years, we realized, it wasn’t working the way we thought it was. We had tried to put it in places where it wasn’t right for that particular community, and it was a mistake.

Jean acknowledged that and said, “Here’s what we did, here’s why we did it, here’s what happened, here’s what we learned from it.” Talking about some of those failures, and letting people learn from some of those experiences is very important.

That was actually the main reason we joined The Giving Pledge. It wasn’t just to publicly announce, “We’re giving away most of our money,” because we actually had planned to do that anyway. It was a belief that if we network together, philanthropists, and learn from each other, particularly learn from each other’s mistakes, then everybody’s giving would be a little bit smarter, a little bit more leveraged, a little bit more impactful, and the world would be a little bit better place. It was really more about that community of philanthropists that were under The Giving Pledge umbrella, and the ability to learn from them that we thought was the main value.

Sarah Lacy: Are you having more fun now or did you have more fun in those early AOL days?

Steve Case: I’m having fun now. I, actually, had fun in all these different phases. I think I had more fun in the first 10 years of AOL than the second 10 years, even though, the fame and the fortune came in the second 10 years. The first 10 years, the pioneering, scared, back to the wall, “How is this going to work out?” I loved that.

When we finally got our traction and momentum, of course, I loved that too. There’s obviously benefits to it. But of those two chapters that just trying to figure out how to take this idea and make it a reality and take an industry that only three percent of the people were connected and get everybody connected.

Figure out, “How do you get the PC manufacturers to do it? How do you get the networks to do it?” There were a lot of complicated moving parts to it. That I think was interesting. If I compare that versus what I’m doing now, I think they’re about the same on the enjoyment factor.

They’re different, because what I was doing there is different than what I’m doing now. But the fact that I’m able to give back through some of the things we’re doing philanthropically, because I’ve been blessed with resources.

The fact that I’m able to invest in companies and be involved with a lot of really smart, innovative passionate people who are doing interesting things that are trying to change the world.

The fact that I have the opportunity to travel around the country and try to inspire and nurture and celebrate entrepreneurs and encourage the development of more regions all across the country and that people, thankfully, pay attention, at least some of the time, to what I’m saying in Washington and I can be, hopefully, a helpful constructive force there.

I think there are ways to have a significant impact across all really four of those sectors and I enjoy doing it. I’m probably working as hard as I ever did and I’m having fun doing it.