AOL co-founder Steve Case foresaw the importance of the internet decades before it became mainstream. TechRepublic spoke to Case about lessons from AOL and the dawn of a 'third wave' of the internet.

Image: Steve Case

In 1995, Steve Case, co-founder of AOL, was asked on PBS why people should care about the internet. What has now become an integral and fundamental part of our daily fabric was, just twenty years ago, hard to even describe. "In the early days of AOL," Case wrote in his new book The Third Wave: An Entrepreneur's Vision of the Future, "so much of our job was just explaining what the Internet was."

AOL, a startup, became the major way that people got online when companies like IBM and GE should have prevailed. At its peak, AOL was driving half of internet traffic—turning the internet into a way of life.

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While the initial days of the internet involved laying the groundwork, Case sees the "second wave," starting in 2000, as defined by the applications and software—like Google, Facebook, Snapchat—built on top of the internet. Now, he says, we are at the dawn of the "third wave."

The third wave, Case believes, is the concept of the "Internet of Everything," where every part of our lives will rely on an internet connection. He sees this new wave defined not by hardware or software but by partnerships—especially between business and government. New partnerships, Case believes, will be able to change the way our institutions, like healthcare, education, and agriculture, integrate the internet into our lives.

TechRepublic spoke to Case about lessons from the early days of AOL, the Time Warner debacle, and how we need to prepare for the third wave of the internet.

You say AOL was a "decade-in-the-making, overnight success." What tipped it over the edge?

It was a lot of things. That's part of what I think will be important in this third wave—the notion that revolutionary things happen in evolutionary ways. In retrospect, it's actually easier for me to see why it took so long. At the time, it was frustrating. In 1980, it was still illegal for consumers or businesses to connect to the internet. That didn't change until 1991. Most people didn't have PCs. It was really still more limited to office. And most people who did have PCs didn't go to the trouble of buying a modem to connect to the internet. The communication software was really hard to use. It wasn't consumer-friendly.

The cost of the networks, the Time-Net, Telenet, and other things back then was typically about $10 an hour. And when you actually got online, there wasn't much to do, there wasn't much content. There weren't many people to talk to. In retrospect, it just required some foundation building. How do you get most consumers to buy PCs? How do you make the PC modem an integral part of the PC, not a peripheral part of the PC? How do you get the communications down from $10 an hour to 10 cents an hour? How do you make the software CDs? It was a lot of things. It wasn't like you could just wave a wand and instantly they would happen. It was going to take some time. That's the mindset that the innovators, whether it be bigger companies or obviously the startups, that are going to have to bring to bear. If they really try to take on some of these sectors like healthcare, education, because they are hard, they're complicated, you're not going to have an overnight success.

Entrepreneurs don't like to hear that—the slog is much less interesting than an overnight success. But that's the reality, and part of why I wrote the book was to prepare people for the longer battle.

In the early days of AOL, you had to explain to people what the internet was.

It was hard to explain, because most people didn't really see the point. Most people, in the '80s but even in part of the '90s, thought it would be something only hobbyists might be interested in, but average people would have no interest in it. Why would you send an email? Why wouldn't you just pick up the phone and call somebody? Why would you try to read your newspaper online? Why wouldn't you just read the newspaper? People just were kind of skeptical. When we started AOL in 1985, we called it "online services," because the internet itself was its own network, mostly used in government institutions and universities.

We had to create our own everything. That was sort of a parallel universe on the side of the internet. It wasn't until the internet was commercialized in 1991 that we actually could link the two.

You describe the time when AOL went down in 1996 as a "national incident." What did it mean at the time?

It was kind of good news, bad news. The bad news was it was a crisis, because we had told people that this new medium was something that they should embrace. They should use AOL as their connection to the internet, as their on-ramp to it. A lot of people had decided to go online, and to go online with AOL. Many were even starting to run their businesses through email and things like that. The fact that we were down for 23 hours was frustrating to them and disappointing to them. We understood that. We felt like we had let lots of people down. The upside was that it was an interesting sign that the internet had come of age, that AOL had come of age. Even a few short years before, no one even knew what we were doing or cared what we were doing.

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Image: Steve Case

If we had been down for a month, nobody would've noticed. The fact that we were down for a day and the fact that it was suddenly this big crisis, was suggesting that what we had been dreaming for when we started in 1985 was finally happening. It was finally becoming part of everyday life. That the internet was relevant, it was important, it was needed.

For most people in the late '90s, AOL was the internet. Even the way we positioned the service at the time was a slogan, "the internet and a whole lot more." It encompassed everything on the internet as well as a whole set of services including instant messaging and exclusive content and other things that were only available to AOL customers. It was not uncommon.

Part of the fabric of AOL is community and connecting people. Did AOL foresee some of the future social implications of the internet?

Our core belief was always that community was the key feature, even though we did a lot of things around content and context and connectivity. Most of our traffic was those community functions. I think it is a precursor to what we've seen in the second wave with companies like Facebook really taking the idea of that community to a whole other level. Or even Twitter, which is kind of described as a themed status update, very persistent. You basically create an API around that idea. Instead of it being a temporary status update that will go away, it became more of a platform.

I think some of the groundwork for that second wave and some of the great successes in the second wave was laid in the first wave, in part by AOL.

AOL was somewhat of an underdog in the beginning. You write about how companies like IBM and GE should've prevailed but didn't. Why not?

Part of the reason I wrote the book is to send a message to bigger companies. How do they navigate the future? Seeing these big companies that should've been dominant, and learning from the challenges we had as AOL grew, and certainly after we merged with Time Warner, gave me a perspective on it.

Companies like GE didn't view the internet as that important. They had a lot of other businesses to focus on. They had a small division of GE called GE Information Services that was mostly focused on, in fact exclusively focused on, selling access to corporations. The consumer side of that was just sort of an afterthought. They just didn't really believe it was their core business, didn't really choose to invest in it.

Same thing with IBM. They were selling business on computers. They were selling hardware. They were interested in services that might help extend their reach. At the time, it was mostly about selling computers. They viewed their investment in Prodigy along with Sears as mostly about an adjunct to their computer business. The people they staffed it with were mostly people who came from IBM and Sears that weren't really the kind of pioneering, entrepreneurial innovators.

I think the model that you see recently with big companies trying to innovate is not just focusing on what they're doing internally, but paying attention to what's happening on the periphery. How do you partner with entrepreneurs with interesting ideas? Or in some cases, even acquiring startups, but recognizing that most of the innovation is going to come outside of your company. You can't just kind of acquire it and staple it. You have to figure out a way to connect to it and figure out how to accelerate it.

What went wrong with the AOL-Time Warner merger in 2000?

Broadband was a threat to our business, but we also believed it was an opportunity. That's part of the reason to merge with Time Warner was to make sure that we had the lead position. At the same time, half the broadband was still elusive. There were efforts to try to get the government to force cable companies, broadband providers, to open up their networks. That was unsuccessful.

I think AOL would've continued to do well without a merger, or it could've considered other merger options—eBay and so forth. The ultimate choice to do it was strategically, to position ourselves well when broadband arrived. Financially, it was the best position for a possible kind of economic downturn.

What would you have done differently?

Focus on the people. It was not the idea of the merger that was the problem. Things like YouTube or Skype or iTunes didn't exist at the time of the merger. No company would've been better positioned to do digital music than a company that has the largest presence—internet presence with AOL, the largest cable system, and Warner Music, the largest music company. It should've been something that AOL-Time Warner did, not something that Apple did.

Similarly, AIM dominated the instant messaging scene. We really should've been the kind of leader of the pack. Because of internal pressures, we ended up not watching that.

SEE: Case accepts blame for AOL-Time Warner debacle

What are the most exciting things that you're seeing online today?

I'm obviously pleased and proud of the role the internet has played in changing a lot of things, the first wave and second wave. I'm still struck how many big parts of our lives haven't changed all that much. Those are some of the things I talk about for this third wave.

How do you really change classroom learning so it is more personalized and adaptive? How do you really change healthcare so there's more convenience, better outcome, and more precision? There have been some changes in those sectors, but the way we teach has remained about the same. The way most doctors practice and the way most patients are treated is about the same.

In the third wave, you say it's critical that companies form partnerships with government and institutions. Are there challenges with this, especially when it comes to a somewhat prevalent anti-government attitude in the Valley. Can that be overcome?

Both need to present things differently. It's not just one side or the other. I think companies need to understand there's a constructive role for government to play, while some of the regulations might be frustrating.

SEE: Worst tech mergers and acquisitions: Nokia and Microsoft, AOL and Time Warner

Most people want government to make sure that when their kids go to school and eat lunch, it will not make them sick. Or when their parents go to the doctors because they have some heart problem, they're not going to give them a drug that's going to kill them. Or if they get on a plane, it's not going to crash. These are reasonable things for reasonable people to expect. That's why we have regulations.

Some of the regulations are stupid and need to change, but there's going to be regulations around healthcare and education and transportation and energy and food and many other aspects of our lives. We need to be a little more respectful of the people making those decisions in government.

The third wave is where engineering meets the real world. Steve Case

Government needs to understand they can't just focus on keeping bad things from happening. They also have to enable good things to happen. They do have to be more agile and lean into the future and be more flexible and take more risks, and it requires engaging with the innovators, so that they understand the situation before they decide to make any kind of regulatory policy decisions. Part of my frustration is that they're talking past each other. We have to get beyond that and figure out a way to have a constructive dialogue.

You say the big players in the third wave will be 30-something year old farmers or people with their own businesses—not necessarily the 20-something techie types who can develop a popular app.

Obviously, the engineering side of things will continue to be important. I think the third wave is where engineering meets the real world. Having the perspective of some of those worlds is important. I'm sure there will be some great ag-tech companies in Silicon Valley, but there will also be a lot of great ones in the middle of the country, where they've been doing farming for centuries. Like a place like St. Louis where Monsanto is, where they have tens of thousands of PhDs who understand agriculture. My guess is that some of those will be some startups that spin out of companies like Monsanto. That may very well be the more innovative ag-tech companies, because they understand those dynamics. Similarly, there are a lot of healthcare companies now in Nashville and Baltimore.

My guess is we'll see this regionalization of entrepreneurship, and we'll have people with perspective and some credibility in the industry. If you're trying to sell your software to a hospital, somebody calling the hospital needs to understands how hospitals work. It's not saying that engineering is not important or young engineers won't continue to be super innovative, but I think the third wave requires a broader skill set.

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