The Third Wave an Entrepreneur’S Vision of the Future by Steve Case

The Third Wave An Entrepreneur’s Vision of the Future By Steve Case

Steve Case’s journey began shortly after college when he cofounded America Online (AOL) with his computer programmer friend Marc Seriff in 1985. At the time, only three percent of Americans were online, many of them using Commodore 64s. It took nearly a decade for AOL to achieve mainstream success. It became one of the top performing companies of the 1990s, and at its peak AOL hosted more than half of all household Internet traffic in the United States. Later, after Case engineered AOL’s takeover of Time Warner, he became chairman of the combined business. There, he oversaw the most powerful media and communications conglomerate in the world.

In his new book, The Third Wave, Steve Case takes us behind the scenes at AOL. He documents some of the most consequential business and technological happenings of the last 30 years, while offering incredible insights from his work as an entrepreneur, investor, philanthropist and advisor to presidents. While a lot has obviously changed on the technological front since 1985, Case argues that the underlying business lessons of that time are far more relevant to today’s entrepreneurs and corporate leaders than one might think. In many important ways, we’re going back to the future.

Back To The Future Steve Case believes the world is entering a new era, driven by what he calls the “third wave” of the Internet. The first wave saw pioneering companies like AOL, Cisco and Microsoft lay the technological and legal foundations for consumers to connect to the Internet, starting with dial-up modems and eventually with cable. Together, they were building the on-ramps to the “Information Superhighway” (remember that hackneyed term?).

The second wave of the Internet began at the turn of the twenty-first century, just in time to inflate the dot-com bubble and then see it burst. It’s what Case refers to as “the Internet’s first real extinction event.” This era was about building software on top of the Internet: First, search engines like Google made it easier to explore the sheer volume of information available on the Web. And then, sites like Amazon and eBay turned the Internet into a virtual one-stop shop, promoting an explosion of commerce, as well as convenience.

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The Third Wave

It was during the second wave that social networking truly came of age. Where Google sought to organize most of the Internet’s information, social networks like MySpace and Facebook aimed to help us organize ourselves (while attracting billions of profitable users along the way). And it was also during the second wave that Apple introduced the iPhone, Google introduced Android, and a whole mobile movement was born. This convergence sparked a new era of growth, as smartphones and iPads became the engines of the new Internet, creating a new digital economy that would soon flood the world with millions of mobile applications, from Angry Birds to ride-sharing and everything in between.

Today we’re entering into a third wave of the Internet. “Decades from now, when historians write the story of technological evolution, they will argue that the moment the Internet became a ubiquitous force in the world was when we started integrating it into literally everything we did. This moment marks the beginning of the third wave,” writes Case.

The third wave is when the Internet stops belonging to Internet companies. It’s the era in which products will require the Internet, even if the Internet doesn’t define them. It’s the era when the term “Internet-enabled” will start to sound as ludicrous as the term “electricity-enabled” (as if either term was ever an especially meaningful differentiator). It’s the era when the concept of the “Internet of Things” (i.e. adding connected mobile sensors to real world products, like watches and fridges) will be viewed as too limiting, because we’ll realize that what’s emerging is the much broader Internet of Everything.

According to Case, the entrepreneurs of the third wave of the Internet are going to challenge and re-invent the biggest industries in the world – from healthcare to transportation to education and beyond. They’ll create products and services that make our food safer, our lives longer and our daily commutes easier. The scale of disruption to these and other established industries will be unprecedented.

The nature of entrepreneurship will also change during the third wave. Third wave company-creation stories are less likely to begin with college dorm-inspired apps that go viral, as they so often did over the last decade or so. Instead, third wave entrepreneurs will need to build robust partnerships across sectors in a way that second wave companies never had to. They’ll also need to navigate a complex policy landscape that most second wave companies could happily ignore. And they’ll need to do it all in a space where the barriers to entry are far greater than anything ever experienced during the second wave. The playbook these business leaders will need is the one that worked during the first wave, when the Internet was still young, when the barriers to entry were enormous, and when partnerships were not just niceties, they were necessities.

But before we delve into the third wave playbook, let’s take a moment to re-examine our roots. It’s amazing how far we’ve come.

The Third Wave

Getting America Online With The Third Wave, Case didn’t set out to write a pure memoir of his days with AOL and Time Warner. But he did want to share a few key stories from that time, believing that, as Shakespeare famously said: “What’s past is prologue.” In other words, there are important lessons to be learned from the formative days of the Internet. He also didn’t want to write a step-by-step guidebook for budding entrepreneurs, as there are plenty of those. And he didn’t want to get too wonky on policy, because then no one would want to read his book (but Case does believe America is at risk of losing its lead as the world’s most innovative nation, and he felt it necessary to explain why and what we can do about it). Consequently, the Third Wave is part autobiography, part entrepreneurship playbook, and part policy manual – with his lessons from AOL serving as the unifying theme throughout.

“The rollout of the AOL service in the late 1980s was a little bumpy,” writes Case. “Different computers all had somewhat different needs, and it took us nearly a year before we got much traction. Our growth finally accelerated once we launched a Windows version.”

In late 1991, Case and Seriff decided they needed to take AOL public to raise the money they needed to fuel their rapid expansion. Following the IPO, over the next three years or so, AOL grew to over 4,000 employees and was creating about 200 new jobs each month.

By 1998, AOL had 25 million customers and was one of the most highly valued companies in the world. For those readers who don’t remember (or who simply were not old enough), it may be hard to appreciate how significantAOL’s role was in ushering in the Internet age. In the late 1990s, AOL was the way most people did just about everything there was to do online. If you were online then, the odds are high that the first time you connected to the Internet, the first time you sent an e-mail, the first time you did a search, the first time you received electronic news, the first time you bought anything online, the first time you heard music or watched a video online, the first time you saw, sent, or stored photos online, the first time you connected with friends online, it happened on AOL. For most Americans, AOL was, for its time, Twitter, Amazon, Spotify, YouTube, and Instagram all rolled into one.

Of course, it wasn’t all smooth sailing. On the business side of the equation, Case writes about a near-death experience the firm went through during its first year of operation when a partnership deal they’d entered into with Apple suddenly went south. The author notes that things would have turned out very differently for his company had Steve Jobs been CEO at the time, but Apple had recently fired him. Fortunately for Case, a threatened lawsuit against Apple netted AOL a $3 million settlement, which was just enough money to keep AOL afloat long enough to refocus its business.

On the technological side of things, AOL also had its share of challenges to overcome.

The Third Wave

Not long after AOL went public, the company’s core software was struggling to keep up with its tremendous growth. On one hand, it was a nice problem to have. But Case and his team knew that if they didn’t adapt their code to keep pace with how the market was evolving, they wouldn’t be able to sustain AOL’s growth curve. Initially, AOL’s code was written to support a business model that charged users based on how much time they spent online. This approach worked fine when there were fewer things to do online. But as the number of Websites began to grow exponentially, and folks started spending more of their free time in front of their PCs, AOL’s consumers started to become grumpy with how much they were being charged. So the AOL engineers changed the code to start charging a flat fee for Internet usage, as opposed to charging customers by the hour. That helped satisfy AOL’s existing customers, and led to millions more users coming onboard.

It’s true, of course, that technology has made tremendous strides since that time, when users had to get online with rudimentary Apple II computers, via maddeningly slow 300-baud modems.

But where the early pioneers like Case struggled to make connections to the Internet itself, today’s entrepreneurs are working on connecting the Internet to everything else, and disrupting just about every industry imaginable in the process. Which is why the experiences of many young entrepreneurs over the coming decade are going to be more analogous to the first wave than to the second. And when it comes to disruption, where better to start than our dysfunctional healthcare system?

Disrupting Healthcare If you’re a tech entrepreneur looking for an industry to disrupt, what better place to begin than healthcare? For starters, it’s a massive industry, making up one-sixth of the U.S. economy. On top of that, healthcare industry incumbents have been pitifully slow in the adoption of technology. As most patients can attest, going to a hospital often feels like you’re stepping back in time. Many hospitals still rely heavily on paper medical records and fax machines. “If you’ve ever wondered why the American healthcare system costs more than other advanced countries but doesn’t produce better results, this is largely why,” says Case. “Most of our hospitals are stuck in a pre-Internet world, and patients are suffering because of it.”

Forward-thinking entrepreneurs see opportunity here, and investors are starting to climb onboard. In 2014, digital health startups raised 4X as much money as they did in 2010. “What began with simple fitness trackers that measure the number of steps you take in a day will soon transform into far more complex technology that will enable users to take their full range of vital signs on a serial basis, and even alerting their doctor if something is wrong,” explains Case. “It won’t be long before tracking your health on a daily basis becomes completely routine, as simple and essential as brushing your teeth.”

Needless to say, this will have profound effects both on how patients are treated as individuals, and on how the entire health system operates. When your doctor

The Third Wave

receives a summary of your health tracking data, she’s leveraging a tool of precision that she currently lacks. Today, when a doctor asks us questions like “When did it start bothering you?” or “Have you noticed any other symptoms?” Too often, we don’t have an accurate answer to provide. In most cases, that lack of precision may not be significant. But there are times when a more accurate reading could mean the difference between life and death. It can give your doctor the tools she needs to assess whether the headache you’re complaining about is a simple migraine, or a deadly aneurysm … perhaps before you even arrive at the hospital. It means being warned, at home, by your smartphone, of the blood clot that’s circulating in your body before a stroke hits you, or a deadly heart attack occurs.

Early warning systems like this will make our mobile phones seem smarter and more essential than ever. Imagine the health benefits to our population, plus the money to be made for innovators (according to the consulting firm McKinsey, the value to the economy of this kind of monitoring could be as much as $I billion per year by 2025).

Disrupting The Food Industry Just like healthcare, food is really big business. Globally, the food industry is a $5 trillion sector. Third wave entrepreneurs look at these numbers and see opportunity.

A lot of innovative third wave companies are aiming to challenge the way food is produced, distributed, and consumed. The third wave will fundamentally change how we grow and raise our food, how we store it safely and how we deliver it to customers.

Imagine, for example, owning a refrigerator that can determine whether your produce has been mishandled, or an oven that refuses to cook questionable meat. “These are not the things of science fiction,” writes Case. “They are the children of the third wave.”

The Three P’s Whether it’s disrupting healthcare, education, transportation or the agricultural sector, the superstar entrepreneurs of the third wave will pursue bold visions. But their true gift will be mastery of execution. Years ago, AOL wasn’t alone in believing in the idea of the Internet, but it out-hustled and out-executed its competitors. The big established companies with the deeper pockets, like IBM and GE, should have prevailed. But they didn’t. Their inflexibility and lack of entrepreneurial passion hobbled them.

When the former CEO of AOL talks to aspiring entrepreneurs, he’s often asked the same basic question: “what do I need to do differently to start a successful third wave company?” He says that it all comes down to the three P’s: partnership, policy and perseverance.

The Third Wave

1. PARTNERSHIP There’s an old African proverb that Steve Case has grown fond of: “If you want to go quickly go alone. If you want to go far, go together.”

As simple as this advice may sound, Case believes it’s probably the most important lesson one can learn in business. And it’s particularly true in the third wave, where the success of a company will depend largely on the partnerships its leadership can forge; sometimes even with the very organizations they’re trying to disrupt.

During the second wave of the Internet, which is now drawing to a close, partnerships were less important.

Some of the most successful companies were those that essentially optimized a niche app, figured out a way to get traction, and then drove viral adoption. They were able to follow a fairly straightforward playbook: Focus on building a great product. Focus on building a loyal audience. Worry about monetization down the road.

But in the coming third wave, a great product will only get you so far. Also, you typically won’t be able to build an audience by simply dropping your app in the App Store and waiting for users to start signing-up. This is because most third wave industries have gatekeepers. For example, in the education sector, there are key decision makers in school districts who need to approve any products that have to do with classroom learning. Teachers can’t just download a random app and start using it with their students.

The same is true in healthcare, transportation, finance, education, food and dozens of other sectors. That’s why, for the most part, success will hinge on an entrepreneur’s ability to form constructive, supportive partnerships with the organizations and individuals that can influence those decision-makers and, eventually, with the decision-makers themselves. These third wave entrepreneurs won’t have the option of going it alone.

Forging effective external partnerships starts with having a good team. “A brilliant software developer who comes up with a new way for hospitals to track patients isn’t likely to get a fair hearing from the medical community on just her reputation alone,” writes Case. “But that dynamic changes instantly if she shows up with her newest board member, the former CEO of the Cleveland Clinic. Now she has a foot in the door, and a serious shot at a partnership.” If she manages to land the first deal, she’s more likely to land the next one, and so on.

We’ve seen a similar dynamic in the education sector with the rise of MOOCs (Massive Open Online Courses). The original idea behind MOOCs was that these companies were going to offer a free platform for learning, where anybody in the world could be a professor by uploading content, and anybody could be a student by accessing it. But it didn’t take long before the folks behind these companies realized that they had to change their business model. To be credible, they figured out they

The Third Wave

had to partner with the Harvard’s and MIT’s of the world in order to give their student customers comfort about the quality of the learning. One of the leading MOOC companies, Coursera, even hired the former president of Yale, to be its CEO. The credibility he brought was viewed as critical to the future of the company.

2. POLICY Third wave industries are some of the most regulated in the country, and usually for good reason. “We don’t want businesses selling drugs that haven’t been approved by the FDA, or companies selling unsafe food to our children,” explains Case.

If you want to succeed in the third wave, it doesn’t matter whether you think government regulation is a good thing or a bad thing because it’s not going away. Like it or not, government will always play a role in industries like healthcare and agriculture, so third wave entrepreneurs will need to have a handle on the policy issues they’ll encounter.

This means that third wave entrepreneurs will need to engage with governments, rather than try to hide from them. The challenge, of course, is that few company founders are policy wonks, and even fewer have the time (or desire) to become regulatory experts. Regardless, they’ll have to learn their policy briefs, or at least hire people who will do that for them. In the years ahead, companies won’t be able to get venture funding without demonstrating a credible plan to manage regulatory issues. A company that lacks a clear strategy for policy change is gamble for investors no matter how good their idea is.

Now, at this point you might rightly ask: “But what about Uber?” As most of us know, Uber didn’t try to work with government at all. They employed a strategy of “ask forgiveness, not permission,” and although the jury may still be out in a handful of cities, for the most part Uber seems here to stay. According to the author, there are several reasons for this. First, Uber was primarily dealing with local governments, each with their own particular rules and regulations regarding the taxi industry. That gave Uber the opportunity to employ a “divide-and-conquer” strategy, launching city-by-city to build a critical mass in the marketplace. As Uber successfully demonstrated, this kind of strategy can work if it’s local.

Additionally, Uber had the ability to provide their service, end-to-end, without government assistance. Uber didn’t need the government to do anything from an enabling perspective. It just needed to be convinced to stay out of the way long enough for Uber to gain a market foothold, and by that point it would be too hard for government to stem the tide.

Unfortunately, this will not be the case for most third wave startups. “A company that wants to change the way urbanites hail a car is one thing,” says Case. “But a company that wants to connect wind power to our cities, or feed the children in our schools will need to work with government, not as an adversary but as a partner.” This requires meaningful policy reform.

The Third Wave

3. PERSEVERANCE “Perseverance is part of the story of every successful company,” writes Case. “But third wave entrepreneurship will require even more of it.” Why? Because, linked to the point above, in the third wave, government will have a much bigger say in what your business is allowed to do, and government can be quite unpredictable and slow to move.

Case highlights the example of the genetics-testing company 23andMe. In 2014, 23andMe was prohibited by the FDA from selling its products, and immediately many observers assumed the company was dead. But less than a year later, the company was able to get a special exemption from the FDA and resume selling. Had the founders of 23andMe not persevered, the story would have turned out very differently. The same will be true of many third wave companies, says Case. Of course, there will still be the occasional “come-out-of-nowhere” phenomenon. But in the main, the next generation of entrepreneurs will need to be prepared for a long slog.

Ride The Wave When Steve Case was graduating from college in the early 1980s, and not yet sure what he was going to do for a living, he applied to a couple of business schools. This was mostly to hedge his bets, because Case was already leaning towards becoming an entrepreneur. The biz schools both asked for a personal statement, so he wrote: “I firmly believe that technological advances in communication are on the verge of significantly altering our way of life. Innovations in telecommunications (especially two-way cable systems) will result in our television sets becoming an information lifeline, newspaper, computer, school, referendum machine, and shopping catalog.” Case was pretty satisfied with himself when he submitted the essays, but to his shock and amazement, both schools rejected him.

It turns out that Steve Case gets to have the last laugh, because the trends he wrote about nearly four decades ago proved to be pretty accurate. Today, technological advances in communication aren’t “on the verge” of altering our way of life – they’ve already transformed it in profound ways, with much more to come as the third wave takes hold.

This is where the next generation of entrepreneurs comes in. Steve Case and his band of pioneers at AOL helped get America online, and brought the Internet into our homes and businesses. Now he says it’s up to the next generation to surf the third wave, and start harnessing the power of technology to improve virtually every aspect of our lives, from healthcare to transportation to education and beyond.