HOW AOL LOST THE BATTLES BUT WON THE WAR

AMERICA ONLINE DEFIED THE TECHIES, CATERING TO THE CHATTING MASSES. ITS SURPRISING DEAL COULD MAKE CEO STEVE CASE'S STRATEGY LOOK BRILLIANT

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AOL is also taking its first tentative steps as a media company. Case has vowed, for example, to make AOL as smut-free as possible, but on any given night, mild chat-room conversation about Proust is likely to be outgunned by what AOLers--to get around the service's auto-delete features--euphemistically call "bikini talk." The ultimate goal, Case says, is a self-regulating environment, but in litigious America, that's almost a pipe dream.

The service has already landed in court over what can and can't be said online. Sidney Blumenthal, a White House aide, is suing the service for carrying the gossip sheet known as the Drudge Report, which alleged Blumenthal had a history of spousal abuse. Denying the story, Blumenthal and his wife filed a $30 million complaint against AOL and Matt Drudge, who writes the eponymous report. Case says the firm shouldn't be held responsible for simply distributing information. But as AOL becomes more of a media company, Case will have to learn that it will be held responsible, legally and morally, for the information it passes along, especially from those with whom it has contracts.

Case knows there are more battles coming, and the best offense is his passion. Last week, to celebrate the CompuServe announcement, he took the show on the road to Columbus, Ohio, CompuServe's headquarters. In front of a packed room of demoralized, worried employees, he praised CompuServe as a leader in technology and recalled his own early days using the service in the 1980s. As the room warmed to his rhetoric, Case described the AOL he envisions, a place as simply wonderful as the Oahu beaches he knew as a child, and a business as secure as his old lemonade stand. To seal his deal with his new employees, Case stripped off his ratty shirt and slipped into a CompuServe polo someone had handed him. "Now don't look!" he joked as he unveiled a pasty-white beer belly in front of the crowd. But Case's new employees, laughing and cheering, disobeyed AOL's visionary. They couldn't take their eyes off the future.

--Reported by Daniel Eisenberg, Stacy Perman and Bruce Van Voorst/Dulles, Lisa Granatstein/New York and Jenifer Mattos/Seattle

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