Bad Marriage? AOL Time Warner
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JIM LEHRER: On this day of another large drop in corporate stock prices on Wall Street, we look at AOL Time Warner, the corporate marriage that has seen big losses in its stock price, among other things. Margaret Warner has our story.
MARGARET WARNER: It was touted as the largest corporate merger in history, the most significant coming together of mass media and the Internet. The $165 billion AOL Time Warner deal was announced in January of 2000 by Steve Case, chairman of America Online, and Gerald Levin, then Time Warner’s chairman and chief executive officer. Case would be chairman, Levin CEO of the newly merged company. They took their show on the road, promoting the “synergy” of their new corporate marriage here on the NewsHour.
STEVE CASE: We do believe we’re on the path of building what may be the most valuable company and most respected company in the world someday.
MARGARET WARNER: The principals called their creation “the world’s first Internet-age media and communications company” as they converged America Online, CNN, HBO, Warner Brothers Studios, Time, Inc.’s 140 magazines and Time Warner Cable.
While Time Warner had more properties and higher profits, AOL was then at the peak of the Internet boom, its total stock valued at $200 billion, more than double Time Warner’s. But not long after the new company signs went up, the stock went down, and so too did investor confidence.
Then, last December, in a stunning move, Levin said he was leaving, and Richard Parsons moved up to CEO. Now, the Time Warner side of the family seems ascendant, with yesterday’s news that AOL veteran and chief operating officer Robert Pittman was resigning under pressure. Steve Case remains chairman, but he’s the last AOL veteran in top management. Under CEO Parsons, a Time Warner veteran, two other Time Warner alumni will share chief operating officer duties– Don Logan and Jeff Bewkes. Big questions bedevil AOL Time Warner stock: Declining Internet advertising revenue, low demand for new digital cable services, and new allegations about questionable accounting.
The company is now valued at $100 billion. Its stock has fallen more than 70 percent since the merger two and a half years ago, and left analysts questioning whether the “synergy” of the two companies is in fact still sizzling.
MARGARET WARNER: And for more on what’s gone wrong at AOL Time Warner, we’re joined by Bill Whyman, a technology analyst and president of The Precursor Group, an investment research firm in Washington; and Jeffrey Rayport, CEO of Marketspace, a business research unit of the Monitor Group Consulting Firm in Boston. He’s a former professor at the Harvard Business School. Welcome to you both. Bill Whyman, let’s start with Bob Pittman, the man who was forced out from his number two post. Who forced him out and why?
BILL WHYMAN: I think everyone forced him out. There were a lot of unhappy people. Investors were unhappy with a lot of destroyed value. I think consumers are unhappy because they haven’t seen the promise of this merger, and I think inside the company there was a lot of dissatisfaction with the failure to actually execute on and capitalize the promise of this merger.
MARGARET WARNER: So Jeff Rayport, would you consider– did Bob Pittman deserve this much of the blame, or is he a fall guy for a situation in which there is a lot of blame to spread around?
JEFF RAYPORT: I think you might say, Margaret, that he is the fall guy for a lot of blame in the simple fact that the AOL addition to Time Warner was just the latest addition to a company that’s built up as a conglomerate over the last arguably twelve or thirteen years that had become, in some sense, ungovernable. I mean, simply that when Time and Warner came together in 1989, there were doubts about whether the Ivy League culture of Time Magazine and the Hollywood culture of Warner’s movie and music businesses could actually reach any kind of rapprochement, let alone full integration.
You add Turner Broadcasting to that in the mid-’90s with the new vice chairman, Ted Turner, single largest shareholder in the company, and then try to overlay AOL, a hot start-up company and add it to those old line assets. You have got a bunch of mergers that basically have never happened and a bunch of tectonic plates that hadn’t joined or the Balkans of the media and entertainment industry.
MARGARET WARNER: So, Bill Whyman, when you say he over- promised, explain what you mean. you What was the synergy that they kept talking about, if you marry the two worlds that Jeff Rayport just described, the Time Warner behemoth with this hot, hot AOL, what were they saying would happen?
BILL WHYMAN: The vision here was AOL anywhere — that consumers would go home, see AOL on their TV with Time Warner content, they would go to the supermarket and get messages on a cell phone with AOL content in it. They would go on the Internet and see a mixture of AOL content and services. And this was sold to consumers globally, that this would change the nature of technology, of content, of cable. They really promised the moon, and very little of it so far has been delivered.
MARGARET WARNER: And they promised not only consumers but investors.
BILL WHYMAN: That’s right. The market destruction in terms of capitalization has been absolutely huge. This is a big, liquid stock. For Wall Street investors, there are not many opportunities to own a unique franchise that they can buy in $100 million chunks, so they bet very big on this. And when a company this big disappoints as big as AOL Time Warner has, it puts Wall Street in a hole they just can’t get out of. They have a lot of trust to earn.
MARGARET WARNER: Jeff Rayport, why couldn’t AOL Time Warner deliver on this vision?
JEFF RAYPORT: Well, I think it’s a matter of degree and not of kind, which is to say that I do agree this was an oversold vision in terms of how this would all come together, but the truth is that in many ways it worked. What Bob Pittman did to set up the advertising council and global marketing solution groups so that big corporations with global operations who wanted to reach their key target market consumers through all of the different channels that we just heard about, that kind of offer really worked.
And when those various media platforms — cable, online, instant messaging, magazines, and so forth started working together, it really produced some results. The problem is that the impact of those results was promised in the billions of dollars. And, given the complexity of the undertaking, it was very difficult to believe that you would be able to produce results of that magnitude that quickly. So part of it is that maybe the vision was ahead of the future. But I think the main thing is that the order of magnitude was off. We got the job done. It turned out that it was a much smaller impact than was originally anticipated or more importantly, promised to the Street.
MARGARET WARNER: Bob Pittman and others were promising, were they not, Bill Whyman, that they would see 30 percent growth a year…I mean, was that…
BILL WHYMAN: That’s right. And they wound up delivering not 30 percent but 13 percent growth that last year. And of course, when you miss a target by that much, Wall Street is absolutely unforgiving.
MARGARET WARNER: All right. Bill Whyman, back to you. What connection do you see between the problems with AOL Time Warner, the failures there and the failures and difficulties we are seeing on Wall Street and stocks in general and the loss of have is investor confidence?
BILL WHYMAN: I think the two are intimately connected. Investing is about trust. It’s people giving you money now for a promise that they’ll give you back more later. And when we see the kind of actions raised, we still don’t have the full truth here on AOL about how did they account for revenues in the key quarters leading up to the completion of the merger, and obviously many others in corporate America; people say, “I don’t trust this. How can you expect me to invest, to buy stock, if I can’t trust the management and I can’t trust the numbers?” Investing is about trust, and there is a big trust gap right now.
MARGARET WARNER: What connection do you see, Jeff Rayport?
JEFF RAYPORT: Well, I think that the trust gap is absolutely real. I mean, that is that some really quite amazing promises were made. Part of them were related to how we were going to change the world with a company like this.
Part of them was what we were going to do for advertisers in reaching vast audiences in innovative ways, and part of them, of course, was the share price appreciation of a company that was going to be the growth juggernaut of the world, that was already largest media company in the world, already touched one out of every three users of the World Wide Web on the Internet today.
I mean, this is a company with vast scale and vast reach, and to paint a vision that, frankly, was that compelling, even a year or a year and a half ago for the folks on Wall Street, let alone the investors on Main Street, and then not to deliver it, is painful enough. To find out — as we have — from the Washington Post stories in the last couple of days that actually there may have been something that smacks of the recent accounting scandals in the midst of all that, doesn’t help a whole lot.
MARGARET WARNER: And, Bill Whyman, I mean, AOL Time Warner, that promise was very much tied to the dot-com promise, I mean, that whole Internet advertising, and so. When that collapsed, wasn’t it inevitable that this would happen?
BILL WHYMAN: It was a catalyst, but I don’t think it was inevitable. Let me give you an example. One of the things that AOL Time Warner promised us was a music subscription over the Internet. They have yet to deliver that in any kind of scale in the market. But why is that? AOL, it’s their music, it’s their cable company, it’s their software, it’s their Internet service, and they already have a relationship with the customer and a monthly credit card relationship. Where is it? It has been over a year.
MARGARET WARNER: So, Jeff Rayport, that brings us back to this new management team. We have Bob Parsons, a former Time Warner guy; we have two Time Warner guys under him. What difference can they make, if we’re talking about the systemic difficulties that you two have just sketched out?
JEFF RAYPORT: Well, I think that there’s absolutely no underestimating the systemic difficulties even with some seasoned managers from a proven company, each of whom have proven track records in those seats. Obviously, Don Logan and Jeff Bewkes are people who’ve produced positive cash flows and attractive financial results quarter after quarter for more than ten years each, and they’ve got over them Dick Parsons, who has been presented to us as someone who doesn’t necessarily know the media industry. He first set foot in the media business when he came in to Time Warner in the mid 90s in a legal role, but he has been presented and retailed, in effect, to the Street and to investors as someone who can build consensus in this balkanized corporation.
The problem here, I think, is that we have got now several guys who have never been supporters of technology innovation and specifically of AOL, and certainly not of the AOL Time Warner merger. Don Logan famously referred to the Internet as giving new meaning to the phrase “black hole,” referred to trying to do coordinated or synergy related things within Time Warner as the world equivalent of herding cats. He is 58 years old and would rather be bass fishing. This is not somebody who is going to be spending a lot of time wondering what his colleagues down in Vienna, Virginia, at AOL headquarters have to bring to the party.
I think we can to expect that he and Jeff Bewkes will be very tough on that online unit. Far from it being the DNA, if you will, the digital DNA that was promised in the early days of this merger, as it was sold to the American public and to the world, I think we are going to see that DNA put in a box. It may stay in the box for a long time. Perhaps there is a risk that it will stay in the box too long.
MARGARET WARNER: Meaning, in other words, that AOL will be told to cool its jets, just try to stabilize its business and not invest a lot? What do you mean by putting it in a box?
JEFF RAYPORT: Margaret, there are significant operating problems at AOL and we can go into details on those, but I think what you say is absolutely right. In other words, they will be told to fix a broken business. Stop hemorrhaging subscriber relationships to the online service, bring the technology infrastructure up to date so it can compete with more tech-savvy competitors like MSN and Yahoo on the Web.
But I think the biggest potential risk is that they will say, “look, these guys down there have so many problems, the last thing we want them doing is trying to create a revolution across all our traditional media businesses” because, after all, those are the ones paying the bills right now; those are the ones generating the big cash flows.
The problem is that the beautiful vision, such that it was, of this merger, depended on being able to bring the digital sophistication with the interactive channel called the Net that AOL represented, bringing that vision to those traditional media businesses was part of the supposed magic of all this. If you keep it in a box too long, we’ll never unlock the interactive potential of the rest of the Time Warner businesses.
MARGARET WARNER: Briefly, Bill Whyman, where is Chairman Steve Case in all of this?
BILL WHYMAN: I think that’s a great question. Steve Case is the single person who was the most articulate and powerful supporter of this elegant vision of a converged synergistic world that nobody really knew what that means. Let me give you an example: AOL bought a company called Radiant. They bought a stake in it. What the company did was make the point-of-sale machines at gas stations. Steve Case wanted people to check e-mail while they were filling up their car. I think we’re not going to see that for a long, long time.
MARGARET WARNER: But do you think he will be more involved in the business day to day?
BILL WHYMAN: I think he has been chastened. I think he is going to have everyone putting a target on his back, and I think he is going to have to be very careful.
MARGARET WARNER: Bill Whyman, Jeff Rayport, thank you both.