DEALMAKER'S DOWNFALL
January 13, 2003

Experts analyze Steve Case's decision to step down as chairman of AOL Time Warner, and what it will mean for the company's future. The NewsHour Media Unit is funded by a grant from the Pew Charitable Trusts

 

Online Special: The AOL/Time Warner Merger Online Special Media Watch Jan. 13, 2003: Update: CNN Chief Walter Isaacson to Leave Post for Think Tank Jan. 13, 2003: Update: AOL Time Warner Chairman Steve Case to Resign July 31, 2002: Update: The Justice Department Opens Inquiry into AOL Time Warner July 19, 2002: A look at the AOL and Time Warner merger, and why the company's stock has fallen more than 70 percent since its merger two and a half years ago. Dec. 15, 2000: Background on the Media Merger . Dec. 14, 2000: Background on the FTC decision to allow the AOL/Time Warner merger. Jan. 12, 2000: The heads of AOL and Time Warner discuss the possible merger. Jan. 10, 2000: A background report on the AOL/Time Warner merger. Feb. 11, 1999: An Online Forum on the AOL-Netscape merger Nov. 24, 1998: The AOL-Netscape merger Browse the NewsHour's coverage of the media, business and cyberspace   AOL Time Warner America Online The New York Stock Exchange Ken Auletta Nina Munk Sanford C. Bernstein and Co	TERENCE SMITH: Steve Case is the most recent in a series of AOL Time Warner executives to resign under pressure during the last year. Gerald Levin, the CEO, was forced out in a board room coup and left last May, and Robert Pittman, the co-chief operating officer, departed in July. In a statement to the AOL Time Warner board of directors, Case explained what he described as his very difficult decision. The company, Case said: "Does not need distractions at this critical time," admitting that he had become a focal point of shareholder anger. Case argued that he "can continue to make a significant contribution" from a lower profile on the board of directors. The Case resignation, which takes effect in May, comes amid continuing controversy over the merger of AOL and Time Warner. America Online, the nation's largest Internet service provider, was one of the darlings of the '90s tech boom. Its rise from obscurity to dominance culminated in its January 2000 acquisition of Time Warner, the old media giant. STEVE CASE: This is the first time a major Internet company has combined with a major media company and the possibilities are truly endless. TERENCE SMITH: Case sounded a distinctly different note this morning on the flagship AOL Time Warner property, CNN. STEVE CASE: The company has not done well. It's certainly not done anything anybody would have expected when we did the merger. So it's not at all surprising that some of that anger and disappointment would be directed at me. TERENCE SMITH: And in a further instance of executive shuffling, Walter Isaacson, the chairman of CNN, announced his resignation today. The AOL unit is largely to blame for the company's woes. Its advertising revenues have dwindled, and in an increasingly high-speed, broadband Internet world, AOL, built on slower, dial-up service, has had slow growth in member subscriptions. Today, AOL-Time Warner stock gained slightly on the news of the Case resignation. TERENCE SMITH: Joining me now are: Ken Auletta, media and communications writer for the New Yorker; Tom Wolzien, senior media analyst with Sanford C. Bernstein and Company; and Nina Munk, contributing editor for Vanity Fair and author of a forthcoming book on AOL Time Warner. Welcome to you all.
	Jumping before he was pushed?
	Nina Munk, you've certainly written a great deal about Steve Case. What do you think was behind this decision today? Was he jumping, in effect, before he was pushed? NINA MUNK: I think that's the right expression to use certainly. The tension has been building for some months now, pretty well everyone out there has been predicting that Steve would be out of there at some point, and the question really was when and how long would it take. I think Steve finally recognized that he just simply didn't have a choice, that there was no longer any support, that the top executives of the company had been openly disregarding his position, and that he was just simply an obstacle at this point. TERENCE SMITH: Ken Auletta, is it fair to blame Steve case for the company's problems -- or a share of them? KEN AULETTA: Of course. I think the answer is yes and no. You have to blame a man who stood on a platform two years ago and said this that one plus one equals four. And in fact one plus one in this case has equaled less than one. So he gets some blame, as Jerry Levin did, as Bob Pittman did, as others have. But obviously Steve Case is not the source of all the problems, so you can say the wicked witch is dead, but the problems remain. TERENCE SMITH: Tom Wolzien, what's the significance of his departure, which incidentally doesn't come until May, but what will be the significance for the company and its prospects? TOM WOLZIEN: It more cleans up the past rather than says anything about the future. Going into the future the company already has new management in place with Dick Parsons as CEO, Don Logan and Jeff Bucus as the number twos. So they really started to rebuild the company, trying to lay out a new strategy for AOL going forward. TERENCE SMITH: Is that, Tom Wolzien, is that strategy credible to you as an analyst? TOM WOLZIEN: I think quite honestly it's going to take a year or year and a half before we know, because the strategy is based on the idea of getting people to pay for the on-line content specifically as opposed to a package with connectivity. Until we see what that content looks like, it's going to be pretty hard to judge. But I have to say 20 years ago if somebody told you that HBO would be based on a New Jersey Mafioso family and would get $15 a month from everybody, you wouldn't believe that at all.
	Culture clash resulting from the merger
	TERENCE SMITH: Ken Auletta, Steve Case also maintains and repeated even today that he believes the merger of these two companies makes sense, and that in the end it will be borne out. Does he have much support for that? KEN AULETTA: Well, he might. I mean, I think one of the things we have to do here is not look at this as if it's the ninth inning but as if it's the third or fourth inning. AOL has 35 million subscribers. Right now half of the people in America who connect to the Internet do it through AOL. So even though its stock price is down to around 14 from a high at one point of 90, and even though it's battered by bad publicity and some potential scandals, this is not WorldCom, this is not Enron. This is a strong company. So it may well be that at the end of the ninth inning with all the various assets - Tom mentioned HBO, you can mention Warner Brothers, its movies and its TV, you can mention Turner Broadcasting, you can mention its cable assets with roughly 11 million subscribers, these are potentially a very vibrant company. And what looks like death today in fact may be something else tomorrow. TERENCE SMITH: Nina Munk, a great deal has been written about the clash of cultures between AOL on the one hand and the new media, and the old media of Time Warner on the other hand. Fit Steve Case into that picture. How much did he contribute, if he did, to that clash of cultures? NINA MUNK: I don't know if Steve Case personally contributed a whole lot. But I think that right from the beginning it was clear that these were two very, very different companies. And in another time and a different era they may have been able to work through that. But when you combine such different cultures together with a stock that's collapsing, with employees who are resentful of the fact that their 401Ks are rapidly depleting, it just becomes a situation that can't be sustained. The AOL culture, as everyone by now knows, was very entrepreneurial, fast paced. It was in Internet time, as one used to say. Time Warner was much more slow-paced. It was more old-fashioned, certainly in the Internet era it was. They had a very hard time coming together. And by the time they were starting to make some progress, there was so much resentment on the part of the Time Warner folks that it became impossible. TERENCE SMITH: And, yet, Tom Wolzien, now the old media folks, the Time Warner, they're in charge. TOM WOLZIEN: There is no AOL Time Warner effectively, there's only Time Warner that's there, Terry. I have to tell you that in this new world that we live in, I have to provide some disclosures: I don't own AOL Time Warner stock. Bernstein, the company I work for, does not do banking for the company. However, in its money management areas and its associated companies there probably is some AOL Time Warner stock that's owned.
	The prospects for the company
	TERENCE SMITH: Looking ahead, Ken Auletta, what do you see as a result of this change and the new business plan, and what are the prospects for AOL Time Warner? And might they split apart? KEN AULETTA: Yes, they may split apart. And one of the key questions will be, can you charge an extra service, in the broad band world you mentioned in your opening piece, where people get onto the Internet easily and have all this access to quick free and relatively free information, are they going to pay a premium, an extra subscription charge to AOL as well as a connectivity charge? So AOL has to come up with a new model, its version of The Sopranos, to get people to pay extra. Will they? We don't know. TERENCE SMITH: Nina Munk, who will be the new chairman? Any ideas about that, any notions of, for example among the names mentioned today of course Richard Parsons, but also Ted Turner, another name thrown into the mix in some of the stories. NINA MUNK: I think, my guess would be Ted Turner himself threw his name out there. By my reckoning, most of the folks out there who would make such a decision would be most reluctant to name Ted Turner chairman. I think at this point Ted Turner is seen as a loose cannon - now, a very brilliant loose cannon, often a terribly useful one. But someone who is more helpful in terms of shaking things up than in fact taking a leadership role that being chairman requires. I think the most likely option is that Dick Parsons will take the title. TERENCE SMITH: Ken Auletta, what does this say to you, this latest development, and AOL Time Warner's difficulties, to the much-vaunted synergy that was supposed to produce great efficiencies in this company and theoretically gray profits? KEN AULETTA: I think synergy is one of the big losers along with Steve Case today. One of the problems you have is that theoretically synergy works, and you can point to some specifics, they sell more subscriptions for Time on AOL service clearly. But in general, theories don't work. When you have a giant company you got to look at the human factors, including the merging of two totally disparate cultures, and how do you get people to work together when in fact they don't share the same values and how do you get them to say in Warner Brothers movies I'm going to sacrifice my product by giving it exclusively to AOL -- it doesn't make sense, it's very hard to harmonize disparate interests. So clearly synergy is a big loser. For journalists that's probably a good thing. TERENCE SMITH: Why so? KEN AULETTA: Well, because one of the arguments of synergy is you have to have more team work, you have to break down the walls between the business side and the new side, have you to have every part of the company helping every other part of the company. And the culture of journalism is very different, it's a culture of keep the distance, it's keep the walls up between the business side and the news side. Don't shill for the other parts of the company. TERENCE SMITH: And of course, Ken Auletta, the departure today of Walter Isaacson - I don't relate that, do you… KEN AULETTA: No, not at all. TERENCE SMITH: …to Steve Case? KEN AULETTA: Walter is the Time Warner guy. TERENCE SMITH: Right. And yet it shows more ferment in the organization. KEN AULETTA: There's no question about that. This is a company full of angst, full of unhappiness. And full of anger.
	The synergy question
	TERENCE SMITH: Tom Wolzien, what's your view on the synergy question? There was such expectation that AOL would become a vehicle to basically carry all of Time Warner's products to the Internet generation. Has it happened? TOM WOLZIEN: It absolutely has not happened. It's a work in progress. But, you know, if you go back over the most of the last century, we wound up with Time Inc. in print, then in the 50s and 60s it added television and radio broadcasting. In the 70s it added cable systems, then HBO in the late 70s, the Turner Networks in the 90s, and online in 2000 at the turn of the century. So sort of the long-term history of Time, Inc. and its derivative companies has been one of always adding new platforms to the old, and perhaps struggling for a while after they've done so. This fits into that long-term history. TERENCE SMITH: Nina Munk, I wonder if you were surprised by Steve Case resigning, in other words, jumping rather than being pushed. You wrote in your most recent article and concluded it in fact in Vanity Fair, quoting someone as saying he'll never go quietly, never go willingly. NINA MUNK: I'm guilty as charged. I certainly did not expect Steve Case to leave as quickly as he did. Steve Case is known above all else for his tenacity, for his refusal to admit defeat. You will notice that for all those interviews he did this morning on the television channels, he never once apologized or in any way suggested that he had made an error or felt guilty for what he had done. He continues to believe in his vision. He's determined that his view of the future for AOL Time Warner will come to pass. And so yes, I was surprised that he did step down. I think finally he was just forced to do so. TERENCE SMITH: Okay. Nina Munk, Tom Wolzien, Ken Auletta, thank you all three very much.

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