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After Nine Years, Time Warner to Split From AOL

May 28, 2009 at 6:45 PM EST
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In a long-expected move, Time Warner announced plans to spin off AOL into a publicly traded company, ending their nine-year run together. A Washington Post reporter explains the company's move.
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JUDY WOODRUFF: Finally tonight, the end is near for what was once a very big deal. Jeffrey Brown has our Media Unit report.

JEFFREY BROWN: The merger of Time Warner and America Online in 2000 was widely touted as the ultimate marriage of traditional mass media and the new world of the Internet. It was also, at the time, the biggest corporate merger in history.

Time Warner was then the world’s largest media and entertainment company, with holdings including CNN, Time magazine, and the Warner Brothers movie and TV studios.

AOL SOUND EFFECT: You’ve got mail!

JEFFREY BROWN: AOL was then the largest online company, providing more than 20 million subscribers with access to the Internet. After the merger rollout, AOL’s Steve Case and Time Warner’s Gerald Levin spoke on the NewsHour about the promise of their new venture.

STEVE CASE, Former CEO, America Online: We’ve always known it was a powerful idea, bringing these companies together. We always knew it could have a profound impact on consumers’ lives, in terms of improving the way they get information, how they communicate, how they buy products, how they’re entertained. And after spending a couple of days taking it beyond the deal stage into the reality of how we can make this work, I think we’re more excited than ever.

GERALD LEVIN, Chairman and CEO, Time Warner: Well, what’s really happening now is we’ve seen two strands, one through the P.C. and one through the television set. And both have different histories, and they’re at a certain state in their development. And this overused word of “convergence” is, in fact, about to happen.

AOL was a 'deal-maker'

JEFFREY BROWN: But nine years and many mostly unfortunate twists and turns later, the divorce is just about final. This morning, Time Warner announced it will spin off AOL and the two companies will go their separate ways.

Joining me to look at what happened is Washington Post business reporter Frank Ahrens.

Frank, take us back, first, to the dot-com boom, that word, "convergence," we just heard, synergy is in the air. What was this deal supposed to do?

FRANK AHRENS, The Washington Post: We were just coming off an era in the late '90s that had seen a number of big media mergers between traditional companies. And there was a strategy of sort of checking a box: Get amusement parks; get studios; get cable; get, you know, all the -- get radio; get TV.

This was the first one that said: Get Internet. Let's bring in this new distribution channel.

And this was at the height of the Internet boom. AOL's stock had been pushed as high as nearly $100 a share. Time Warner's, being a dinosaur media company, was much, much lower. And all this was a merger. In theory -- in essence, AOL bought Time Warner, and they were the ones in charge, and it was going to be -- this was going to be the content plus the pipeline, finally.

JEFFREY BROWN: Even at the beginning, there were questions about it. There were questions about whether it was valued correctly, certainly. Wall Street didn't like it right away. There were a lot of questions clearly about the potential culture clash, right?

FRANK AHRENS: Right. What happened was you had -- Time Warner had just gone through its own culture clash a few years earlier when Time and Warner Brothers merged. And you had the sort of pinstripe New York timing people and the sort of open-collar L.A.-Hollywood people. And they had just come through that.

Now you bring in these deal-oriented folks from Dulles. Remember, AOL was an Internet provider, but it was a deal-maker, a lot of business partnerships, a lot of advertising, a real go-go attitude.

And so there was a clash, an immediate clash. The folks from Time Warner resented these go-go, young, hot-shot 20-something-year-old millionaires telling them how to run a business. And there were a number of concrete examples that came out of that that caused this thing to crash.

JEFFREY BROWN: It's interesting just looking back at that tape, because I remember that day, talking with them when they came, the two CEOs, and the representative of the button-down Time Warner, Gerald Levin, was without a tie...

FRANK AHRENS: Right.

JEFFREY BROWN: ... and Steve Case, from the kind of new media, he put on a tie that day.

FRANK AHRENS: It sort of looked like the young guy trying to look like the grown-up at the grown-ups' table, right, the tie and the shirt? And so we're going to look mature; we're going to look like we really belong here.

Culture clash inside the company

JEFFREY BROWN: Now, I had a chance to talk to Steve Case this afternoon on the phone. We caught up with him. And when I asked him about what happened or what went wrong, he still talks about the premise being right, the idea of integrating the media, but the execution not happening.

He didn't like the word "culture clash," because he said that implies that people didn't like each other, but it was more organizationally that they were never able to put it together. Does that sound right from your reporting?

FRANK AHRENS: There's two elements to that. There were some people who really did not like each other. I knew a lot of folks in the Warner Brothers studios out in L.A. who really viscerally did not like folks from Dulles and vice versa.

JEFFREY BROWN: When you say "Dulles," we should say, for the...

FRANK AHRENS: The AOL headquarters...

JEFFREY BROWN: ... in northern Virginia.

FRANK AHRENS: Correct, in northern Virginia. But he's right in terms of the execution. For instance, the idea was to take all this amazing, world-class Time Warner content and send it through the Internet to AOL's 22 million-some subscribers.

Remember, these were dial-up customers back then. You remember how hard it was -- even today, you get some bulkiness on video with broadband. Remember what it was like trying to watch video on a dial-up? It's impossible.

But AOL had the plan. Well, Time Warner Cable has -- you know, it serves millions of homes, and it gives -- it's rolling out high-speed internet. Maybe we can get them to use AOL broadband and that will be our distribution channel.

But because of the culture clash, because these units acted autonomously, Time Warner Cable turned their back on AOL broadband and said, "No, we're not going to pick it up. We're going to stick with our brand," which was called Road Runner.

So, suddenly, you had all this well of kind of -- water behind the dam amount of content trying to get through a little, you know, skinny garden hose.

Media landscape fractured

JEFFREY BROWN: And then, of course, as you remind us about that period of dial-up, we think of how much the world has changed since then. So many companies that didn't exist then are now everyday names: YouTube, Google, et cetera.

FRANK AHRENS: Exactly. Exactly. This was -- it was hit by a couple of things. So when the dot-com bust hit, AOL's value went way down. Now, because it was hooked to Time Warner, AOL-Time Warner's value went way down. They had to take massive write-downs in value because the stock just shot down because of the dot-com crash. So that was part of it.

Then came the idea of individual user-generated media. The media landscape was fracturing more and more and more, and there was less traction for a really big company.

And the problem was it caused a ripple effect. Edgar Bronfman, who was at Universal, picked up the paper, saw AOL-Time Warner, and said, "Oh, my gosh, I've got to get me one of these." So then he merges with Vivendi, tries to create his own AOL-Time Warner, and that had problems. It was just a cascade of failure.

JEFFREY BROWN: Over the recent years, AOL has tried to kind of remake itself, partly by going to an ad basis, right? Now that it's going to be alone, what kind of future do people think it might have?

FRANK AHRENS: Right, that's a good question, is to ask, what kind of company will AOL be when it starts publicly trading later this year?

I think the answer is largely an advertising company, because if you look at the revenue split that AOL has now, less than half of its revenue comes from subscriptions, comes from the Internet providing. More of it comes from advertising, online advertising, where they're trying to compete against Google, Yahoo, and Microsoft.

So more and more subscribers will start to go away. Now, I think there's a baseline of folks who just want dial-up, because it's cheaper, they don't need video, maybe they can't get broadband.

Millions still use dial-up

JEFFREY BROWN: Yes, I was surprised at the number, that there's still -- maybe I shouldn't be surprised...

FRANK AHRENS: About 6 million.

JEFFREY BROWN: ... but still 6 million people use dial-up...

FRANK AHRENS: ... from AOL.

JEFFREY BROWN: ... from AOL.

FRANK AHRENS: It's one-fourth of their height. But still, I mean, there are companies like EarthLink and then there are PeoplePC that wants to be in that business. That's fine. But they won't be competing against them. Because they're an advertising business, they're going to be competing against Google and Yahoo and Microsoft, and it's going to be a real toe-to-toe fight.

JEFFREY BROWN: And as we started talking about this period where integration was everything, it wasn't just these two companies...

FRANK AHRENS: Right.

JEFFREY BROWN: ... although they represented the biggest one. Where is all that right now?

FRANK AHRENS: Well, I think one of the lessons we've learned of that era, a lot of times, the big merger gets pooh-poohed, saying, "Mergers are bad." Well, mergers are amoral. They're good or they're bad based on the results.

We learned how to merge, I think. Don't merge for synergy. And that was one of the big words. "Oh, we'll cross-promote. Warner Brothers here and Time would cross-promote."

Merge because you want to cut costs between two companies. Merge because you want to add another line of business to yours, another vertical. But don't merge because you expect everyone is going to get together and suddenly start cross-promoting and there will be a sum that is greater than just -- a whole that's greater than the sum of the parts.

JEFFREY BROWN: All right, Frank Ahrens, Washington Post, thanks.

FRANK AHRENS: Thank you.