The Engine Stalls At AOL
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ILLUSTRATION FOR TIME BY VICTOR JUHASZ
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Six years ago, Bob Pittman traded away his job as CEO of the world's largest real estate company to rescue a struggling Internet company that many critics had already written off. He did that and more, using his marketing wizardry to turn America Online into a new media powerhouse, big enough to eventually swallow an old media standard bearer called Time Warner. He became a self-designated prophet of 21st century success: AOL was going to rocket Time Warner into a brave new world, delivering music, movies and you name it, anywhere, anytime--and of course make a killing in the process.
But last week Pittman had to be called on once again to save AOL, which is beginning to look like the media giant's albatross. After eagerly devouring Pittman's hype just a year ago, investors and critics now feel woozy. Incoming AOL Time Warner CEO Richard Parsons, 54, clearly felt that nobody could clean up the mess better than Pittman, which is why he asked his top deputy to go back to Dulles, Va., on a new rescue mission. "AOL is our biggest problem, and so we're putting our best fighting general on it," says Parsons, who was designated CEO when Gerald Levin abruptly announced his resignation last December.
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Pittman takes over from Barry Schuler, the former tech entrepreneur who has run AOL since the merger in January 2001 and will now head a new interactive services division. Although Pittman, 48, is known as an agile manager with an uncanny ability to build big consumer brands, this is the Mississippi native's biggest test. He must restore AOL's luster and regain the trust of colleagues, business partners and, most important of all, Wall Street.
The fact is, two years after the merger was announced, AOL Time Warner's top brass is being forced to prove the decision was not a mistake. Despite its powerful brand and unrivaled global member base of 34 million, the AOL division has seen its once stratospheric subscriber growth slow, its ad revenue fall and its international operations bleed money. The much ballyhooed broadband move--in which networked homes will enjoy high-speed connections to movies and music whenever they want--is off to a rocky start. Any delay is crucial to consumers eagerly anticipating the broadband revolution, because if AOL, with all its affiliated cable systems and entertainment properties, can't deliver those services, who can? Microsoft? Comcast? Rupert Murdoch?
The AOL service's woes have infected all of AOL Time Warner, whose stock is the third most widely held in the U.S. By the end of last week, those shares had dropped to $20.10--wiping out nearly two-thirds of the market value of the combined companies since their merger was announced in January 2000. Several Wall Street analysts estimate the company's cable, entertainment and publishing divisions (which include CNN, Warner Bros., Warner Music and Time Inc., the parent company of this magazine) are worth about $19 a share. That leaves AOL near zero. When it reports its first-quarter financial results next week, AOL Time Warner will take a write-down of $54 billion--the biggest such charge in U.S. history--to reflect the decline in value of the combined company. This meltdown has revived questions raised by some Time Warner division heads in the months following the merger: Why was a solid company sold for overinflated AOL stock?
In part, the AOL division is a victim of the lofty expectations generated by its successes in recent years--and the hyperbole of some of its executives. After the online service's ad and e-commerce revenue doubled in 1999 and nearly doubled again in 2000, executives--led by Pittman--declared that AOL could power AOL Time Warner to a 33% annual growth in cash flow, even during a 2001 that was clearly shaping up as a recession year.
But while managers in New York City were trumpeting these goals, the folks at the AOL division's headquarters in Dulles were overwhelmed by them. Even before the merger was finalized, many of AOL's top managers and technologists were retiring--either formally or in practice--on the immense wealth they amassed before the dotcom bubble burst. Pittman, meanwhile, moved to New York to help run the parent company. And founder Steve Case, now chairman of AOL Time Warner, stepped back from day-to-day responsibilities, in part to spend more time in California with his brother Dan, who is battling brain cancer.
That left Schuler--who had never managed anything larger than the 100-person software start-up that he sold to AOL in 1995--in charge of a fast-swelling staff of 15,000 and $9 billion in annual revenue. Instead of setting strategic priorities, Schuler and his lieutenants bounced between brainstorming sessions for soon-to-debut products like universal messaging and agonizing meetings over how to fulfill short-term earnings goals. One executive bemoans that at the old AOL: "Our great strength was keeping it simple, the goals clear and everyone pulled together. We really ended up losing our focus."
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