STEVE CASE: I guess I would have come at it a different way, because I think it makes sense. I think I'd try to understand what was going on in his thinking, because it did strike me as strategically compelling, almost in the no-brainer category, and as good for Time Warner as I thought it was for AOL. So I wouldn't have taken a "no, not interested;" I would have somehow or other figured out a way to get a clearer sense of why it wouldn't be interesting, because it should be interesting.

When I called Jerry, I said it had to be a merger of equals. I thought he should be CEO. And we should figure out a way to integrate the management teams in a way that makes good sense, because there are terrific executives at both companies.

So I knew the valuation would be an issue, I knew the management would be an issue, and I tried to pre-empt that. For some reason, if it hadn't gone anywhere, as I say, I would have been surprised. I would have persevered. We would have continued to do what we are doing, which was executing a strategy that was working exceedingly well. We continue to grow all our brands quite aggressively and we look at other things, whether it be continued acquisitions in the Internet space, or looking at other media assets, because there really was no -- there was no close second.

Q: Was there an alternative plan that would maybe help you get on the cable systems?

CASE: Well, actually that was not a big driver. I felt that that this was moving in our direction and that I believed that, first of all, the consumer acceptance of broadband that we predicted two years ago was building, but it was not taking off like a rocket. @Home had a million or so subscribers, for example, and it was likely to pick up steam, but would likely be accelerated when AOL -- particularly AOL and others -- started marketing and upgrade its existing customers and that we are beginning to market DSL.

We are looking at some wireless investments, and we've been having discussions with most of the cable companies. And so, we thought that we would continue to build our audience. We had 10 million customers the last couple of years while this broadband debate was happening and they would be able to upgrade those customers and hopefully give consumers a choice of options.

And another big step was when AT&T agreed to some principles regarding open access. The FCC had recently said essentially one way or the other it's going to be open access. So our sense was that was moving in our direction. That was not a key driver of this. That was a factor, but not the key factor.

The real factor was we thought these two companies together would really allow us to do terrific things in terms of changing the way people get information and how they communicate, how they buy products, and how they learn things.

And the biggest issue for Time Warner was how to take all these wonderful brands and the trust that has been built over decades by Time and by Sports Illustrated and CNN and so forth and make it relevant in this new connected world, or more relevant to the connected world.

The big challenge for us was not just broadband access but broadband content. We didn't feel that it was enough simply to provide high-speed access to the things that people were already doing, although those would be nice and some people would pay for it. The real breakthrough would be when we reinvented the service to make it more of a multimedia service. That means having video assets and audio and things like that, so it was a little bit more like a TV experience with the personalization and things like that, not just that the Web pages popped in two seconds instead of 10 seconds.

So that was really the key driver, building this company that was financially strong, 40 billion in revenue and 10 billion in EBITDA in its first year in business, with tremendous brands and strong relationships with consumers, strong relationships with advertisers and a unique ability to bring these worlds together in a way that not only benefited the companies but also most of all benefited consumers.

Q: You talked yesterday about continued commitment to open access on cable. Could you flip that over to the content side and talk about your thoughts about the brands of Time Warner? Do you see CNN exclusively going to AOL and Internet space? Do you see Time?

CASE: No, no. Ultimately, the various CEOs ought to make those specific calls. But my expectation would be continuing to operate a lot of these different businesses as independent businesses and looking to ways to extend them by leveraging other capacities in the company, just as you've seen with CNN and Time Magazine, so there is some cross-promotion integration or creation of some new shows, things like that.

But you've got to continue to run them independently. I'm very sensitive to this, and Jerry and I spent a long time talking about how there really is a journalistic tradition here that is way, way beyond the kind of things we thought of at AOL. We thought of ourselves more as a packager, not as journalists per se. We had editors in one sense because they are deciding what to highlight on a screen, so there is some editorial judgement there, but the stories themselves are coming from CBS or Reuters or Bloomberg or AP. And some of the traditions, starting with Henry Luce, about not just church and state but also serving the public interest as well as the shareholders, are very important, and they resonated with me.

JERRY LEVIN: The unfortunate thing, in an open access, and this is leading rhetoric to a great extent, you just get back and look at what does history teach us about networks. No network can survive if it uses its captive programming as the way to succeed.

As a matter of fact, the maker of the programming is not going to succeed unless it's refreshed by serving live audiences. That's really the message.

Q: That's the model here --

LEVIN: That's the model that we've grown up with, and this now applies in spades in the Internet world because there is so much availability. Now that doesn't mean that you can't enrich the offering, but we have wrestled with this issue and kind of wrestled it to the ground over many years because it's also good business proposition.

CASE: And if you talk to some of the people at AOL, like -- for example, someone who is building interactive properties, in music, and Digital Cities, and ICQ. He'll tell you he's frustrated sometimes that the AOL Music Channel just can't basically point to Spinner and Winamp instead of pointing to a lot of different things. But this is a separate judgement by the people in charge of the AOL music channel about what to promote independent of the content brand for building it.

Of course, there is some desire to encourage synergies, but at the same time, you need to make sure there are independent decisions, and be one of the real things I respect about Jerry's leadership at Time Warner and a similar kind of model we try to put in place, is that you have empowered entrepreneurial executives here. If people feel like they're just part of this big centralized company where you can't do anything without 16 other people agreeing to it, I think that you aren't able to compete on Internet time.

You've got to have nimbleness. You've got to have empowered executives, particularly because, otherwise they'll run off an do some get-rich-quick.com kind of thing. So they have to feel like they're in charge and they have to feel like they're making a difference, they have to feel like they're empowered. We've tried to do that within AOL. Time Warner clearly has done that.

The executives here, Don Logan or Jeff Bewkes or many others, you can go down the list, are people who don't need the work, could get a lot of other jobs in a second and probably make more money in some quick IPO kind of Internet thing. They're here because they feel empowered and they feel that they're making a difference.

Q: That almost begs the question -- You're saying the greatest strength at Time Warner is that each division is able to run its own businesses. Then why more combination?

CASE: Well, it's a balance. I think you have to be able to attract the right people and run things as independent units, and at the same time on major key initiatives encourage people to cooperate.

Before Yahoo was even out there, in fact at the time Pathfinder started, we were trying to buy Yahoo, and it was $2 million for the company because there were two people in the company and we just bought Webcrawler which had one person in the company. We paid $1 million for Webcrawler and saw our valuation, was clearly established.

We called Jerry (Yang), well, two people, $2 million. I think if we said 5 million, I'm sure that we would have gotten the deal. We probably would have gotten it for 3, but we were stuck at 2.

So Yahoo was nowhere and Pathfinder, somehow it didn't really get the attention of the company and things just didn't get momentum. That's an example where we're saying we do need to figure out a way to move, sort of more of a tectonic shift, how do we make that move? But that's not in my mind at all inconsistent with this notion of entrepreneur. It's like looking at governments -- there are things that state governments do and there are things that federal governments do and there's always a little bit of a debate. What should happen at the county level versus the state level? There always is that tension. But there is a logic to why it makes sense to have these different kinds of approaches and certain things need to have almost a national crusade. You weren't going to get a man on the moon if Kentucky and Tennessee were trying to figure out how to make it happen.

Q: Jerry, how successful do you see Time Warner's efforts to be federal on the Internet? Was it going to work if you hadn't made this deal?

LEVIN: I think it would have gotten mixed results. I was trying to use traces of my own mind about internal takeover of CNN. To use Mike Milken terms, you're sitting out there, looking at Time Warner, what would you go after? Maybe the first thing you'd go after is CNN because it has real dot-com transferability. And I wrench it out of its current organization, and I slam Time in there and I make it fly and I don't want to hear anything about somebody coming in and taking it over. Then thinking about the reality, I think I probably could have pulled it off, but it would have contaminated the result. I would have done it -- it wasn't AOL or nothing -- but it wasn't a very satisfying alternative.

CASE: The flip side is going back to your earlier question. We did believe -- I believe that in the long run, that owning content or destination sites or channels or whatever metaphor you want to use is important. We didn't simply want to be an on-ramp. But all the things that people ended up eventually going to and bookmarking were things that we didn't have ownership in.

In the last four or five years we have done some of that with mixed results. Some of the brands have done quite well and others not so well. We found the last couple of years we were better buying interesting brands or strong passionate management teams and then taking them to the next step, ICQ being a good example; more recently, MapQuest is a good example. That's opposed to building them from scratch, which we tried to do with Entertainment Asylum and some things in the sports area.

So if we hadn't done this, although as I said, I believe this was the far and away best thing to do and I would have kept coming at it and hopefully eventually prevailed, we would have moved in that direction. The real debate would be, do you buy a number of web companies coming at this with kind of an Internet-centric focus, or is there some other quote-unquote media company that you look at to achieve the same objective?

But the strategic imperative I thought -- that we kind of reinvent the company. Every two or three years, we kind of reinvent the company, and it was time to be in content, although I think of it more as destination sites. We're not going to do it ourselves. The better thing would be to acquire five or 10 leaders in sports or music or what have you. Or some other media company. But when you look at the Internet, AOL stands head and shoulders above the pack. In the media companies, Time Warner stands head and shoulders above the pack, and you drop down significantly and there's Disney and then there's a handful of News Corps and NBC's and things like that that really are on a different kind of scale.

So AOL and Time Warner was the one that I knew was right and it was just a matter of getting it done. The real question was could we resolve all the complicated issues like valuation -- how do you get to a common ground of Internet valuations of this and media valuations of that?

And how do you make sure you get the best of both worlds in terms of the management teams? If we have any problem, it's an embarrassment of riches because between the two companies, we have an unbelievable cadre of terrific executives.

We need to keep them all, and keep their heads in the game, and even attract more to really capitalize on this opportunity.

LEVIN: When you think about it, just think about it for one second. Our mantra for awhile was, well, they, can't build what we have. They have to buy it. But we could build it. Now we're never going to know the answer to that, but at least that was a mindset for awhile, and I think that's very important because what does the AOL-Time Warner transaction mean?

Well, it certainly means something about respective valuations, like the Internet is real and media properties have real value and in that context it certainly means that. But what about this concept of a media company building itself into this space? Who is going to do it and can it be done?

So to me that's an interesting question. That's when somebody says, well, how do you put these two things together? I'd much rather accept that challenge than the other.

CASE: We both were underestimating the complexity of building what each other had and that's been true for 10 years. How hard is AOL? This little software, and e-mail, and bang, you're done.

How hard is a magazine? You hire an editor, and you know, get a printing press contract. Bang, you're done. Well, it's hard! (LAUGHTER)

Q: Where are the savings?

LEVIN: It's not the traditional savings, you know, when there's a merger and you get these cost efficiencies and you've cut out duplicated overheads. This is primarily supercharged revenues that have a much more efficient cost basis so that the incremental revenue stream, will be something that couldn't have been gotten by both companies.

Maybe 70 or 80 percent of that gets dropped from the bottom line. So this is a billion dollars of EBITDA, not a billion dollars of revenue, and it seems fairly simple to accomplish as we look at the incremental revenue streams that'll come on both sides of the company in the very first year of full operation.

Q: One of the things that struck us reading that release was just thinking back to the merger with Turner where the FTC pretty much imposed a period when you weren't able to have discussions like that and it lasted for about 15 months. Do you anticipate a similar response from the government that freezes all these kinds of discussions until you close the deal?

LEVIN: I guess we apply the standard here that commercial arrangements were good marketplace arrangements for both companies. Having said that, I think it's somewhat like a Warner Brothers movie being sold to a Turner network for the first network window. It's a marketplace number, but the fact that it's available and then it's done and the deal was struck, has a lot to do that there's a family interest in it.

I think first of all I believe we'll have a heavy contest between the FTC and the Justice Department as to who takes jurisdiction of this.

Once that takes place, then I think the legal requirement is that you can't really push things together but you can do a lot of things. During the Turner period, we started CNNSI, because it was a good thing to do and it would fly anyhow. We'll probably have more things that we know we can do together. Let's think InStyle, or a lot of thing that are happening in the supercharged People empire. I could say I'm impatient with the way it's going, so let's get AOL in there.

CASE: It's also apples and oranges. I think with Turner, even though this is a bigger deal per se, it's a very different deal in terms of its strategic orientation. I think that was a deal where a media company with significant television assets was buying another media company with significant television assets. This is a situation where AOL, the Internet company with no magazines, no TV channels, no books, no music, et cetera, et cetera, no cable systems, is merging with Time Warner which has no dial-up Internet customers, which has no instant messaging customers, et cetera.

If AOL was proposing to buy Yahoo or Time Warner was proposing to buy Disney, those are very different mergers. This is a very different kind of construct.

Going back to the other question of the synergies, there are going to be huge opportunities to create terrific new business. We have an opportunity now to apply some of the lessons we learned over the past decade to television -- and maybe the next decade reinvent television. It'll be more personalized, interactive -- those are new opportunities.

But the real initial focus is on the obvious things, like that AOL spends hundreds of millions of dollars on marketing to build its brand. Obviously there is a cross-promotional capability in terms of shows or free time and so forth that has huge potential for us.

Q: You've been spending 100 million to market?

CASE: Hundreds of millions. I don't know what the current number is. Probably half a billion or something, something in that range. You spend a lot of money on marketing, and a lot of that money goes to TV networks and magazines and so forth.

Similarly, on the Time Warner side, we do have the capacity to build bigger audiences for Time Warner Websites. You have a bigger audience, you can sell more advertising. So there are cost-savings in terms of promotional, cost-promotion and revenue opportunities in terms of bigger advertising, it's just sort of a no-brainer. That's independent of these exciting opportunities such as AOL TV.

Q: Steve, on the question getting back --

LEVIN: Can I just go back to that because there is underneath this direct parallel between what AOL has built and what HBO has done, and it's what Time Magazine does, it's the power of the subscription. You start out, it costs a lot of money to get it started and you run like hell to get some subscribers who pay you out of inertia on a continuing basis. You then take that money and you build an infrastructure -- this is what people haven't quite grasped yet, and why the valuation of AOL is quite appropriate. It's a revenue stream that's quite reliable, it's perceived value, and it continues.

You then -- assuming you're first -- or you gain a first position, then you have enough cashflow to keep reinvesting to build more service, more value, so the customer either pays you additional money for more services, or you start new services. You get so far ahead and the reason why it is a financially desirable model is that the cost of acquiring either a new subscriber or giving that same subscriber additional service is so modest because you've already amortized the infrastructure cost. That simple proposition is what AOL is about. It's essentially what Time Warner is about.

That's a very profound position to be in. And that's essentially what's underneath the dynamic of both companies. It also struck me that's a very similar proposition, and it happens it's not B-to-B, it's the consumer here. So that's also very good. I think what the shock of recognition is actually how similar the companies are, although they come from these different spaces.

Q: I wanted to get back to the synergy and decentralization which is centralization, and in the previous mergers of TIME and Warner and TIME and Turner, and stuff, what happened was new operating units got created. We now have five operating units. With this merger, we could have a sixth one in the company, that was digital, or it could totally change four --

CASE: You could have 10.

Q: Or you could use this as a way to totally transform the company, so that publishing is not separate from digital or separate from music and you restructure the company in a strategic and radical way because of this, instead of allowing independent operating units to cooperate and compete almost as if they were independent companies. How do you all see that?

CASE: Well, first, we see it as being the most important question to answer correctly and one that begs a lot of thoughtfulness and not something that we should rush over a weekend. So that's why we put in place this integration team with Bob Pittman as a big part and Tim Novack, our vice chairman and Richard Bressler, and they will be working over the coming months to look at a variety of different options and then make a recommendation to Jerry on it.

There's a recognition that there are a lot of different businesses, subtleties, people, a lot of things to take into account, and there are probably half a dozen different ways to structure it. I do think that coming at it with a sense that maybe a fresh approach, a more transforming approach might work better, is one of the things that should be on the table. At the same time, there is a recognition, you've got to protect some traditions, like the journalistic tradition and church and state and things like that.

So I think we'll close the deal later this year, nine months or so, we'll use that nine months and really roll up our sleeves and look at all the different kind of options. I think everything should be on the table.

One of the reasons I was comfortable with Jerry being CEO is a recognition that within Time Warner, let alone within an AOL-Time Warner, they're very different businesses and personalities and cultures and perspectives and traditions and legacies and priorities and so forth. It's not this one-size-fits-all homogenized approach. The way you approach the movie-making business is very different than the way you approach the magazine business or the cable business.

LEVIN: In its day, the Time Warner transaction was groundbreaking. Mistakes were made. One of the primary mistakes was to fully negotiate the structure of the new company almost position by position, in a situation where it's really part of a negotiation before you're up and running based on perceived leverage with respect to each individual point.

That certainly isn't a satisfying thing to do. Secondly, people were reveling in the differences between the cultures, and in fact, over time it became clear to me that there is a lot of similarities. But that was a background strike against its working early on, and then finally, every deal, no matter what principle you try and apply or what management notion of centralization, decentralization, entrepreneurial, synergistic, it's all about the orientation of the people involved, including those who are calling the shots and there was built intention in the companies for just a lot of reasons.

So that's one experience, having lived through the experience and then working through it has actually been very valuable, just as working through Orlando or the failed Teletext has been very valuable.

With the Turner merger, we did have a transition team and we did put people, but we also took some things out of Turner and moved them around. We disaggregated a motion picture studio, we moved a lot of the distribution, and actually one of those moves we've just recently reversed four or five years later.

So that's a pretty interesting model for trying to do it right. In this case, I think we had yet a new situation where my philosophic tendency will be to want to make more of a transformation than anything that's gone before, still consistent with the fact that even in the new company, the pre-existing Time Warner businesses are 75 percent of the revenue and to a great extent cash flow.

The other thing I'd say is in this case, the personal orientation of the people will be very important and so how do you know upfront that that's going to work? And here's where I believe a lot of the preaching that has gone on recently by us and by me, about our values, is absolutely critical to the success of this business transaction because if I didn't believe that -- and Mel, it goes back to his call and the thing going around in my mind is for sure this is great and I get it, it's a big idea, but this is TIME MAGAZINE, this is Warner Bros., this is the heritage of this company.

There needs to be not just business respect for that, so disaggregate it in some kind of Internet flourish, but respect for it in the values as to what this thing is all about. So unless I made a big mistake in personal assessment here, that's the pivot point for me. When I became comfortable with that, it's not that we still could have fallen apart on valuations, lots of other things, but that's why I believe this'll work with respect to people.

CASE: I just echo that. That was a big deal to me because there are -- I'm not going to name them -- there are media companies that are successful that I could not fathom merging with because I don't think they have some of the shared values in terms of shouldering the responsibility for what they do, of really recognizing not just the shareholder interest but also the public interest.

I think that's very important. I think companies need to be more active in not just playing to Wall Street but also doing what's right for Main Street.

I really believe that. And Jerry does. It's not just saying it. You have to live it. But it's an important signal and a fairly unique signal.

So I think that was a key part of this, looking at properties and saying I'd be proud to be chairman of a company that had this and this and while there might be other mergers and media companies that you could name, I wouldn't be able to say the same thing. I think on the organization side it's important that as we make this transformation that Time Warner become an Internet company and that AOL become a media company -- but not simply about transforming them, but morphing them into this next thing.

It's really the recognition that the combination of these, integrated in the right way, is extremely compelling and it has to be designed carefully, like real sensitivities to make sure that the ultimate structure is organized in the way that best serves the needs of consumers. That ultimately is what companies are all about.

If you look at successful companies and less successful companies, to me one of the real lessons of the last 10 years is all about people, that the people you are able to attract and motivate and retain and so forth, if you've got the right people focused on the right initiatives, then you're in business, and if you don't, you're not.

It's more like a sports team. The right players, the right coaches, make a huge difference. When a good coach comes into a team that's been losing, somehow you start winning. How did that happen? It shows you that the importance of people.

So the structure has to be designed with great sensitivity, great recognition that there are subtleties between these businesses, many of which I'm sure I don't yet appreciate and hopefully we'll learn more about in the months ahead. Ultimately, the best way to serve consumers as well as the best way to attract and retain talent is to be this kind of hot-house of innovation because of the fact that people really want to be part of this company. They see it as being an exciting opportunity from a business standpoint but also a wonderful platform to make a difference in the world.

That's what's going to drive this for us.

LEVIN: Just once they -- if somebody covering this transaction can find the causal connection between the wild-eyed idealism that's being expressed and Wall Street standards, that would be terrific because that's what we're searching for. I really believe it, and it comes about because if I'm right, that that base of values translates into the right people and therefore the right structure, the right organization, then the performance will follow and therefore it will be a leading edge company, and it will deliver shareholder returns.

If somehow that causal connection can be made it would be terrific because right now it sounds like this is a separate thing. We have these values, and we go in here and make the money.

Q: Steve, you now have on your board the CEO's of two large media companies, Thomas Middlehoff and Margorie Scardino. Do they stay on the board after the merger, and if so, does that suggest any possible further either alliances or mergers, particularly in overseas markets?

AOL: Well, they're different. We have not determined the makeup of the board other than each company will contribute eight people. But Thomas Middelhoff will not be on the board because Bertelsmann is a competitor of Time Warner. I briefed Thomas over the weekend about this, and he decided, which we felt was the right thing, to not participate in the board meeting because he didn't feel like it was appropriate. Margorie Scardino from Pearson is different. Quite a bit different than Bertlesmann, quite a bit less competitive.

CASE: Well, no, my understanding is there are some discussions, a year or two ago about maybe you'd consider Margorie to join the Time Warner board.

LEVIN: Rubin Mark, who is on our board, is on the Pearson board.

CASE: So she is, it's a little bit different case. She did participate in the phone calls. We did not feel she was conflicted. So she will be considered.

Q: Jerry, you talked about the companies having similar models, subscription-based, although the values per subscriber I guess was totally different. In terms of getting the valuation, and you took some heat the last time you went through this exercise, with the Warner merger, you're negotiating at a time when the stock is actually falling. Tell me a little bit about reaching the valuation.

LEVIN: Yes, I think that was the toughest thing to get your arms around and also the thing I'm most pleased about. I think in the technology of M&A, the metrics that you arrive at are usually the standard banker convention where you do a relative take on two stocks and you take a certain period, then you adjust for other factors.

Here, if you look at the last 12 months, the AOL stock, you would have had a much more favorable ratio for AOL. If you went back three years, it would have been in Time Warner's favor by a factor of 9:1. So what that tells you is the AOL stock is not seasoned in a conventional sense, but if you stop there, you wouldn't get anywhere.

So what you have to do is then turn around and say what's the right result for the shareholders in terms of participating going forward in the benefits that will come to each side that couldn't have been derived alone? And in that calculation, I looked very hard at the last six months, the last 18 months. I also looked at some projection as to what might happen to the AOL stock and to the Time Warner stock with a certain exchange ratio and then I got very fixed on an exchange ratio.

And there is kind of a bid-and-ask where AOL wanted to try and keep the support under the AOL stock but at the same time still recognize that the Time Warner stock was undervalued.

Undervalued in the sense of its relationship to an Internet complex, that is to say, okay, Time Warner may actually be worth something if it's on its own, but if you connect it to something, it's worth more. I finally got my arms around it over the millennial holiday, waiting for the Time issue to come out on that Monday, but watching 100 hours on CNN. It actually came into mind and said "I think this is the right number", and it happened to be 1.5, and that's assuming we're working out all the other things, I'm going to put that in front of Steve and Ken Novack and saying this is not a negotiation, high-low, I think that's the right number.

I think it's the right number for the AOL shareholders and for the Time Warner shareholder. And the proof of that will be if in the end some people think that AOL has been sold at too much of a discount or Time Warner has been sold at not a high enough premium. If we get those disparate reactions, then we've probably done the right thing.

CASE: What we got, I think yesterday, was about what we expected. There were some people who were criticizing me for paying such a big premium for Time Warner, saying at the close on Friday, AOL if you look at the combined market cap was 65 percent of the Time Warner, 35 percent of it. And others were critical of Jerry saying, well, if you look at the cashflow, 80 percent of the cashflow is coming from Time Warner, only 20 percent is from AOL, and we just needed to come up with something that we were both comfortable with. The bottom line is I became convinced that AOL shareholders were better off owning 55 percent of AOL-Time Warner than 100 percent of AOL, and similar on Jerry's side, that Time Warner shareholders were better off owning 45 percent of AOL-Time Warner than 100 percent because of the strategic opportunities, but also to address some of the strategic challenges.

The real question for AOL was about broadband. People were focused on access, but they were focusing way too much on access. The next thing they should have focused on was, okay, if you get the access how's the service going to sing? On Time Warner, there's all these wonderful assets, but it's sort of missing in action in the Internet. If it was an Internet company and had Yahoo's multiple -- you know.

LEVIN: Let's go back to a fundamental valuation concept. It's really about discounting future cashflows. So one profound thing that's taken place here is that I am acknowledging certain Internet valuations, at least as applied to a company like AOL is actually a fair valuation. It's not crazy.

So if I accept that, that's a very important premise, then I also -- now putting an AOL shareholder's hat on -- have to accept that in fact, these Time Warner properties are very valuable and all I'm doing by putting it together is I'm accelerating the time when that value can be realized and so there should be something, some recognition of that so that the Time Warner shareholders get this acceleration and hence someone calls that a premium. But in fact, that is all it is.

And basically since this is a merger of equals, it is trying to get the numbers straight so that you give the Time Warner shareholders this acceleration and you validate the AOL valuation and you pretty much come up with, it's somewhere in the zone of 50-50, although there's 55-45, is just the way it ends up based on the current number of shares that are out there.

CASE: But there is a problem here. The thing I was most worried about as we were thinking of this the last few months is the AOL stock would run up. It sounds bizarre, but basically I recognize that from Time Warner's perspective of a merger of equals was an important concept and something, 50-50 or close to 50-50 was going to be important, and our stock, like all Internet stocks are, is very volatile.

Last spring, we had a market value of $200 billion. Everyone thought we could do no wrong, and then within six months, it had dropped to $100 billion and everybody thought Microsoft was going to offer free access and kill us. Then it went back up. And so, it's very volatile. You have to kind of look beyond that, and as we were looking at things in the last couple of months and particularly in the last couple of weeks, our stock had come down a little bit, which was actually helpful in getting to a common ground where Jerry could feel like he had done the right thing for his shareholders in getting something that is close to 50-50 and I could feel that I was doing the right thing for AOL shareholders without looking like I was paying too much of a premium, even though I wasn't particularly focused on that because the volatility of our stock could make that premium bounce up and down so dramatically in very short periods of time.

LEVIN: If you go back to the Time Warner merger which was a merger of equals and a stock for stock transaction until Marvin Davis came by, then the Warner shareholders owned a greater percentage than the Time, Inc. shareholders.

Q: This is the flip side, though, Jerry, of the discounted cashflow argument, that AOL has been enjoying a cashflow growth rate of around 50 percent, Time Warner 15 percent, so the combined company by my bad math is around 27 percent. So those are really slowing down the Internet possibility or the Internet valuation possibilities. The Wall Street valuator went out with the ... and said gee, we had this thing that was growing at 50 percent. I had to slow down my view of it.

LEVIN: First of all, let's put PE's aside. This is going to be a cashflow company. Twenty-seven percent -- let's choose that pro forma. So that's a pro forma revenue growth number. The juice in this company is going to come from the cashflow growth, because, and I'll go back to my statement of the original formula: Once you have these amortized streams and we used the number yesterday that we have 100 million subscribers across the company, and you go through all those, but if you're contributing some of them, the cashflow margin, on the margin, of incremental revenues, if we're smart enough to figure it out, we sure as hell ought to be, is somewhere in the 70 or 80 percent, which is basically the cable business, too.

And so that means that you get the turbocharges on what we call the EBITDA or the cashflow, and I believe strongly that we can justify the valuations because of that kind of growth rate. Even putting the billion dollars out there right away, even in advance of the transition team doing all of its stuff.

So I think we're somewhat beguiled here by the fact -- and maybe this transaction will help it. The Internet valuations seem -- someone is trying to find a metric that will satisfy it. So it's a multiple of revenues or it's aggregate value to revenues, that ratio, when in fact, I actually came back in my own mind with respect to AOL and did a per-sub valuation. What are these subs really worth going forward? And I got very comfortable.

Now let me go back to the ratio.

If you come to this and you're a doubter and you're a Time Warner shareholder, and you think what happened in AOL stock last summer, hey, that's the real value? Then this is a merger of equals, it's 50-50 and the exchange ratio worked.

If, however, you think that the 200 billion is the real value, then you'll get Time Warner up to a level that's pretty close to that. That to me is the elegance of this. Well, I can tell you, I thought long and hard about it. And as I say, I'm satisfied that we've made a breakthrough here, because what would have prevented a deal like this from happening before, put the social issues aside just for a moment? It's really how can you possibly bridge the valuation gap?

CASE: AOL, interestingly, some people joke, is sort of the widows and orphans play in the Internet space because you look at our company, our earnings, it is a whole class different than the other Internet companies. In fact, you probably could add all the Internet companies together and we would have more revenues and more earnings. So it is actually valued at a multiple of earnings much, much less -- a multiple of revenue -- much, much less than the Internet space.

So we're already kind of somewhere in the middle between them and now, on a pro forma basis, you're right, it goes to kind of a 30-ish multiple which is compared to other companies pretty moderate, and the question is are we able to execute a strategy that really captures some of these opportunities, not just on some of the revenue figures, but whole new businesses we can create and positions more and more of an Internet company.

Q: So how do you take that pro forma? The 30-some pro forma? What will you see, if you do things right? Where does it go?

CASE: I'm not going to put a number on the table. But obviously, this is viewed as an Internet company. There's a huge upside. And I think this notion of here are Internet companies and here are media companies is not going to be the way it's looked at five years from now. They are blurring together. Ultimately, they are the same in that from a consumer standpoint, there are ways you get information and ways you communicate, ways you buy products, the way you've learned things, the way you're going to entertain. That's the way consumers look at it, and I'm proud to say, the last five years, it went from 1 million AOL members to 20 million members, and I'm proud to say that in the last five years, people have used it, it went from an hour a week to an hour a day.

But it's never lost on me that an hour a day is nothing compared to the time they spend watching television, listening to music, reading books, reading magazines. This is the real world, and we want to basically have an impact on the real world, and in the real world people are more and more excited about the Internet, more and more excited about the possibilities, feel more and more empowered. There is more and more diversity of choices, with millions of Websites and so forth.

But although they are spending more and more of their life on the Internet and will now take it from the PC to the television and from the television to pocket devices and data phones and so forth, they still are going to watch television, they still are going to read books. I'm proud to report they're still going to read magazines, Time Magazine and Sports Illustrated and Fortune and so forth and the ability, and the recognition of that and the ability to take some of these traditions into this new world and take some of our new world thinking in terms of how to build a sense of community, to apply those lessons to some of the Time Warner properties where it makes sense and for us to learn some of the lessons that have been honed over -- even though Jerry says the company is only 10 years old and we are an older company, which I guess -- I don't know what exactly that means, but it seems like a nice thing for him to say. I know that the tradition of this company is not a tradition of 10 years, it's a tradition of Henry Luce, 75 or 80 years, and we're pretty smart people, we're pretty adaptable people, but there is nothing like the school of hard knocks, and we think it's great that there's a company that's built this kind of tradition.

LEVIN: And actually, Little, Brown started in 1839. It was helpful -- AOL makes money, has a profitable formula, has real management, real good board and therefore is like a blue chip company in the Internet space. It's very helpful to our thinking and certainly to our board's thinking.

Q: What does it do to everybody else and all your peer groups, your industry? Does this create a new wave of mergers that follows you or is this one of a kind transaction that can't be replicated by anymore else?

CASE: I think this is one of a kind. As I said, you're really looking at the number one company on the Internet and the number one company in the media space. I think it's one of a kind. It's presumptuous for me to postulate what somebody else's strategy might be, somebody else's reaction might be.

I think if you look at the basic guiding principles of this, I've said it before, but we're trying to change the way people get information, communicate, buy products, and learn things.

We are trying to blur the lines between media and entertainment, communications, the Internet. We are trying to build bridges between the television, the telephone and the PC. And to the extent, and I believe, and I've believed for some time, the extent -- you're just doing one little piece of the jigsaw puzzle. That's not really probably in the long run, going to serve the interests of the consumers. Consumers do want diversity, they do want choice, which is one of the things they like about the Internet. But they also want convenience.

In fact, one of the trends we are starting to see is that, as people integrate the Internet more in their lives, they love it. They're just -- they're tantalized by it. They can't believe all the things they can do with it, in terms of somebody instant messaging with their mother at the other end of the country.

AOL: You probably all have been given -- I'm sure you have -- many job offers where you could make more money and you say, well, money is not insignificant. I have family, college education, things like that. That's not the only thing. There is other factors and you're proud to be Time Magazine. It's just a different thing than if you were running a little website even if you made a lot of money.

What we want to do is be able to create this environment where people are excited by the possibilities. They are the change agents. They are doing the innovative things. They are able to acquire brands like we did with ICQ and take them to the next level and it's just tremendously exciting because you're really at the epicenter of a change in how people live their lives. At the same time, you have the ability to make a lot of money because stock options can do that.

At the same time, you are part of a company that's going to make a difference. This is a company that is going to set the standard of this next century for how to serve the public interest, and it's not just rhetoric on the day of a press conference. It is things that Jerry believes and I believe and our actions in the past I think support that. We've made commitments to the digital divide, we've made commitments to protecting privacy.

We've been a leader in making sure the Internet is safe for kids. And through this company, we think we can make a difference.

One person -- I won't say who it was -- told me not too long ago that independent of this, "I hope you realize that as the head of AOL you have in some ways as much potential impact on people's lives as if you were President of the United States, and I hope you internalize that and shoulder that responsibility."

Well, if that was true before, it's certainly going to be even more true now. Companies can make a difference, and it's partly based on what they do in their business to change people's lives, but also what leadership they take beyond their business and I think that's very, very important and we both shared that view. We do think we have an opportunity to create the most valuable company.

We also have to create the most respected company. If we just make another billion dollars and it's the most valuable company and are on the cover of TIME three more times, been there, done that.

Now it's a time to make a difference, and this company I think is uniquely able to really kind of go for the stars here and really try to set a new example, set a new pace for corporations.

LEVIN: Just two points. First of all, Joel Silver called me last night and said he enjoyed our press conference a lot more than the presidential debates... Actually he was talking about the Republican debate. We talked about the concept of business failure and how important it is. I can give you the three examples. We made movies at Time, Inc. We had Time-Life films that made Ft. Apache the Bronx and two others.

We made three films. It was clear to me that we should make movies, that that should be a part of this company. So we eventually put Warner Bros. in the company. But those failures, and to try to do it out of HBO, really pre-disposed us.

We also needed an advertiser-supported network base. So we tried several things again out of our own base and failed. I had also wanted to do a cable news service but we weren't making money at the time at HBO so we didn't do it.

Well, so we eventually put Turner in the company. The Pathfinder experience, the Teletext experience, to me, resonated that this is absolutely essential.

So what I'm saying, it's not just the theory because it emboldened me to want to do something. There were very positive results. In other words, you could see the opportunity in what we were doing.

I can't call it a failure, and so yes, now we need to be together with AOL, to realize it, but was Orlando a failure? No. I'm trying to do it in a way that doesn't sound offensive or really simplistic, but it really is very important.

CASE: When all is said, you want to market your failures and your successes.

LEVIN: If the failure was just a complete disaster, that would be one thing. But since there were reasons why it didn't get extrapolated and it actually had data points that were extremely valid and that's what you assimilated or incorporated. then that's a very interesting part of the business.

But we have basically a New York Post society, and it's essentially winners and losers at any given moment. And so therefore that somehow gets in the way or predisposes you or makes you not want to take some steps that you actually should take, and so the one other characteristic of Mr. Case, having lived through a lot of things myself, is this persistence element, that when the whole world is saying this is crazy, and you know, it's not that you're wild-eyed and this is not Don Quixote, De la Mancha, but it's just that you uniquely do have a conviction based on valid data points.

CASE: Although there's good news-bad news on this. I do share the view that has been expressed by others, it's a contrarian point, that it's a bad sign to be on the cover of TIME MAGAZINE, cover of BUSINESSWEEK. Can I add, Walter, I think Jeff (Bezos) is a terrific kind of representative of what's great about the Internet, but ultimately, it's not about that the stock is bouncing around, the headlines for the moment. To the extent you think of this in a longer term perspective, what do they say about you in your obituary and they're probably not going to say how rich you were, they probably aren't going to say how many deals you did and things like that.

The question is what -- did you make a difference? Everybody wants to make a difference, whether it be in their family life or their business life or some people have a business life and a political life because they think they can make a difference there.

It seems to me that there may be an integrated approach to this and maybe you can achieve all these different objectives if you think about it instead in more historical terms. Think about what's happened over the last century and 100 years ago what happened was that the telephone became part of our lives, 75 years ago what happened is cars became part of our lives, 50 years ago what happened is television became part of everybody's life. And 25 years ago, what happened is cable television, special interest publishing, things like that, became part of everyday life.

I think ultimately, you've got to look at these things through not the prism of what's said today or this week or this month or this year but what's said 50 years from now. The same thing was true said about the president, some people it's not when they leave office what's said. It's what people 50 years from now, the historians say. I think that's really what matters.

And you think about it in that kind of sense and you recognize that it is important to not just be the most valuable company but also be the most respected. It is important to take very seriously the responsibility to build a medium you can be proud of.