AOL-Time Warner: How a sure thing fizzled

Ignatius Haryanto, Contributor, Jakarta

There Must Be A Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for the Digital Future Kara Swisher with Lisa Dickey, Crown Business, 2003 xi + 306 pp

Back in January 2000, the world was shocked when an unprecedented mega deal was signed between America On Line, an established Internet provider in the U.S., and major media company Time Warner.

Time Warner itself was a merger of Warner Bros Company, holding leading film, record and other media companies, with Time itself a combination of Time magazine,Sports Illustrated and other major print media. When the merger was signed, it combined a total US$247 billion in assets from both companies.

What a combination: AOL controlled the hardware of the telecommunication industries, and Time Warner could support its partner with its varied information and entertaiment content.

But there was to be no happy ending for this marriage of industry leaders. After the mega merger, both companies slumped on the stock market, their prices falling further and further seemingly every month. The directors may blame the fallout from 9/11 terror attacks on the entertainment and information industry, but that would only be a scapegoat.

This book takes us behind the scenes of the merger, and tries to answer why the collaboration of the best media and communications companies did not work. Is it just a case of incompatible yin and yang, or more about having two captains setting a course for disaster?

Swisher is an acclaimed technology columnist for the Wall Street Journal, who covered the mega deal and is author of the 1997 book AOL.com. She enriches the book and an already fascinating tale by interviewing several important figures from both companies.

Mega mergers among companies have been common since the mid- 1980s, and from one merger to another the value always increased. The AOL-Time Warner marriage was a phenomena in itself, breaking all previous records. Their expected convergence, or synergy, the key word during the decade of media mergers, simply did not pan out.

But the losses, not just material but also of face, were huge to the two giant corporations and their leaders. CNN founder Ted Turner, already ranting on a daily basis to AOL Time Warner CEO Gerald Levin about the problems resulting from the merger, eventually branded the latter a "liar and a thief" as he lost $7 billion.

At the heart of the problem were the very different corporate cultures of the various parties.

"At Warner, if you didn't make mistakes, you'd be fired because you weren't taking enough chances, At Time, the attitude was, don't make mistakes," an executive of Time Warner said.

Another issue was the "creative accounting" from AOL, which Time Warner was aware of before the deal was signed but considered a minor discrepancy. In hindsight, the parties appear to have been blinded by the huge scope of the deal, without considering that the minor problems would add up to cause its downfall.

Swisher does not set about citing who should take the main responsibility for the disaster, since there were many potential perpetrators, the situation was convoluted and the "suspects" and the "victims" were often one and the same. The situation is complex, a combination of arrogance, ignorance and dissimilar corporate cultures.

Moreover, it turned out the Internet business was not really as promising as hoped. Just a month after the mega deal was announced, the Nasdaq index dropped to its weakest level, and other Internet companies were swept up in the turbulence.

Internet businesses, on the one hand, depend greatly on the advertising industry, yet subscribers reject their use because of privacy reasons. Thus, advertisements are not really a miracle for Internet businesses, and cannot lift them up in the era of big competition among media industries. Meanwhile, for a group like Time Warner, glowing advertisements always followed each new product from the group.

One high-ranking executive of AOL had already warned about the matter, but the response was not sufficient to take action. Before the deal, AOL shares were worth $90, but one year after the deal they were only $50.

Steve Case, first AOL Time Warner CEO, is a former technology reporter for Washington Post, and he headed AOL after eight working years, with AOL only in business for 15 years. Initially, AOL was only an online video-game provider, and compared to Time Warner, five times older than AOL, its products were too few and lacking creativity. Some people at Time Warner undermined Bob Pitchman from AOL, since they doubted his creativity in leading a company that had long depended on this quality.

Gerry Levin had an optimistic plan for a television revolution, believing that television would be used to play interactive games, for film on demand, shopping and so on. The idea was great but misguided, as the world was looking instead to the brave new world of the Internet.

The moral of the story is similar to that found in the Greek tale of Icarus, who arrogantly flew to close to the sun and then came crashing to earth. Swisher offers 13 ways for AOL to fix itself after the debacle, but a lot of damage has been done already. One of the casualties was Case, who resigned from his post in May 2003.

What should have been a happy, sure-thing tale ended up as a confounding tragedy.