Don't Expect New Chairman To Change Everything at AOL TW

Even before Case quit, Richard Parsons was on top already running the show

Anyone waiting for momentous shifts at AOL Time Warner spurred by the exit of Steve Case and the crowning of Richard Parsons as chairman and CEO is probably in for a disappointment. Case's exit is less substantive then all the hoopla it generated.

Certainly, Case's decision to resign as AOL's chairman is a surrender to months of pressure caused by AOL's financial decline and accounting scandals. And, just as certainly, upping Parsons from president and CEO to chairman and CEO, as the board decided last week, signals that AOL's board wants to maintain what little stability they've been able to establish in recent months.

But Case's exit, announced Jan. 12, is most significant as a symbol of the end of the Internet Era (as if anyone needs another reminder). Industry and Wall Street executives say that, when it comes to operating and restructuring the company, Case had pretty much abdicated authority to Parsons long ago, when CEO Jerry Levin fled and Case's onetime heir apparent Bob Pittman was squeezed out.

Parsons already had the authority of CEO, meaning that all division executives reported to him and he got to reorganize the company as he saw fit. That meant squeezing out the most powerful of Case and Pittman's AOL executives and putting in his own people. Parsons has been leading talks with Comcast Corp. over the pending spinoff of Time Warner Cable, a byproduct of the unwinding of Comcast and AOL's Time Warner Entertainment Partnership. Time Warner executives said Case hasn't been particularly clashing with Parsons.

'Cleaning up'

"I don't think it makes one bit of difference in the operation of the company," said Sanford Bernstein & Co. media analyst Tom Wolzien. "This is more cleaning up the past. They had already set their path for the future."

Another Wall Street executive described Case as "an irritant" to the old Time Warner executives and investors, partly because he served as a reminder of AOL's missteps and partly because they still had to worry every time they sought to reverse or repudiate some aspect of AOL's old strategies.

"With Case there, [new online division chief] Jon Miller has to look over his shoulder," the executive said. "It's sort of like when your brother-in-law comes for two days but stays a week. When he finally leaves, it's such a relief to have your house back. The Time Warner guys can walk around in their underwear now."

Parsons, of course, is no less to blame for the failure of AOL's takeover of Time Warner than Case, Levin or Pittman. As president of Time Warner, he supported and helped negotiate the deal. He shared Levin's anxiety that Time Warner lacked an Internet strategy and needed to merge into a dotcom to secure one.

But he failed to recognize that, just weeks after the January 2000 deal was signed, the Internet bubble would pop, and Time Warner could have scooped up all the dotcoms it wanted—including AOL—for pennies on the dollar.

But that wasn't important to AOL's board last Thursday. What's paramount is that its members think Parsons is the guy to turn the company around. The company says that there will be no one replacing Parsons as president. Former HBO CEO Jeff Bewkes will remain chairman of TV and film operations, and former Time Inc. CEO Don Logan will remain chairman of "subscription-based" units: America Online, the Time Inc. magazines and Time Warner Cable.

Parson's mission will start with fixing America Online. Even with the decline of the online unit's advertising revenues (which had been inflated by—at best—misstatement and exaggeration), AOL generated a fat $1 billion in free cash flow last year, according to Morgan Stanley media analyst Richard Bilotti.

But advertising revenues may fall by some counts to as little as $400 million next year (from more than $1 billion), and the subscriber base and accompanying revenues have stalled.

The better news is that Parsons' other mission is to keep on track the Time Warner media businesses. Excepting Warner Music, those properties have generally weathered the recession fairly well, without the kind of disasters seen by media peers like Vivendi and Disney. (And just a day after the board announced Parsons' new title, NBC said it had agreed to a new two-year deal to renew The West Wing
for $6 million to $7 million per episode. That's a nice way to spend your first day on top.)

Parsons' other major task will be finally ending the difficult Time Warner Entertainment venture, which Levin designed in 1993 and struggled to extricate himself from a year later. TWE put 26% of AOL Time Warner's prize assets—Warner Bros. studio, Time Warner Cable and Home Box Office—in someone else's hands. That limited AOL's ability to tap the cash flow from those assets.

That's where the Time Warner Cable IPO comes in. Comcast inherited its TWE interest when it bought AT&T Broadband last year. (AT&T got it when it bought MediaOne Group, which had been spun off from one of TWE's three original investors, US West.) Comcast likes cable systems, so it will relinquish its interest in HBO and Warner Brothers for a larger, liquid stake in a publicly-traded Time Warner Cable.

AOL executives have said that deal is expected to come to the market sometime in the second quarter, a tough moment given the battering that cable stocks have taken in the past year. It also raises the question: If Comcast and AOL are willing to sell stock in the systems when values are so low, how confident are they in the financial prospects of other cable systems?