Time Warner wins the war - Broadcasting & Cable

Time Warner wins the war

With Pittman out and Bewkes and Logan in, AOL execs take a back seat
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When America Online first cut its deal to take over Time Warner a few days into the year 2000, AOL's Bob Pittman lauded the combined company's odd, new management structure that would make him and Time Warner's Dick Parsons co-COOs.

"This is the perfect one-plus-one-equals-three opportunity," Pittman said. "We are the missing pieces of each other's puzzle."

Last week, he learned a different new math: one plus one equals one. And Parsons is the one. Pittman is now missing in action.

Pittman, a one-time president of MTV, is taking the fall for AOL Time Warner's stumbling stock and unfulfilled operating promises. There are certainly plenty of other AOL executives who could share the blame for such things as setting—and, presumably, actually believing—unrealistic financial expectations. From the start, there was limited cooperation among the company's various divisions and leaders, Parsons among them.

But Pittman, who tried to position himself as heir apparent to the CEO slot, is out because Parsons is seen as better-suited to lead AOL out of its mess.

Pittman is direct in a way that the old, powerful executives at the Time Warner divisions found abrasive; Parsons has a firm but solicitous approach that Chairman Steve Case and AOL Time Warner's board decided was best-suited to replace ex-CEO Gerry Levin.

Pittman's directness rescued AOL when he arrived in 1996, bringing some badly needed business discipline with him.

His ouster is accompanied by the elevation of two well-respected veterans from the "old-media" side of the company. HBO Chairman Jeff Bewkes will ascend to a newly created post, chairman of AOL Time Warner's entertainment and networks group. All TV, movie and music units will report to him, including Jamie Kellner's Turner and WB networks.

Paralleling Bewkes is Time Inc. CEO Don Logan, who will become chairman of the new media and communications group, which will include America Online, Time Warner Cable and the magazines.

In short, Time Warner's takeover of AOL is complete.

"All the top people are Time Warner people," said a senior executive at one AOL division. "All this sniping and griping about America Online will stop now they've got their team in. They will pull the rope from one side to get the stock price going again."

It was not, of course, supposed to turn out this way. America Online made its $124 billion play for Time Warner way back when the financial world was still enthralled by the unbridled promise of the Internet. AOL's entrepreneurial culture was supposed to overtake the stuffy folks at Time Warner.

But the acquisition was based on a false premise: fear. Time Warner had some mature giants in media, like Time
magazine, CNN, the Warner Bros. studio and HBO. Levin sold the company because he feared that old media would get marginalized in the bold new world of the Internet.

After futilely scratching for an Internet strategy, though, Levin figured that combining with the strongest Internet aggregator of content and connectivity was the company's best option for growth, and even survival.

That anxiety seems kind of quaint more than two years later amidst the financial wreckage of the Internet, where the content driving the most traffic is pirated Warner Records music and Warner Bros. movies.

The big question is what to do next? The big job of fixing AOL goes to Logan, whomever he hires to run the unit and whomever that executive hires to replace the wave of executives who will doubtless follow Pittman out the door.

Wall Street executives say Parsons is shifting emphasis from driving subscriber growth at any cost to, instead, making sure the company gets maximum profit out of its existing 26 million U.S. subscribers.

That would seem a good place to start, anyway. Morgan Stanley media analysts Rich Bilotti and Mary Meeker estimate that, to sign up each new subscriber last year, AOL spent $505. That's double the $241 new-customer cost two years earlier, and it was expected to balloon past $1,400 next year if not put under control.

Insiders say Parsons has railed over marketing spending and high customer churn, but Pittman saw subscriber growth as the driver of everything else at AOL.

A turnaround in the economy will cure a lot of other ills, notably at the ad-supported TV and magazine businesses. Straightening out the ownership of the Time Warner Entertainment partnership with AT&T could make the company easier for investors to understand and give AOL Time Warner total control of Warner Bros., HBO and Time Warner Cable.

But no one is expecting instant magic, as AOL's $11 stock price shows.

"We view them as merely baby steps," said SG Cowan media analyst Peter Mirsky of the management moves. "In actuality, it appears as if very little has changed. This seems to bring the management structure back to the end of 2001," when Pittman was COO of the subscription businesses and Parsons ran the content operations.

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