Why the Web can't remain free

It's rare to hear anyone utter a disparaging word about Richard Parsons, AOL Time Warner's co-chief operating officer.

Perhaps that's why AOL Time Warner CEO Gerald Levin has gone to Parsons since 1995 whenever somebody's feathers have been ruffled. The towering, bearded executive was at Levin's side as Time Warner's president and still remains one of Levin's most trusted confidants. Parsons' effect has been felt behind the scenes--cooling disputes between divisions, mollifying conflicts with competitors, and breaking stalled negotiations for high-profile deals.

In the aftermath of AOL's acquisition of Time Warner, Parsons has emerged in control of the company's coveted intellectual property vault. This includes management of all businesses involving film, music and book publishing.

While Parsons' current job is certainly far-reaching (AOL Time Warner is the world's largest copyright owner), he sits behind the glare of a more radiant star: Co-COO Bob Pittman. Chatter in the media and on Wall Street says Pittman is a shoe-in as Levin's successor. This speculation has raised questions about Parsons' future and more questions about who is really calling the shots on a day-to-day basis.

Nevertheless, Parsons is perhaps one of the few media executives who has more friends than detractors among peers and competitors. And on May 2, Parsons was appointed by President George W. Bush to co-chair a committee to overhaul the Social Security system; he held a previous position with the Ford administration from 1975 to 1977. Even with the appointment, Parsons insists that AOL Time Warner will remain his day job and that his public service roles will be secondary.

On the same day as his assignment from Bush, CNET News.com met with Parsons in his office on the 29th floor of AOL Time Warner's Rockefeller Center headquarters in New York. Overlooking midtown Manhattan, he discussed his thoughts on where the Internet is headed, the necessity of defending copyrights, and the culture changes within the company since AOL and Time Warner became one.

Q: As we've seen over the past few years, a lot of Internet media companies and Internet content companies have been developed, and some media companies have tried to develop Internet content companies. Most of these initiatives have flopped. Look at entertainment with the Digital Entertainment Network--that didn't happen. Music--Napster got into its legal issues. Does the Internet make or destroy businesses in this age, especially for a business such as AOL Time Warner?
A: That's a good question. I think the answer is: It will in the fullness of time. My own read on the situation is that one of the reasons why you're seeing a lot of the air going out of the dot-com balloon right now is that the technology is there, and people can envision the things you can do with the technology. And (technology companies) got out in front of where consumers are and where the infrastructure is.

By that I mean, just because you can watch a movie on your PC doesn't mean people will do that. Just because you can do digital animation and Flash technology animation and create interesting interactive content for the PC platform doesn't mean people are going to watch it there. Human habit patterns change much more slowly than technology does.

The other observation that I'd make is that the infrastructure is not there. For a lot of the things the technology will enable, broadband is going to have to be pretty ubiquitous. And the reason why Napster has found a real following is because music is one of the forms of content that can be delivered digitally without too much bandwidth. But when you get into full-motion video, you're going to have to have a far more ubiquitous availability of broadband infrastructure to make it consumer-friendly and appealing.

So I think that there was a lot of hype based on people understanding what the technology would enable, but the marketplace wasn't ready for a lot of this stuff yet, and the infrastructure necessary to deliver it in an appealing way wasn't there. In the fullness of time, your generation will supplant my generation as the major consumers, and the infrastructure will be in place, and I think it will fundamentally transform the way many businesses are done.

At the same time, many people have tried to make money off of content on the Web, and nobody has been able to do that. One media executive said that with content on the Web, "trash is trash," and that nobody is going to buy into it. AOL Time Warner is the largest content owner in the entire world; what's the meeting point there?
Well, let's start with music. We clearly believe that digital distribution of music, either in streaming form or--more likely in my judgment--downloading, is going to transform the way a significant part of the marketplace purchases and consumes music. We announced this thing called MusicNet the other day, and what got lost in the announcement is that we and RealNetworks had formed MusicNet a year ago. What MusicNet will be is a business-to-business application where it has all the relationships with the music companies and access to all the music. Then it can sell that on a wholesale basis to AOL, for example. AOL can brand it and can present it and charge for it in a way that is consistent with their business plan and their business model and their customers' desires.

I think that's an area where it does come together and where a real business model can be created that results at the end of the day in people making a profit. The problem with so many of the (dot-com) models is they used spurious metrics, like how many eyeballs are you capturing. But at the end of the day, if you're not making money and you can't give your investors a return on the capital that they invested, it dries up. And without capital you can't run a business.

It's interesting what you're saying about these spurious metrics. What's your viewpoint of how these big Web portals were buying up so-called real estate back in the day?
Well, I don't want to be seen as trashing anybody. But I will tell you, as Time Warner we looked at most of the business plans of most of the major portals that you would be familiar with out there. And we scratched our heads and said, "Guys, when do you actually start making money with this?" It seemed like the game plan was to just capture eyeballs and, in a sense, share of mind. But there was no way that that got translated into share of wallet because it is not an advertising medium yet.

They were using the words "The broadcast networks model," where the sole source of revenue is advertising. But it ain't TV. It can be and will be I think a very dynamic and appealing advertising platform in the fullness of time. But what you're going to need is something that competes with television commercials, but has the added advantage of interactivity. But we aren't there yet. We don't have the infrastructure, nor do consumers look to that to make their judgments about what kind of car to buy and what kind of soap suds to buy. They watch TV.

So we never believed in the advertising-only business model, at least in this time frame. And one of the reasons why AOL was such an attractive merger partner for us is because it's a two-revenue-stream business where the backbone of their business is subscription revenue.

Do you think the Web can remain free?
No. No, I don't think so. Not if it's to achieve or realize its ultimate destiny as the global interactive marketplace that it can be.

If we could go back to MusicNet, what indications out there point to the fact that a music subscription service can work? What fuels your confidence?
What fuels our confidence is that we've seen--and I'll use Napster because it's the best example--that millions and millions of consumers are both able and interested in accessing music content online. It shouldn't be a surprise. First of all, the music can be delivered in a virtually perfect form, so there's no degradation of product.

Second, it's convenient and easy. We've done studies about why do people who go to record stores leave without making a purchase. About 22 percent leave without purchasing something. Half of that 22 percent leave because they couldn't find what they were looking for. It was actually there, they just couldn't find it. For the other half, the store was out of stock. You're missing 20 percent of your market. You can solve both of those problems online.

We think the online opportunity not only is much more efficient in the point of view that it's always in stock somewhere online and you can always find it. And we'll expand the marketplace--bring people who normally don't go to those places where you buy records back in the marketplace.

At the same time, you've been a staunch defender of copyrights. The future of Time Warner as the largest copyright holder in the world is tied very closely with a medium that has traditionally not followed the norms of copyright protection.
You're talking about the Internet?

Yes.
Well, every new technological development creates the opportunity for someone to work around pre-existing paradigms and rules. So, for example, when somebody created the phonograph and records, it was an opportunity to sort of potentially capture and pirate live recordings. One way you could be sure you got paid if you were a musician was to say, "The only place you can hear it is if you come to my place and I'm going to charge you." Somebody can then record that and sell it and not pay you for it--you could be pirated.

So the laws have to change and the marketplace has to enforce rules that enable the system to continue to work. All we are saying in the Napster case is it's what Napster is doing that's the odious thing in the sense that they're not playing by the rules. They're abrogating people's rights. In our MusicNet deal, we said we would license Napster or we would allow MusicNet to license Napster provided that Napster could come up with a system that protected the rights of the copyright holders and was legitimate, and enabled the owners of the property to get paid for its use. That's all.

So the rallying cry on behalf of copyright owners has not been that digital technology is bad. Somebody is going to develop a legitimate digital delivery system that respects the rights of copyright owners, and then it's a big win for us.

How's the "Bob (Pittman) and Dick (Parsons) Show" coming along?
I think pretty well. You know, Bob used to work here before. I knew Bob before he left to go and run some other ventures, Century 21 and then AOL. First of all, I think Bob is very happy to be back. While he is a new-media guy...his start and his roots, and his real cultural orientation, has been in the old-media world at Time Warner. The good news is he and I are fundamentally oriented towards the same things. We just want to collectively win. We want to create value for shareholders. We want people to (react) when you say, "AOL Time Warner," to go like this: "Wow, man, that company is slammin'."

One executive in the company said in terms of (AOL Time Warner CEO) Gerald Levin's succession plans, "It's Bob's to have and Bob's to lose." It seems like a future has been pointed out for him. Where do you see your future at this company, and would you want to be CEO?
I mean, first of all, who wouldn't want to be CEO of AOL Time Warner? But I'm not fixated on it, and at the moment I'm not concerned about it. I've worked with Jerry as his right-hand guy for half a dozen years now, and my sense of Jerry Levin is that there's still life in them there bones. I don't think Jerry's planning to go anywhere.

I know the press loves to play this game of who's up, who's down, the "Jerry-o-meter" and all that sort of stuff. But I actually don't spend a lot of time reading the press; I have too many things to do. So I don't worry about it. I'm not fixated on it. I'll say this: There are any number of people in this company who are not only qualified to run AOL Time Warner, I would argue they are more qualified than I.

In terms of corporate culture--
I'm the best-looking, though.

Oh, right.
But there's a real talent in this company. And Bob is one of them. Bob is a very talented guy. (HBO CEO) Jeff Bewkes is a very talented guy.

I'm wondering what sort of cultural changes you've noticed since the merger. Has Time Warner changed a lot?
Well, certainly there's more impetus for change and there are differences between the two cultures. To start with, the most obvious: As a group (AOL is) younger. They skew younger than we do as a group. (Time Warner) has been around, been in business and (is) probably a little more diverse in terms of background and experience. They tend to be younger and tend to be more focused in background and experience in new-media arenas.

To me, one of the interesting things is they bring a kind of no-fear attitude and approach. Because, frankly, they've only known success. It's all been pretty much an uphill glide. Things are going up and up and getting better. Whereas many of us have our share of things going up but we have endured things going down, and that makes you more cautious. That kind of no-fear, let's-go-get-it attitude I think that AOL brings is interesting. And needed.

What the AOL-ers have to understand, and are beginning to understand, is that when they did the merger with Time Warner, now they're a big--huge, in fact--company with real assets and real businesses. They've got something to lose, so you can't approach everything with the point of view of, "Well, if this doesn't work we'll just change it and go in a 180-degree opposite direction tomorrow." And what the Time Warner-ites have to gain is both a little more of that no-fear and some of that kind of joie de vivre that AOL brings. (That's) what we actually needed in our culture. So I actually think it's a good mix and blend. And I'm very optimistic about the future of the company.

People describe you as a statesman, a the guy who smoothes things over. Is that the type of attitude that is needed in this company?
I think it helps, but you need some china breakers. And you need some people who can figure out how to harness that energy and imagination and creation and make the gears work. Part of my role is to be a flywheel in the organization. Now, that doesn't happen overnight, by the way. Anybody who thought we'd be able to pull this off without any speed bumps along the way, that's just not reality. But I think my own assessment is we're farther ahead and things are going better than I would have anticipated. And I thought they were going to go OK. But things are going better than OK.

Looking back at the government scrutiny that was involved in the merger review, what were some of your thoughts in retrospect? Should government play such a role in future deals?
In theory, the government should only intervene where you cannot rely on competition in the marketplace to produce a result that benefits consumers. If you're dealing with highly monopolistic areas where there's no choice, then the government should intervene to make sure there's tension in the system from the consumer's perspective. But if there's competition, theoretically in our free-market economy that competition should be the leveler and make sure consumers get the fair shake.

I think, however, that the government and those who are put in positions of authority and power get confused about what their job is, and they think their job is to substitute their judgment for the marketplace, as opposed to letting the marketplace work. I think it's just gotten harder and harder to do transactions, and I knew this was going to be a tough one to work through. It turned out to be a very tough one, but we got there at the end of the day.

You're doing this new initiative with the Bush administration. It seems in the past there've been reports about you keeping a close eye on the public sector as well. Tell me more about your role in this entire initiative. Will it affect your role at AOL Time Warner?
It obviously is going to place some time burdens for the next six months or the next eight months, or for however long it takes us to complete it. This is a supplemental activity. I still have my day job, so to speak. This is the kind of thing for me that is ideal because I enjoy what I'm doing at this company, and this is a very interesting time to be at this company. To leave to go back into public service isn't where my head is at, but if I can do a few things like help move the needle in discrete areas like Social Security, I'm glad to help out.