AOL: Just a cog in big media's wheel

Old media officially took control of new media within the world's largest media company Wednesday, when CEO Gerald Levin unexpectedly announced his retirement. By selecting former Time Warner executive Parsons as his successor less than a year after the AOL-Time Warner merger, Levin disproved many assumptions about the direction of a company conceived at the height of dot-com power--and about the role of the Internet in creating a brave new world of media. Essentially, the establishment neutralized the revolution.

"In its role in a diversified media company, the Internet has a place as does any other medium," said Mark Mooradian, an analyst at Jupiter Media Metrix, commenting on the significance of the power transfer. "The Internet is simply another one."

Since regulators signed off on the merger in January, the prestige of online media has fallen dramatically, a factor that may have helped Levin consolidate his control of the company even as he failed to meet its ambitious growth predictions amid a sharp economic downturn.

Parsons, co-chief operating officer of AOL Time Warner and formerly president of Time Warner, will take the helm in May 2002 when Levin steps down. Robert Pittman, the star America Online executive who serves as the co-COO with Parsons, will become the sole COO of the company, reporting to Parsons.

AOL Time Warner executives did not return requests for comment.

In an interview Wednesday on CNN, Levin said he endorsed the team of Parsons and Pittman as being fit and able to run the company. Nevertheless, the decision to pick Parsons as CEO came as a surprise, given that most people inside and outside the company assumed the AOL side, in other words Pittman, would take charge once Levin retired.

Although Levin's decision was a surprise to people in the company and on Wall Street, it was greeted passively. Shares of AOL Time Warner have remained nearly flat, rising a fraction Wednesday and closing down merely 3 percent, at $34.75, Thursday.

"The market is not upset at this move," said David Joyce, an equity analyst at Guzman & Company. "It's essentially the same AOL and Time Warner combination."

Morning after the revolution
When AOL announced its intention to acquire Time Warner in January 2000, industry pundits expected the legion of young, scrappy AOL executives to clean house. At their disposal was the world's largest library of copyrights in the form of music, movies and animated characters. AOL also gained the nation's second largest cable TV service; the nation's largest magazine publisher; and well-known TV networks such as CNN, the WB and The Cartoon Network.

Running these Time Warner divisions were members of the old establishment, and some entrenched people were the first to go, including investment head and former Time Warner Chief Financial Officer Richard Bressler. AOL executives filled in the top ranks of the combined company, taking on positions such as CFO.

Meanwhile, several executive vice presidents began conducting marketing efforts between divisions. The idea was to find ways for Time Warner's properties, such as Warner Bros., Warner Music Group and its broadcast networks, to promote their products through AOL's Internet channels.

But the disconnect became more apparent between the two cultures. Operating a media company the size of Time Warner requires the respect of franchises and the sacredness of intellectual property. That contrasted with the AOL attitude that new interactive opportunities could be created on the backs of institutions such as Time magazine, Bugs Bunny and Madonna.

In an interview with CNET News.com in May, Parsons said the cultural rift between the two sides was lessening, but still there.

"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," Parsons said. "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.'"

In a sense, the gung-ho sentiment brought by AOL was being consumed by the longstanding ideals of Time Warner. This began to show in the company's personnel.

Last month, CFO J. Michael Kelly, a long-time AOL employee, shifted roles to become COO of America Online. In his place, Levin named Wayne Pace, a veteran of Time Warner's Turner Broadcasting. AOL Time Warner denied that the move was a demotion for Kelly.

Just another division
There is no doubt that AOL Time Warner is being viewed by Wall Street as a media stock, along the same vein as Walt Disney, Viacom, News Corp., Vivendi Universal and USA Networks. When the AOL-Time Warner deal was announced at the height of the Internet boom, AOL's stock price dropped nearly 10 percent out of concern the company would be valued on Old Economy terms and lessen its ability to garner an Internet valuation. =""> In a sense, the grandiose notion of the Internet completely transforming traditional media has been tempered by the reality of daily budgets and short-term revenue projections.

At the same time, in the past year investors and analysts have begun to question AOL's billing as the company's crown jewel. Although the Internet division generates more revenue than any other unit, reporting $2.2 billion last quarter, Wall Street has expressed concern about AOL's future.

The division's advertising revenue growth slowed dramatically to 5 percent in the third quarter from 26 percent the previous quarter. Long buttressed by its ability to strike multimillion dollar, multiyear deals with advertisers, AOL is scrambling to offset the decline in ad sales.

In addition, despite AOL having the largest number of subscribers in the world--32 million as of Nov. 26--analysts are concerned about slower subscriber growth. Subscriptions and advertising are AOL's bread and butter. But recent hard times have transformed the division into AOL Time Warner's latest headache.

AOL Time Warner executives remain upbeat about the prospects of the Internet and continue to believe in the medium's ability to boost business. In an interview Thursday on CNBC, Pittman said AOL's ability to bundle new services into existing subscriptions could boost spending on AOL Time Warner products in the household. The AOL service has started to offer cable access in Time Warner markets and plans to launch a subscription-based online music service shortly.

"If we can deliver all those services, we can take $150 out of the home," Pittman said.

The company also is turning to a new growth prospect: Harry Potter. The film "Harry Potter and the Sorcerer's Stone" has topped $200 million in box office sales and is expected to be a runaway franchise on the level of "Star Wars" or "Batman." Meanwhile, AOL Time Warner's New Line Cinema is due to release the first installment of "Lord of the Rings," a movie trilogy that will offer the company hefty returns as well over the next three years.

AOL has also pursued a competitive bid for AT&T's cable business, a move that would turn the company into the nation's largest cable operator by an enormous margin.

No turning back
Despite the changes of AOL's fortunes over the past year, its effect on Time Warner cannot be overlooked. The Internet has become central to the combined company's thinking, from creating ways to market movies on AOL to the interactive look and feel of CNN's revamped Headline News channel.

AOL's acquisition also provided a massive distribution system for Time Warner's Web properties. Time magazine and CNN, for instance, are featured prominently on AOL's welcome screen. Executives also say AOL has helped entertainment divisions launch new movies and recording artists and has driven people to high-speed Internet access through Time Warner Cable.

Up to now, Time Warner's Internet strategy was a series of highly publicized failures, ranging from the shuttering of its Pathfinder Web portal to the hyped initiative to develop a series of Web hubs, hubs that never launched.

"Finally, Time Warner came up with an Internet strategy by allowing an Internet company to buy it," Terry Semel, former co-chairman of Warner Bros. and current CEO of Yahoo, said last month.

The reality is that the Internet did not kill any other medium as many pundits and Web executives prophesized. Radio continues to be a highly profitable business, as do television and print. Rather, the Internet has found a home among its mass medium brethren and will be subject to the same cycles of ups and downs, requiring seasoned managers to oversee it all.

The lesson, according to Adam Klein, lead partner of the media and entertainment practice of Booz-Allen Hamilton, is that big media will continue to get bigger while smaller "niche" players will continue to exist.

"But," he said "anyone in the middle will get squashed."