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The old school treatment for AOL

Time Warner's Don Logan wasn't originally thrilled about the megamerger with America Online. But now that the online service is under his wing, he's finding ways to make things work.

Listening to Don Logan, it's easy to forget that barely a year ago, investors were ready to storm the gates of AOL Time Warner's Rockefeller Center headquarters to protest one of the greatest corporate failures in history.

These days, life at Time Warner (note the name change) is getting back to normal. The media giant surprised Wall Street last week, when it reported earnings that far surpassed expectations. Its debt no longer flirts near junk bond levels, and most of its businesses are growing at a healthy rate.

And then there's America Online. Despite showing solid gains last quarter, the division still struggles from losses in its premium dial-up service and is still losing online advertising dollars.

Logan, who splits the responsibility of running Time Warner's business divisions with Jeffrey Bewkes, is charged with turning around AOL. While other high-profile businesses such as Time Warner Cable also fall under his wing, Logan's tenure will be marked by whether AOL can regain its former glory or ultimately opt to dump the business. Time Warner says it plans to keep AOL--at least for now.

Analytical, empirical and no-nonsense, Logan exemplifies an executive pedigree that was once written off as "old school" during the Internet boom. Instead, the Alabama native employs a measured approach, combined with a Southern sensibility, to manage his businesses.

In Time Warner's new Columbus Circle home overlooking Central Park, Logan expounded on his outlook of the company a day after AOL announced a distribution deal with Road Runner, ending years of intercompany gridlock over how to work together.

Up until yesterday, it seemed as if the Road Runner side and the AOL side were barely on speaking terms. And all of a sudden, out comes this deal.
As it was trying to migrate into broadband, AOL had a strategic issue to deal with. On the narrowband side, it had provided access.

Personally, I believe that AOL is going to continue to grow over the next several years.
AOL had a relationship with the customer, and when it looked at its plans going forward, that's the way it wanted to operate in the broadband world. It was looking at broadband in the same way it ran its business on narrowband.

The fact of the matter is that with broadband, AOL doesn't have that same control. The phone companies control it, the cable companies control it, it's their wires, it's their pipes. They're going to want to do different things. They're going to want to own the consumer relationship and the ability to package their overall services. It's not just about high speed to them.

For us, to work out a deal with our own cable system, the strategic standpoint that you had to deal with is that our cable company only covers about 20 percent of this country. Other than speed, there are really no products and services that utilized broadband capacity. Just being able to do e-mail faster is not really exciting from a broadband standpoint. So, the first thing was to create a product; a suite of services.

As in AOL for Broadband?
Yes. And as we did that, we then figured out how to align our interests with cable. Not just Road Runner but all cable systems and DSL (digital subscriber line) providers. We have something to offer them, and they have something to offer us. It's a win-win.

Do you expect to do similar deals with other cable companies?
We expect to be doing other deals with MSOs (multiservice operators) and phone companies, yes. Once we made a decision that we didn't have to own the customer relationship, it allowed us to take an approach where we could work with everybody in a similar way.

Why would any other cable company want to do a deal with AOL?
They should.

Why?
Because we're going to put content out there on their services that they're going have to buy, pay for or build somewhere else. Because the AOL brand already has value and resonates with consumers. So I think: Why wouldn't you?

And then, on the bounty side, we can help drive connections back to them. If you're in Comcast territory, and someone wants to migrate to broadband, we can arrange for them to get broadband services from Comcast. We drive customers to them, and they don't have to spend their marketing dollars.

At the same time, you've been building up this AOL for Broadband product, and suddenly, you started to push content out to AOL.com and future plans with Netscape.com. What's going on there?
We want a customer relationship with as many people as we can possibly have.

We peaked in 2001, and most of the deals were long-term deals that weren't sustainable. So we had to wash all that out of the system.
The business we were in--and the reason why Wall Street questioned our growth prospects--was because the premium narrowband business was declining. People either migrated off to broadband or were going to these low-cost ISPs (Internet service providers). What we had was a declining narrowband business that we were always trying to protect. Before the change in strategy, we were afraid to offer anything else.

There are a lot of people who don't want AOL for connectivity. We want to do more with them. If you look at areas of growth on the Web, it's primarily coming from customer touches, advertisers and search. We want to maintain a large customer base and as large a customer touch point as we can.

Last quarter, you said you expect to see a growth in advertising this year, much of that coming from search. Google gave you guys $200 million in revenue in 2003. Is part of reason why you want to make a greater push on the Web to give the Google relationship a wider scope?
It's not Google, because Google will not be the majority of the advertising that we carry in the reported advertising number at the end of the year. CPM (cost per thousand, or impression)-based advertising is important to us. I said advertising is going to grow, overall. Search is a part of that. But our overall underlying advertising base is growing as well. The reason why it was hard to see that trend for a while was because we had long-term deals burning off, and they fell out of the system. We peaked in 2001, and most of the deals were long-term deals that weren't sustainable. So we had to wash all that out of the system.

But advertising has turned. We want as much inventory as we can possibly get to tap into this growing market, because we do have this rising tide in the market now. Advertisers are looking at the Internet more closely. And we need to serve them with as broad an audience as we possibly can, with as diverse an array of products as we can.

Does it make sense for Time Warner to keep AOL as a business in its family?
It makes sense if AOL can develop a sustainable business model that allows it to grow comparable to our other businesses, or greater, over a long period of time. I say that because if you asked me if we should stay in the publishing business, I'd give you the same answer. I think the publishing business is wonderful, and I think it has many opportunities ahead. I think it's important to continue to look at our mix of assets as a company. We sold music this year because of that reason. We sold music because, if you looked out in the future, it was hard to see how we were going to sustain the growth rate that we needed for the growth of our company overall.

Personally, I believe that AOL is going to continue to grow over the next several years. And that's the question that everyone's been asking, because we've been dropping subscribers until this year. We said we bottomed out last year. You have to remember that a significant amount of the advertising that was driven by the Internet bubble went away. It's impossible to pick up the bottom line and move forward. Everyone was focused solely on that. There were other good things happening, however. In Europe, for example, three years ago, it lost $600 million, and it broke even last year. It was a huge swing, and it's profitable right now.

So there are a lot of good things happening with AOL, and we think we have the pieces in place now. We think we have options for growth going forward. I think everyone's looking for proof points. We're trying to restore our credibility and demonstrate that the narrowband business isn't going to disappear as fast as people thought and that there are strategies that have opened the door to allow us to grow in directions that they were unable to do five years ago.

Once the investigation by the Securities and Exchange Commission is resolved, will you pursue an initial public offering for Time Warner Cable?
If we do it, it will be done for strategic reason as opposed to when we first started taking about it--when we needed money. Remember, we had a few acquisitions, and our debt was getting up to a point where we were concerned about our ratings. We didn't want to get to the point where there weren't choices except to have the cable company go public to deal with our debt issue. We don't have that right now. Our debt is way down--we are way below the target we set for the end of the year already--and we're generating a tremendous amount of free cash flow over the course of the year.

We have the capacity to do things without an IPO, even expanding our footprint, if we choose to. The reason you would do an IPO is because it makes good strategic sense, and you believe it would benefit your shareholders.

So does it make strategic sense right now?
You can debate it both ways. I'm not sure where we're going to come out on. As you said, we first got to get the SEC thing behind us. There are pros and cons right now.

Do you see yourself in this role five years from now?
I don't know. I don't know how the company will be structured or organized. You take it as it comes. I like what I'm doing, and I enjoy the people. I enjoy working with Dick (Parsons, CEO of Time Warner) and Jeff. It's a good team. I think we made a lot progress. I think the company has a lot more credibility than it did a couple years ago. I think we restored the trust of our shareholders. We got to demonstrate growth, and we're going to do that.