Pittman's rescue mission for AOL

AOL Time Warner's co-COO is back in his old office in Virginia as he splits his time between pulling the online unit out of a slump and guarding his operations role.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
6 min read
Bob Pittman is back.

Literally. Last Friday, AOL Time Warner's co-COO reclaimed the same fifth-floor corner office in northern Virginia that he left just over a year ago when, riding high as a key architect of America Online's stunning buyout of Time Warner, he moved to New York City's Rockefeller Center.

You could call it a homecoming. But it's not a happy one for Pittman, who last week took the reins of AOL from its former head, Barry Schuler. Since Pittman joined AOL Time Warner's upper ranks last year, the division has seen declining advertising revenue and sagging subscriber growth, troubles that have made it a focal point for investor concerns about the deal. AOL Time Warner stock is now trading at 52-week lows, prices that have stripped away two-thirds of the value of the two companies when the merger was announced in January 2000.

Pittman, who is credited with fixing AOL once before, has been re-enlisted to work his magic a second time. By many accounts, the assignment will be a crucial test not only of his skills but also of the AOL Time Warner deal itself.

"If (AOL) isn't perceived in six months as a turnaround, then this merger will be seen as a failure," said one former AOL executive speaking on the condition of anonymity.

A source at AOL agreed, adding that Pittman "is on the hook."

What a difference a year makes. When the historic $106 billion merger between AOL and Time Warner closed, Pittman, AOL CEO Steve Case and AOL CFO J. Michael Kelly ascended into the executive suites at Time Warner's headquarters as conquering heroes. They would share power with Time Warner's Gerald Levin, appointed as the combined company's chief executive, and Richard Parsons, who stepped in as co-COO alongside Pittman.

But the message was clear: The AOL crew had arrived as the shock troops of the new media elite, charged with blowing out the cobwebs and transforming an Old Economy empire of magazines, films, broadcast networks, record labels and cable networks into an interactive powerhouse.

Today, it is the Time Warner side that appears to be in ascension. While Case remains as AOL Time Warner's chairman, he is maintaining a low profile at the company. Parsons is preparing to inherit the CEO position from Levin, a role that many had once assumed would go to Pittman. And Kelly has been pushed out as AOL Time Warner's financial chief to serve as the AOL division's COO.

One key question that remains unanswered by the shuffling is how Pittman will carry on his role as sole COO of AOL Time Warner once Levin officially steps down in May. Pittman, described by Parsons as the "operations guy," has direct responsibility over all AOL Time Warner divisions. Furthermore, Pittman was expected to play a critical role in implementing Parsons' mandate that AOL Time Warner divisions work for the good of the whole instead of just their own businesses.

Sources close to AOL said Pittman will spend most of his time at the company's Dulles, Va., headquarters. Whatever time is left will be spent in New York filling a position that's a full-time job in its own right.

Regardless of the actual time split between the two jobs, analysts wonder whether Pittman will be stretched too thin.

"An organization of that size, you need a CEO and you need a COO," said David Simons, managing director of Digital Video Investments, an investor research firm. "The whole raison d'etre (of the deal) was 'synergy,' which has yet to occur apart from units buying ad space from each other."

Pittman declined to be interviewed for this story. Through a representative, AOL Time Warner insisted that the reshuffling does not portend a diminishment in Pittman's role. "Bob knows the AOL business inside and out. He'll handle both jobs with the skilled leadership and operational insight he's known for," the representative said.

Tying it all together
In the case of AOL Time Warner, "synergy" means weaving AOL's Internet dominance throughout its other film, publishing and TV divisions, and vice versa. For now, the company has been light on evidence that the crossover is working, although it may be too soon to dismiss the odds for long-term success.

Examples of synergy so far can be seen on many of AOL's online services such as CompuServe and Netscape.com, where Time Warner companies supply the lion's share of content.

Other areas of synergy have seemingly delivered only momentary gains. The company early on touted a marketing blitz that allowed it to hawk AOL's ubiquitous CD-ROMs to subscribers of Time, Fortune and other publications. But there are signs that such cross-promotions may be losing steam. AOL's subscribers now top 34 million, including nonpaying members on free trial offers. But the rate of growth has slipped in recent months; it took the company 74 days to add its most recent million members compared with just 35 days for the previous million.

Meanwhile, AOL is being challenged on the broadband front. While it owns the nation's second-largest cable network, it has struggled to distribute high-speed AOL on rival cable services. The company maintains that dial-up is its primary business, adding that consumers will move gradually to broadband services.

"We've always said that consumer's move to broadband will be evolutionary, not revolutionary," an AOL representative said.

However, Wall Street is itching for more progress from AOL's broadband service. Investors are waiting anxiously for the company's first-quarter earnings report April 24 to reveal any further signs of distress. Among other things, the company has announced that it will absorb a $54 billion noncash charge, a record amount for such a write-off from any company.

Even though AOL is drawing most of Wall Street's fire, it remains a cash cow for the company. The AOL unit in 2001 generated $2.9 billion in earnings before interest, taxes, depreciation and amortization (EBITDA), making it the second-most lucrative division in the company behind Time Warner Cable.

Meanwhile, most of AOL Time Warner's "traditional" divisions remain giants in their league. The film division is still feeling the afterglow of a blockbuster holiday season with the international success of its Harry Potter and Lord of the Rings franchises; Time Inc. remains the world's largest magazine publisher, and Time Warner Cable continues to be immensely profitable.

Back to Dulles
AOL employees have greeted Pittman's return enthusiastically, less for the warmth of his personality than his operational know-how.

He's not the type of manager who strolls the hallways and high-fives his staff members. Former employees said he was rarely seen outside the fifth-floor executive offices during his previous years as president.

Steve Case was "the only person who we had a close identification with," said one former AOL executive who wished to remain anonymous. "Pittman was the guy who was brought in from the outside to kick ass."

Indeed, Pittman's tenure at AOL coincided with an uninterrupted growth spurt that turned the company into a behemoth capable of swallowing Time Warner.

Since then, the market has changed dramatically, however, and he likely will need to invent a new game plan to get the company back on track.

Previously Pittman scored easy dot-com money by leasing out areas of AOL to start-ups oozing with venture capital funding. These advertising and e-commerce deals, many inked for tens of millions of dollars over a two- to five-year period, provided profitability on top of AOL's standard subscription revenue.

The collapse of the Internet bubble quickly showed how difficult it would be for companies to attract more stable advertisers. Just like Yahoo, which saw its revenue plummet between 2000 and 2001, the ground beneath AOL started crumbling last year. And like Yahoo, AOL hasn't been able to find other advertisers to make up for the failures among its biggest clients.

Complicating matters, consumers are increasingly showing signs of impatience with AOL's hard-sell tactics. The company was recently hit with a class-action lawsuit alleging that members were improperly billed for merchandise hawked in pop-up advertisements that they never ordered.

Now, the inheritors of AOL are taking a step back to figure out what works and eliminate what doesn't.

"What we're doing this year is retooling the whole AOL ad-commerce machine to make sure we're offering more conventional advertisers more compelling type of product than we were in '98, '99 and 2000," Parsons said in a January interview.

Now, some analysts say, the question is not only whether Pittman can deliver better numbers for AOL, but also whether he can create enough room for himself to maneuver his way back to New York full-time.

"My way of thinking is there's another organizational shoe to drop," said Digital Video Investments' Simons. "He won't get a co-COO (at AOL Time Warner), but my guess is they'll create some new position that will fill that role. They'll do it in a way that says Pittman isn't being forced out."