There Must Be a Pony in Here Somewhere

by Kara Swisher

  When AOL was just another Internet company, it was easy to write off this kind of superciliousness as the kind of bluster needed in a medium that was struggling into creation. But after the AOL Time Warner merger was announced, the perception and audience changed dramatically—while many AOLers did not. I teased Berlow to behave when I saw him right after the merger was announced. “That word is not in my vocabulary,” quipped Berlow, who bragged to me that he’d sold billions of dollars of ads without having to behave. He then compared his job to a wartime scenario, using a battle metaphor. “I was told to take the hill, so I took the hill,” he said. “And I will keep taking the hill.”

  Another top AOL executive was more regretful of the behavior. “Time Warner people looked at us like Internet snot-noses, and we did not disappoint them,” said the executive. “We should have chilled out, because the behavior did not work anymore, if it ever did.”

  Time Warner was not blameless in this, of course, packed full as it was of people who resisted the ideas AOL brought simply because of the manner in which they were delivered. While one might sympathize with them over the rudeness, Time Warner also had its share of well-known divas and other assorted characters. This was, after all, a company that included fussy recording-industry mandarins, egomaniacal Hollywood movie moguls, grumpy journalists, and, well, Ted Turner.

  While AOL executives could certainly be obnoxious, the complaints about Colburn and Berlow also provided a handy excuse for noncooperation from Time Warner. This resistance, of course, had deep historical roots, given a longtime culture that had not rewarded unification over independence. Its culture, in a way, prohibited companywide collaboration, which was Time Warner’s own version of arrogance.

  “It was all so political and it’s kind of hard to operate when the enemy is within,” said a top AOL executive. “If people think the enemy is within, there is no AOL Time Warner.”

  With little corporate meddling for much of its history, Time Warner’s divisional executives had developed a high regard for their talents and a fierce interest in protecting their power. It seems obvious enough that experienced executives like Time Inc.’s Don Logan were never going to take true direction from someone like Berlow or Colburn, or even Pittman. They had worked long and hard enough that they would be less than welcoming to what they perceived as a foreign intruder. “This was not a company that wanted suggestions from neophytes,” said one Time Warner executive, “especially neophytes with planes.”

  Time Warner executives, almost to a person, denied being uncooperative to me, noting that AOL simply did not understand how cooperation worked at the company. “One could have the impression that we have some reticence or resistance, but that is not true. We cooperate where we must,” said one top executive at Time Warner. “We all wanted to figure out how links would work, but what they proposed was immediately destructive. They called it parochial, but I call it doing our jobs.”

  And, among Time Warner executives, there was also a reluctance to take more risks on the digital technologies that AOL’s team was advocating so intently. Time Warner had already lost big in this arena and was not the most open to the virtues of the Internet’s ability to transform their businesses. In fact, because of past experiences, it had seen only downside to any such forays. Given that those who had succeeded in the Web space had become phenomenally wealthy, Time Warner’s extreme lack of success must have made their executives chafe at any further lecturing by the mouthy AOLers. And as their own stock drifted slowly down from the latest brush with interactive businesses, the situation became untenable. That said, if the stock had remained high, I have no doubt that the arrogance of AOLers might have even come off as downright charming.

  But the stock didn’t stay high. And the culture wars only got nastier and nastier.

  Have It Our Way

  Both the Time Warner ack-acking and the AOL smacking got even worse when AOLers started to seriously delve into each individual Time Warner business and demand changes. Conforming to the dysfunctional pattern, some of their points were, in the long-term scheme of things, correct. But the manner of the message rendered them useless. While company executives were told they still could run their businesses as they saw fit, a pervasive feeling of being forced to do so took over quickly.

  “These are all different cultures, businesses, and structures, and you really have to have an ability to operate differently. You try to make rational connections, but when it is immediately brought to a coercion level and not based on market conditions, it will not work,” said a Time Warner executive who was initially open to more synergies. “How you do it—because it is to the advantage of the company to cooperate—is that you respect the systems and debate the issues, you respect the rule of information and decision-making.” AOLers, many asserted, did none of this.

  AOL was particularly interested in Warner Music, for example, since it wanted to dominate the business of digital delivery of music. Now, with Warner assets, this was an arena where the combined company could show the ability to create important synergies. If AOL and Warner Music could cut through some of the thorny issues that had long separated the technology and entertainment sectors, and make some real progress on legal ways to distribute music online, it would be seen as an important win. The problem was, like most music companies, Warner Music felt under siege because its core business was under relentless attack from the growing phenomenon of free music swapping online.

  Warner Music’s apprehension at working with AOL worsened even before the merger closed, with the mid-2000 release of file-swapping software by an AOL subsidiary called Nullsoft. Nullsoft founder Justin Frankel had developed Gnutella, which helped users search and manage downloadable music files without distinguishing whether they were legal or illegal, much like Napster did. AOL pulled the plug on Gnutella by August, but it certainly sympathized with its function. When I visited AOL and asked a top executive about the yanking of Gnutella and the public declarations against services like Napster, he opened a drawer and tossed me a Napster T-shirt with its winking logo as a gift. “Napster is good,” he whispered. “No matter what we say.”

  Indeed, AOL’s Internet roots were much stronger than its copyright concerns—and its hurry-up attitude clashed immediately with the more wary style of Warner Music. Almost immediately, AOL wanted to use Warner artists on its service, waving aside complex copyright agreements and artist relationships as easy barriers to overcome. Lower-level AOL employees even began relentlessly emailing counterparts at Warner Music about how they were fighting a losing battle with online music, which bothered its executives. At AOL, though, it was perfectly normal for junior employees to challenge the higher-ups.

  “It felt like a piranha attack,” said one Warner music executive. “And it was all designed to help AOL and not us.” Like many at Warner Music, this executive thought it wiser to treat AOL’s service like any other Internet company, and to partner with the best one, rather than giving them special access, despite top company directives to do so. And once again, Warner Music didn’t complain when AOL helped launch new bands, including one called Eden’s Crush, by flacking them hard on the online service’s welcome screen.

  AOL executives were perplexed by Warner Music’s obstinacy and inability to blow apart the business model for the music industry, which had long enjoyed the ability to charge ever-higher prices. But now, as attitudes changed among key customers—young people—as they began to download music for free over services like Napster, AOL executives thought Time Warner should be bold and push for different methods of selling music.

  “Our reach often exceeded our grasp, but at least we had vision,” said one AOL executive charged with making a music deal work. “There are a million excuses to hide behind if you don’t want to do anything, but neither Warner Music or anyone else there ever accepted that if we could crack the code, there might be whole new ways to market.”

  Those at Warner Music scoffed at this idea, noting it was working hard with
companies like Apple Computer and others to solve its critical digital challenge. While AOL talked a good game, the music group employees found the decision-making process in its online music group slow, its management constantly in flux, and its focus more on promotion than commerce. Worst of all, they felt AOL’s technology was clunky and not able to take advantage of fast-moving Web trends. What AOL kept offering, they felt, was no good.

  “They could have been leading the way, like Apple did later,” said one Warner music executive, referring to the computer company’s much praised music-buying service launch in the spring of 2003. “Instead, they offered us nothing that would really help our business.”

  New ways to create, distribute, and market movies was another major focus of Pittman and his crew, one Levin also strongly supported. And, once again, while there was some truth to the AOL executives’ contentions, their know-it-all delivery was deeply flawed. Things immediately got off on the wrong foot after both Steve Case and AOL online service head Barry Schuler lectured Warner Bros. studio executives, including its chairman and CEO Barry Meyer and its president Alan Horn, on how the coming tide of digital filmmaking would sink them if they didn’t change the way they made and sold movies.

  Fights erupted over a range of issues, including AOL’s desire to take over the lucrative Harry Potter Web site for the Warner Studios movie. Warner’s executives argued, much as the music division had done, that it had complex and binding agreements with its artists—in this case, restrictions imposed by Potter author J. K. Rowling—that limited its ability to turn over material to another division. With echoes of the Road Runner debate, the studio won that skirmish after Pittman sided with Warner and garnered lucrative endorsements for the site. This infuriated AOL executives, who felt its online division marketing, which had flacked the movie relentlessly on the AOL site, had been a big help in making the Potter movie a hit when it debuted in the fall. For this, they felt they got nothing.

  And the two divisions would also clash over Warner Bros. marketing in newspapers, a longtime practice that AOL considered expensive and ineffective. Berlow attended a controversial presentation to the Warner executives on the issue, which included an analysis showing how other competing studios did more business and experimentation online with AOL than Warner did. And he and others were aiming at the studio’s reliance on newspapers, which many felt were often vanity buys undertaken mostly to satisfy spoiled stars and directors rather than as effective marketing to get more people to actually go to see movies. Why not, they asked, try to change marketing practices on one movie in one market to see what would happen?

  To the executives at Warner Studios, the presentation felt like a corporate dictate to move those ad dollars to AOL instead. “It was draconian—you do things our way or else,” said one studio executive. “The threat was always hovering that ‘Dulles’ would be unhappy if we did not cooperate.” And yet, despite all the Sturm and Drang, Pittman never pushed hard enough to make anyone do anything and no such changes were actually made. “I bit my hand keeping quiet,” said Berlow. “They claimed we were forcing them and then nothing was ever forced.”

  Other AOLers pointed to this as another example of a companywide lack of vision. “Sure, we were asking for stuff from Time Warner, and maybe we were unreasonable,” said another AOL executive, who agreed with Berlow. “But we were trying to look to the future, which they didn’t seem to do too much of.”

  Time Warner saw it differently. “If a bunch of people with no attention span wants to paint it as resistance, that’s not what it was,” said one Time Warner executive.

  The battles worsened, especially at the division that put up the biggest fight against AOL’s attempted incursions—Time Inc. As the stalwart of the entire Time Warner empire and the most powerful magazine publisher in the United States, the division and its executives were not open to advice about advertising from a northern Virginia start-up. Under the steady leadership of Don Logan, who had reinvigorated the division after years of drift, Time Inc.’s executives and editors did not welcome AOL’s many directives and requests.

  While they were initially pleased when Time Inc. magazines got big circulation boosts from experiments in selling magazine subscriptions online, the executives basically closed down their division to AOL on other issues. So when AOL, for example, pushed immediately to use exclusive photos from Time and other magazines, executives there refused, pointing out that Time didn’t own the images most of the time, so would not turn them over. When AOL made similar requests for special content, Time Inc. executives became exasperated that AOL didn’t understand that it wasn’t there just to help make the online site better.

  But the real clashes centered on attempts by AOL to broker big ad deals through the Ad Council. Charged by Pittman with coordinating large cross-company deals, and headed by his close adviser Mayo Stuntz, the effort was designed to press a range of marketing initiatives across many of AOL Time Warner’s mediums to pull in big advertisers. In addition, Myer Berlow was made president of a closely linked unit called Global Marketing Solutions, which was supposed to streamline the process for advertisers to get these kinds of deals done.

  The idea that AOL Time Warner could provide one-stop shopping with ease garnered resistance from the start, in part because a prior Time Inc. effort at ad cooperation among its magazines ad sales staff, called MaxPlan, had been a disaster. In the experience of Time Inc. ad sales executives, joint ads deals only led to discounting that lost money and forced clients to advertise where they might not want to. Most executives believed that they could get better deals selling ads separately. And figuring out how to share the wealth in a group deal was always an issue no one wanted to contend with.

  “I didn’t find the Time Inc. folks resistant to big-ticket advertising packages, but they were wary because all their experience told them that big-ticket packages almost always resulted in demands for huge discounts,” said Time Inc. Editor-in-Chief Norm Pearlstine. “In addition, they worried that some of the selling strategies associated with these packages made them counterproductive.”

  Still, cross-company ad sales were one of the main promises of the merger, and major deals were needed to prove its worth. Initially, the group did a number of them, such as a $6 million deal with Wrangler jeans to be on AOL, TNT, and also in Sports Illustrated. Others with Toyota, for example, were considered promising. But some deals that were held up as major coups were actually with vendors of AOL Time Warner—such as those with Nortel Networks and WorldCom, neither of which could be described as bold new initiatives.

  Given the sagging economy, the reluctance of the units, and the fuzzy premise, synergy was struggling soon enough. In one small deal Business Affairs cooked up to dump longtime Time Warner corporate air carrier American Airlines in favor of United Airlines, AOL’s carrier of choice, things came to a head. The AOL side favored United since it included a one-year commitment to spend $5 million on company properties, including AOL, although it provided less of a corporate discount for air tickets. Time Warner, whose executives had plenty of frequent flyer miles on American, thought the deal would actually lose money since United’s flights were costlier, and that American Airlines—which had spent $10 million at Time Warner—would do so again, although without a definite commitment.

  “It was hardly worth changing ad partners,” said Jack Haire, Time Inc.’s ad sales head. “It was done to generate buzz for AOL.” Haire, whose calm, suburban preppy demeanor was worlds away from that of the peripatetic Berlow, became apoplectic over the deal, since the only benefit to him seemed to be the press release that could be written touting another combined ad deal. “You just want to make an announcement to pump up the stock,” Haire said he told Berlow with barely concealed contempt about a number of such deals. “You just want to make these deals for Wall Street and not the business.”

  But Berlow didn’t consider that a problem, referring to the need to find synergies in the merger. “What else is there?” Berlow
said he told Haire, since he felt every manifestation of unity trumped all. “Yes, we want to make good on the promise to shareholders, since my constituency is shareholders.” Could the philosophies and style of AOL and Time Warner be any more different?

  Later, the group would clash in a similar manner over a deal Berlow brought from Burger King that was valued at $80 million, which needed to deliver certain bells and whistles from all the divisions. Most were doable, but Berlow fought with other executives on the Ad Council to get it passed. Some units wanted to do their own deals, which mucked up the unified approach.

  Eventually, Berlow cobbled together a deal, but he wanted to announce it before a Wendy’s fast-food-chain deal that the group had also been working on that was already completed. This enraged the Time Warner executives, who felt it betrayed an ad relationship, because Wendy’s had been the first at the table and deserved the lift an announcement might provide. “To AOL, it was ‘Who cares, because that was yesterday’s deal,’ ” said one Time Warner executive close to the negotiations. “They were not interested in long-term relationships and we would have passed on Burger King if it meant screwing another advertiser.”

  And that was precisely the problem: AOL had enjoyed a long and lucky period when it could and would demand anything from advertisers who were desperate to get on its online network. At Time Warner, as at most traditional media companies, there were always competitors vying to take away advertisers. When Berlow and others at AOL continued to act as if they were the only game in town when representing divisions other than AOL, it caused alarm. There was no telling what they might do or say, or how they might damage longtime business relationships. To those at Time Inc., years of success had made the AOLers sloppy and arrogant, striking deals that were more like promotions than advertising.