There Must Be a Pony in Here Somewhere

by Kara Swisher

  “I give them an ‘A’ for ambition and a failing grade for sophistication,” said Haire to me in 2003. “They were successful in the new economy, but in ours they had a clumsy and damaging way of doing business.” Haire thought AOL had a dangerous tendency to “disregard a long-term ad relationship by throwing a client under the bus for a short-term gain.”

  Berlow considered the Time Warner attitude pathetic. “They didn’t want to understand the value of a transformational deal, and they didn’t want to hear it, because they stood for status quo and all they hope for is the status quo,” he said to me in 2002, as we sat in his home on the Upper East Side of Manhattan. At that point, he’d resigned from the Global Marketing Solutions job, but was still employed under contract at AOL Time Warner, although he spent a lot of his time making wooden bowls and furniture at his own workshop. “They saw the whole acquisition as a bank robbery, so we couldn’t blind them with vision.”

  Breaking (Into) the Bank

  One thing Berlow had right was the bank robbery metaphor. As the stock started to peter out over the course of 2001, the Time Warner corps soon became paralyzed with anger and angst, which made working with AOL pretty much impossible. “Managers knew they had been undersold, so every time someone from AOL wanted anything, you’d rather hate them instead of help them,” said one top executive. “We could only put up with the arrogance if the share price were there.”

  I heard this sentiment time and again from Time Warner employees, who felt that their company had been taken along with their money—all in the service of AOL, rather than of the combined company. As the year progressed, and AOL’s business—along with the entire Internet’s—began to look less strong, Time Warner executives began to suspect that AOL might have been a one-trick pony and that their divisions would be sacrificed to help bolster it.

  Don Logan of Time Inc., ever the math nerd, had actually done a Venn Diagram—overlapping circles used to show relationships between things—after Pittman had touted the fact that the companies had only had 10 advertising clients in common. While everyone thought that was wonderful, sources close to Logan said he was appalled, since Time Warner knew all the stable advertisers and it meant that AOL did not have an ad business that was sustainable. To him, AOL only seemed to have had worrisome dot-com clients and only those traditional advertisers experimenting in the online space. With such an unstable base, Logan thought whole market was still in its infancy and that the money would dry up quickly.

  Some AOLers were acutely aware of this, too. “Past performance is no indication of future performance,” one executive at AOL warned me when I asked if the company was about to sail off the cliff as Yahoo had done in 2001. The trouble at Yahoo got so bad that its longtime CEO Tim Koogle had stepped aside under pressure at the start of the year and had been replaced by, of all unlikely people, the former head of Warner Bros., Terry Semel. Yahoo had already been drastically cutting its yearly revenue projections for 2001 when Semel arrived, after dot-com ad deals had dried up. And Semel, who had dabbled in some dot-com investments after he left Warner, spent much of the year drastically overhauling Yahoo’s entire strategy.

  Though Yahoo was AOL’s biggest rival and presumably the new canary in the Internet coalmine, Pittman and others continued to promise that all at AOL was fine. They insisted that profits were sustainable and AOL would make the transition smoothly because of its regular subscriber fees (which Yahoo lacked) and the new revenue streams coming in from Time Warner. It was a typical AOL mentality, because AOL was a company with a history of finding new businesses to save it just before the old ones crumbled. But this deliberate ignorance of key trends was reckless.

  With the cross-company deals coming through more slowly than expected—due in equal parts to the weakening economy and intracompany noncooperation—new incremental revenues weren’t being funneled into the online company fast enough. With dot-com ads in free fall, this was a dangerous situation.

  Similarly, in June 2001, when AOL launched an internal investigation into one of its own ad deals, no one could have guessed that it was a harbinger of far bigger problems to come. The investigation, which examined some unorthodox transactions related to its March 2000 deal with Las Vegas–based electronic marketplace site PurchasePro.com, seemed serious. AOL had even put senior vice president Eric Keller on leave while it investigated the situation.

  The real fallout from this and other deals wouldn’t become clear for another year, but only six months into the merger Time Warner executives became increasingly worried that AOL was in it only for the quick cash. “Their view was you don’t say no to cash versus what was right for business,” said one executive at Time Warner. “And our businesses were doing fine until cash became the issue.”

  Indeed, it became the only issue, as Mike Kelly—reporting directly to Levin—applied even more painful pressure on the cost side than Berlow and others had been putting on the revenue side. Kelly’s massive cost-cutting directives began hitting the divisions, which now had to initiate layoffs of several thousand employees almost immediately, offer buyout packages, and even cut budgets for pizza and other foods served during late-night magazine deadline pushes. Accompanied as they were by the arrogance and “you just don’t get it” attitude of the AOL conquering army, such cuts and layoffs, which are a normal and expected part of any merger, completely wore down the patience left among Time Warner employees. The hostility of top executives soon trickled down to the rank-and-file, who got a bitter taste of Kelly’s we-make-the-numbers-or-else haranguing.

  The cuts were particularly painful at CNN, which bore the first wounds of the deal in early 2001. The Atlanta-based division was a tightly knit group and the cuts, which came suddenly and without warning or real explanation from the top, devastated morale. People with decades of service were dumped unceremoniously and given severance payments that required them to sign nondisparagement agreements.

  Like the attempts to goose revenue, these draconian cost-cutting measures were all part of Levin and Pittman’s quest—with Parsons silently acquiescing simply by not raising his voice loudly in disagreement—to make their aggressive numbers for revenue and cash-flow growth. To deliver these lofty figures, Levin let Kelly loose on the division heads in a manner they’d never seen before. Nobody could grind them like Kelly, and no one did—making him even more reviled across the company than Berlow, since Kelly was now asking divisions to start sacrificing things that they had spent years building.

  With the rallying cry of $11 billion EBITDA—earnings before interest, taxation, depreciation, and amortization—Kelly was soon clashing with division heads over making their numbers. The difficult-to-reach numbers were hard enough to swallow, but Kelly’s pushy style made it worse. I think there is no one—apart from Kelly—who didn’t complain about his rough persona, which was variously characterized as bullying, rude, obnoxious, and highly personal. He would often call people morons in meetings—which he told me he considered a joke—and deliver withering assessments of their performances in front of others.

  Some from AOL understood Kelly’s method, and didn’t mind it. “Kelly was hard on us at AOL, but we needed that,” said Richard Hanlon, investor relations head. “But it was less welcome at Time Warner and they took umbrage, which he didn’t think they would.”

  Kelly agreed with that, noting that he was more worried about missing the numbers than about alienating people at Time Warner. “If we held back, I wasn’t sure what it would mean, because if we weren’t pushing, we were going to fail,” he told me in 2003. “I thought I was just hearing pain from people who hadn’t had to perform before.”

  Still, as the economy continued to weaken, some division heads were upset at being asked to push numbers they didn’t believe were possible to make. “There was a huge amount of rebelling,” said Walter Isaacson, who was moved to become head of CNN. Some complained that Kelly had bulldozed them into agreeing to plans they couldn’t achieve, and that no one in the corporate suit
e was listening to them. There, the top executives waited and hoped for the ad market to rebound.

  Ted Turner, worried about the impact of cuts at CNN and hearing of the worsening ad market from his close associates at Turner Broadcasting, started complaining in management meetings that the financial goals were not achievable without damaging the businesses badly. He thought the numbers were killing the company, and many agreed. Even executives at AOL started to warn corporate to move off the numbers.

  “If you want a dead stock, we can move off the numbers,” Pittman replied. “The market is waiting for us to stall.” Having recovered by May to what would later be the combined company’s peak of almost $57 a share, executives hoped the worst was over.

  But by July of 2001, when the company’s quarterly results showed some weakness in meeting its revenue predictions by $500 million, shares began to plummet. The decline was further intensified by a small warning made by Kelly in the analyst’s call after the results were released. Pushed by Kelly to go on the record about some doubts without abandoning the beloved numbers, the company noted that the $40 billion revenue figure was “at the top of our range” and they would make it only if the company’s last quarter was strong. Still, the company executives once again stressed that the media behemoth was certain to excel with its diverse businesses. Levin, who had not favored backing down, wanted Wall Street to understand the merger’s main goals were still strong.

  Analysts were wary, but they kept their price targets high for AOL Time Warner anyway, blaming the weak quarter on the economy and not on any apparent management or business problems. But an internal memo at AOL Time Warner from its investor relations unit knew better, warning top executives that more disappointing news meant “all bets on this year and next are canceled, with obvious consequence for ownership, ratings and support.”

  Later, Levin and other company executives would use their minor warning as proof of their backing off the too-positive projections they’d made in January. It was a fig leaf for the real problem. Rather than focusing smaller, on short-term victories, the AOL Time Warner executive team had badly overpromised. And they had ruined their chances of ever making those numbers, because they had been beating too hard on a recalcitrant company to achieve them.

  It would take until late September—two weeks after the devastating September 11 attacks on the World Trade Center and the Pentagon, which sent economic shock waves throughout the world—before the company made the announcement that some had long expected. After 20 months of insisting it could meet its aggressive financial targets, facing a decimated ad market, AOL Time Warner finally admitted it could not.

  “AOL Time Warner Inc. today commented on the impact on its business of the September 11 terrorist attacks and the advertising market slowdown, which was compounded by these events,” read the press release. “As a result of these developments, the company said it now expects to achieve full-year 2001 EBITDA growth in the 20 percent range and revenue growth of five to seven percent.”

  Many found it cynical for AOL Time Warner to have waited until after September 11 to blame the results on terrorism, rather than on deeply problematic business issues. Other companies had done the same, but it is clear that AOL Time Warner should have considered pulling back on its impossible financial goals much sooner.

  While Pittman and Kelly would get the bulk of the blame for the restatement, the real responsibility for not changing the number sooner rested with Gerald Levin as the company’s CEO. To make matters worse, none of the executives under him were strong advocates of refiguring the projections, despite their worries, creating a situation where no one took a leadership position on the issue. And Case and the board abrogated their role in not pressing Levin harder and allowing the company to wait until a tragedy gave them reason to move.

  “That’s really when we finally threw in the towel,” Kelly told me in 2003 about the restatement. In reality, the towel had been thrown in long before that, almost from the first days of the merger when it was clear David Colburn’s putz joke was not very funny to anyone.

  I managed to track down the AOL executive who had those putz T-shirts made up. It was not, in fact, Colburn who did it, as many had thought. Another urban legend bites the dust. “It was my idea, because people were a little depressed about the merger and I was trying to bring a little levity,” admitted Paul Baker, an AOL lawyer and deal maker. “But we really underestimated the touchiness at Time Warner over it, even though it was not done in a mean-spirited way.”

  Baker, who left AOL Time Warner in 2001, sighed at the sudden change of mood that took over right after the merger that was supposed to bring the next great era for AOL. “Everyone thought we were so smart, and then within two years, we were assholes,” he said. “I mean, it’s not illegal to be an asshole.”

  No, it is not. While disturbing questions of legality would soon be raised regarding AOL’s business, being an asshole was merely devastating to any chance the merger had of success in the first place.

  The world breaks everyone and afterward many are strong at the broken places.

  ERNEST HEMINGWAY, A Farewell to Arms

  Chapter Six

  WAY, WAY AFTER THE GOLD RUSH

  The Life of the Party

  “You have to remember,” said Ken Auletta, the New Yorker media writer and a longtime observer of Time Warner, as we considered the unusual career of Gerald Levin in the fall of 2002. “He was like Gromyko, always on the podium.”

  Auletta was referring to the late Andrei Gromyko, the dour Soviet foreign minister who had a talent for survival, outlasting leaders from Stalin to Gorbachev and also nine U.S. presidents. Like the indestructible Communist diplomat, Levin had always seemed likely to be the last man standing, no matter the crises that had begun to engulf AOL Time Warner in 2001.

  After all, despite widespread discontent internally and on Wall Street, a lack of traction for the synergies and financial returns he’d touted, and a rapidly weakening economy, most expected that after 30 years of climbing to the top of the corporate ladder, Levin would overcome these as well. Even with the rumblings of trouble that commenced almost as soon as AOL and Time Warner merged, it was still too early to count out the wily corporate politician.

  It turned out a lot different at Time Warner, where animus toward Levin runs deep. He was the guy who decimated the employees’ 401Ks. The guy who handed the keys of an iconic, 80-year-old American business to a 15-year-old upstart. Who sold the company’s soul after asking almost no one at Time Warner if they thought it was a good idea. Who didn’t bother with adequate due diligence or other strategies to protect Time Warner stock. Who allowed AOL’s troops to rampage through the corridors of Time Warner. Who wagered Time Warner’s future on a dream that had already failed too many times before.

  “It was an incredible case of intellectual arrogance,” Michael Fuchs, a pugnacious former Time Warner executive whose relationship with Levin was both highly emotional and deeply troubled, told me in a common assessment of his former boss. “He bet the company when he didn’t have to.”

  That was the nice way of putting it. In 2002, Time magazine critic Robert Hughes expressed more raw feelings in a scathing email to Levin. Levin insisted to me he didn’t receive it, but he could still have read it—like the rest of New York’s chattering class—in Tina Brown’s Sunday Times of London column after Hughes had forwarded it to her.

  “How can I convey to you the disgust which your name awakens in me?” wrote Hughes, whose reputation within the company was legendary for both his prodigious writing talent and his obstreperous personality. “The merger with Warner was a catastrophe. But the hitherto unimagined stupidity, the blind arrogance of your deal with Case, simply beggars description. How can you face yourself knowing how much history, value and savings you have thrown away on your mad, ignorant attempt to merge with a wretched dial-up ISP?”

  This was ugly enough, but Hughes saved his real wrath for the end. “I don’t know what advice
you have to offer, but I have some for you,” he wrote. “Buy some rope, go out the back, find a tree and hang yourself. If you had any honor you would.” Even in the cutthroat environment of big business, that’s an astonishing thing to suggest to someone, no matter how angry you are. Yet these are exactly the kind of emotions the AOL Time Warner deal and its aftermath aroused.

  In fact, if you took a stroll through the Time magazine bureau in Washington, D.C., in the fall of 2002, you’d have seen Hughes’s “hang yourself” email posted proudly above the copy machine. In the halls of the Time-Life building on Sixth Avenue in Manhattan, the bulletin boards were papered with news clips critical of Steve Case and Bob Pittman, too, with a smattering of editorial cartoons about corporate greed and crashing stock holdings. By this time, it was hard to get very far in reporting this story without getting an earful of angst from everyone at AOL Time Warner, especially concerning the financial pummeling employees had suffered—whether it was a magazine reporter who became unable to send his kids to college or a studio mogul who’d lost millions.

  The plunge of AOL Time Warner stock decimated Levin’s own wealth as well, since he sold little of his holdings as the stock tanked. Worse, he borrowed in order to buy stock. And his lavish spending in greener times (as well as the expected cost of his impending divorce) had led Levin in late 2002 to start selling his various properties, including an expensive Upper East Side triplex (once featured in Architectural Digest), a group of upscale condos in Santa Fe, and his interest in a California vineyard. In winter 2003 he told me that his personal net worth had fallen from the neighborhood of $400 million to around $10 million. “And I will probably not hold on to much of that,” he added in a resigned voice.

  Yet it’s hard to feel too sorry for Levin, since he still controls large holdings of stock options that could be worth a fortune someday if the share price ever rebounds. And, after years of excessive multimillion-dollar salaries, he still pulls down an annual $1 million consulting fee from AOL Time Warner as part of a five-year contract, as well as $400,000 a year as part of his pension, when he left the company—a fact that enraged his critics. When Levin abandoned New York for the West Coast in 2003, some would joke that Marina del Rey, where Levin had moved to be with the new woman in his life, could now be considered “the newest city in the witness protection program.”