There Must Be a Pony in Here Somewhere

by Kara Swisher

  “If you look at a company like AOL Time Warner, how do we, when you get to be this size, continue to be a growth company?” Pittman asked the gathering. “The only way you can do it is to continue to invent new businesses which have very high growth rates, and it’s in our DNA.” He continued talking up AOL Time Warner’s future as a growth company, noting that all great innovations—including MTV—were considered failures before they later hit big. And he particularly touted the online service, dangling visions of the unit’s eventually garnering as much as $160 a month from each member from a suite of digital services, rather than the current $24 fee for simple dial-up access.

  But Crawford had heard enough hype. After the speech, Crawford met AOL Time Warner’s newly installed CFO Wayne Pace and investor relations head Richard Hanlon, as well as investor relations staffer Eileen Naughton, on the hotel’s sunny terrace, and he unloaded. He expressed his contempt for what he considered questionable behavior, adding that AOL’s top executives had misled him in earlier meetings about AOL Europe and other parts of the business. He railed against the lack of disclosure, the lack of transparency, and the unwillingness to be forthright under the new regime. Crawford noted that he “grew up” with Time Warner, and that there were certain standards that needed to be maintained. “Do not let AOL people pollute you,” he warned Pace, pointedly not looking at Hanlon, who was from the AOL side.

  “I knew right there it was over for anything to get better,” recalled Hanlon, who left AOL Time Warner in March. “We had a long way to go to get back the faith and confidence of Wall Street.”

  Soon enough, Parsons and Pace tried to assuage Crawford and other outside investors that the company would change its style by disclosing more and promising less. They convinced Crawford to come visit the online service in March to get a better feel for the business. An internal document about Crawford’s visit urged executives there to stop the spinning. “The essential mission tomorrow, therefore, is not to dazzle him with numbers,” read the AOL Time Warner memo. “He has seen the numbers and that is what worries him.”

  Soothing the worried soon became Parsons’s main job, and he decreed a new mantra to underpromise and overdeliver, rather than the other way around. His main messages were simpler and much less grand than before: A diversified business moving conservatively, but strongly, into the future. That was the internal message, too, as Parsons began to mend fences—including reaching out to Turner, whom he even went so far as to call “Uncle Ted” at a public event later in 2002.

  To mend fences internally, the company’s divisions were finally given permission in late March to use whichever email system they wanted—nullifying the company’s earlier, wildly unpopular directive to try to use AOL email products. In an uncharacteristically sheepish statement, spokeswoman Tricia Primrose was forced to admit, “Unfortunately, it didn’t work for everybody. So we decided to give everybody the choice that met their needs.”

  In early April, a similarly embarrassing policy change removed another major complaint for employees. To date, the company had offered matching funds for employees’ retirement plans—but they could be invested only in AOL Time Warner shares. To help defuse the anger and frustration over the dismal stock performance, the company changed its policy. Henceforth, employees could put their matching funds in other stocks.

  Bit by bit, management was trying to win back its frustrated employees—particularly those on the Time Warner side. But the one thing that would truly win back disgruntled workers was the thing the company seemed incapable of offering: A rebound in financial fortunes. That outlook became even more dismal at the end of March, when the company revealed in regulatory filings that it would adopt new accounting standards by taking an incredible $54 billion charge to reflect the depreciation of the company’s stock value since the merger had been announced. While it was a noncash charge—and therefore had no impact on the bottom line—it was the largest write-down in corporate history. You couldn’t find a more potent symbol for the failed marriage of AOL and Time Warner.

  But soon enough, that huge charge would expand beyond anyone’s wildest imaginations. Facing a slowdown in subscriber growth, declining ad sales, and difficulty in shifting its business over to high speed, AOL had finally—and very publicly—hit that cliff that had worried executives at the online unit as far back as 1998. Since the merger had been predicated on the power of the once mighty online service, the fate of all of AOL Time Warner now rose and fell with the unit that Levin had once bragged was the “crown jewel.”

  Now AOL was more like cubic zirconium. And it was left to the greatest salesman AOL had ever had to save the day again. Or, as I asked in a column when he headed back down to Dulles, Virginia, to try to fix what was clearly broken: “Can Bob ‘Pitchman’ toss another winning game?”

  Hail the Conquering Zero

  First, the ones who blew it—or who were to be blamed for blowing AOL’s momentum, anyway—had to go. On April 9, 2002, the company announced that AOL CEO Barry Schuler would step down—shuffled off to head up a vague new purgatory called Digital Services Development Group. A software and gadgets geek, Schuler had been the wrong choice to head AOL, but it had taken nearly 15 months for his superiors to take action.

  In a way, AOL’s collapse wasn’t only Schuler’s fault, despite the fact that he turned out to be a polarizing figure after Pittman went to New York to become co-COO. It was, in fact, Pittman’s departure to Manhattan after the merger that had signaled a dramatic shift in AOL’s management. Ted Leonsis, who had been shunted aside under Pittman’s reign, had watched those changes with trepidation. “The fact is, when AOL was in its heyday, we had a dream team, and here we were breaking up that team and letting the best head for New York,” said Leonsis. “We should have been bringing the best from Time Warner [to Dulles] to make up the difference.” Now, much of the executive ranks were dangerously thin at AOL.

  And as AOL’s wave of talent headed for Manhattan, Schuler inherited a troubled business well beyond his management capabilities at exactly the time the dot-com economy began to tank. Schuler had operated capably under Pittman’s firm hand. But once in charge of things, he turned out to be a spectacularly bad choice, since he lacked his former boss’s ability to keep everyone in line. Common complaints about Schuler included his short attention span, his lack of enthusiasm for selling ads, his excessive interest in tech trends that were not fully baked, his inability to get tough on weak staff members, and even the distractions created by his own vast wealth, which included an 83-foot yacht and a Napa Valley vineyard.

  Schuler’s fortune came out of a spectacular trade he’d made in the 1990s. Though not the highest-ranking executive at AOL, he was probably the wealthiest after Steve Case, after having sold his company to AOL for stock in a deal that was worth a fortune. Schuler’s firm had been responsible for redesigning AOL’s interface, an area Schuler was much more capable in than management. “I believe Barry took the [AOL CEO] job because Bob wanted him to,” one high-ranking executive at AOL told me. “But when he got it, he did not want it.” Schuler was, in his heart, a product guy.

  Time Warner’s Joe Ripp, who became the AOL unit’s CFO after the merger, was even more cutting about the management problems that festered at AOL. “People like Schuler had always run small companies and in good times, but wealth made them think they were much smarter and could do anything,” he said, underscoring AOL executives’ inability to change with the times. “Schuler used to constantly tell me that I thought like an old media guy, and I said, ‘Good, because all you new media guys are going bankrupt.’ ” He and others at the company began to complain to Pittman about Schuler’s shortcomings as a leader, as the business weakened.

  When he saw signs of trouble, Pittman appointed corporate CFO Mike Kelly to become AOL’s COO in November of 2001 and sent him down to Dulles. It was a move encouraged by Schuler, who did not like to run day-to-day operations and preferred to focus on the products. It was also a perfect time fo
r Kelly to make his own shift. He’d already rubbed raw the other AOL Time Warner divisional heads, and they all now despised him for his grinding and verbal abuse over the financial goals. And he’d also used up the goodwill of Wall Street. In one well-publicized instance, he had even cursed at powerful Merrill Lynch media analyst Jessica Reif Cohen in a conference call.

  But Kelly’s arrival didn’t stop Pittman from getting further frustrated with Schuler, who couldn’t seem to restore AOL’s business to its former speed. “God could have been running AOL and it wouldn’t have worked,” said one AOL source. “The fighting with Pittman made it worse, since it didn’t seem as if he was listening to what we were telling him about the falloff, since he had run it in the boom times.” With growth down, Schuler now began to realize he should have spoken up sooner.

  But Pittman felt Schuler was lagging, failing to bring out any new innovations in response to the changing times. Although AOL had a history of always managing to find a lucrative new business just before the old one disappeared and Pittman and others had promised that ad profits were sustainable, cross-company deals weren’t coming through as fast as had been promised—due in equal parts to the weakening economy and noncooperation inside the company. More important, new incremental revenues simply weren’t being funneled into the online company fast enough to keep up with AOL’s formerly speedy growth. Pittman felt Schuler was incapable of making the kinds of cuts and changes the company needed to reignite AOL.

  So Schuler had to go. And taking his place would be a returning savior: Bob Pittman. Pittman’s reengagement seemed a good idea, since he also needed to restore the luster at the online service as his power base at AOL Time Warner began to erode. As AOL went, so, too, went his reputation in the rest of the company. Or as one Time Warner side executive put it to me: “Pittman was not going to tell me about running my business when his was tanking.”

  Dick Parsons was, as ever, more diplomatic. “Nobody understands AOL’s operations and potential better than Bob Pittman, and no one is better qualified to manage this business,” he said in a statement. With wonderful understatement, the quote went on: “Bob is taking on this role at a time of both opportunity and challenge.”

  To me, that translated as: Bob, you got us into this mess—now you get us out of it. When I first heard of the shift, I wasn’t so surprised, since it was clear that Schuler wasn’t the right kind of guy to make the changes AOL so desperately needed. But I wasn’t so sure Pittman was the right guy anymore either, given the wholesale changes that had taken place in the market. Yahoo, under its new CEO Terry Semel, had already announced in November of 2001 that it was going to take comprehensive steps to fix its broken business, having recognized that the industry was now quite different. Over that fall, I had asked a string of AOL executives, including Pittman, when they were going to start admitting the obvious. But I heard only the same phrase echoed back from each of them: “AOL is different.”

  It wasn’t, of course—but it was springtime in Dulles, and a whiff of hope was in the air. Bob Pittman was riding to the rescue, and the time was ripe for AOL to stage a comeback. This was a favored AOL scenario—a chance for the company to beat the odds and show up everyone. Over the next couple of months, the company undertook a few moves to try to make that happen, including making several executive shifts and bringing in some new faces. Only two days after the announcement of Pittman’s return, the company named radio veteran Jimmy de Castro as the new president of AOL Interactive Services, to replace the retiring Jon Sacks. Creative and energetic, de Castro seemed like a good choice to inject some life into the moribund unit. A devotee of “spinning”—an exercise involving frenetic group pedaling on bike machines—de Castro ran his own spinning classes at the Dulles campus.

  Spinning turned out to be a pretty good metaphor for the trouble AOL was in, since all key revenue metrics were declining fast. The company had predicted no growth for 2002, after a 7 percent decline in earnings for the AOL unit in the fourth quarter of 2001. But it was actually much worse than that, since AOL had gotten $138 million of advertising from other AOL Time Warner units. Without this critical inflow, ad revenue would have actually declined 27 percent for the division. There was a difference between order taking from eager dot-com prospects desperate to do a deal and actually selling in a weak ad environment. What was required was a culture change that Pittman was incapable of making, since he had created the one that needed to die.

  Subscriber figures were also suffering: Now it took 75 days to sign up one million new members, more than double the time it had taken a year before. Overall growth—the key metric that had kept AOL’s stock at a peak—had been slowing yearly as AOL ran out of likely prospects. To make matters worse, many more of the new dial-up service members joined through less lucrative offers via PC manufacturers, which cost AOL more to acquire since a big cut went to its partners.

  And there was still no real broadband offering to speak of, even though this was clearly the area AOL needed to migrate its users to in the future. Development of a different kind of service based on broadband needs—more video, audio, and other robust graphics—was a costly endeavor compared to what was needed to satisfy dial-up users. And AOL got less money from each broadband customer, too, since it had to share much more of the monthly fee with cable and high-speed telephone suppliers. “Every time someone switched off of AOL and onto using AOL via broadband, it is a bad day for AOL,” said one AOL executive. “High-speed blew apart what was a very lucrative business for us that we knew well.” It is no surprise then that Pittman once again preferred to delay the inevitable as much as possible by attempting to persuade members to slow their broadband adoption.

  But times had changed, and Pittman hadn’t seen this particular movie before. “People always said, ‘We can’t,’ and we did,” said one executive who hoped Pittman could turn around the business. “But Bob underestimated the extent of the collapse, and so he thought he could fix it in the same way as he did before.”

  In my April 2002 column in the Wall Street Journal, I urged Pittman to focus on five key points—well beyond his old tricks of cost cutting and hypermarketing—as he tried to resuscitate his gasping patient. For one thing, I wrote, the company had lost its customer focus on simplicity and had become “a forest of annoying ad-laden billboards and marketing-fueled services. . . . Much of today’s America Online looks like a brochure rack at a tourist rest stop. And its last two software upgrades have been lackluster, giving its service a feel of an era long past.”

  In addition, the brand had ceased to mean anything. “[F]or too long, America Online has operated like a real-estate mogul, collecting fat fees from companies like auction giant eBay Inc. for placement on the service,” I wrote. “Instead of hosting sites like eBay, America Online should be owning businesses like these by now.” Further, AOL had also fallen far behind in the all-important race to high-speed services like cable and DSL. And widespread morale problems at the company were threatening to bring the whole show down.

  Finally, I suggested the most drastic option of all: “If all this doesn’t work, AOL Time Warner Chief Executive Richard Parsons would not be wrong to consider a more drastic move, including spinning off the AOL unit. Sources at the top of the company call this option ridiculous. But is it? Right now, calculating the value of the corporation’s assets at its current stock price, the AOL online service is valued at exactly nothing—so it’s not as if this move would kill the company’s value. The plus: It would allow America Online to become nimble again and rise and fall on its own, able to make alliances it needs outside the Time Warner family. While Mr. Pittman and others touted the magical abilities of the online unit to sell other Time Warner goods and services, it hasn’t turned out quite that well yet, and such deals could still be done without the iron link on friendly terms. What’s more, it’s not as if any of the other slow-growth businesses of the company (magazines, for example) are helping AOL that much.”

  As Pittman got
his hands dirty again in the minutiae of AOL’s troubles, he’d soon find that nothing much was going to help—including himself.

  There’s No Business Like No Business

  Despite the troubles, Pittman, Case, and Parsons grinned out from the June 2002 cover of AOL Time Warner’s internal magazine, called Keywords, under the headline “Lift Off!” Actually, “Grounded!” would have been a more accurate headline, given the problems that would continue to mount over the summer.

  That was especially true at AOL, where Pittman found that just about everything—from morale to ad sales to subscriber numbers—was trending downward at an accelerating pace. He had grown weary of the company infighting, exhausted from the traveling, and worn down by the prospect that turning around AOL would take more work than he had ever imagined. For three months, he’d been trying to revive AOL while still working as COO of the combined company, and was making slow progress. Pittman was stretched about as thin as he could go, and AOL was still sputtering. “He had been getting a pounding and he did not see a way to turn it around,” said AOL marketing whiz Jan Brandt, whom Pittman had brought back into the top echelons of the company upon his return. “And there was no end in sight.”

  Indeed, for Pittman, there was no end in sight for the time it might take to fix AOL, especially because of how badly he and his team had alienated the entire Time Warner management. The New York Post even began running a regular “Pittman Meter,” a graphic that offered assessments ranging from whether he was “toast” to “safe” on any given day. Mostly, Pittman was burnt to a crisp. With increasing skepticism that he could fix the problems at AOL, Pittman went to Parsons before the July 4 holiday weekend and told him he wanted out. “I can’t do this anymore,” said Pittman to Parsons, who urged him to think things through over the weekend.