There Must Be a Pony in Here Somewhere

by Kara Swisher

  But the weekend put him over the edge, when the New York Times—whose reporter David Kirkpatrick was deeply tapped into the growing rage of the Time Warner executives—ran a scathing piece, written with David Carr, detailing Pittman’s failure to turn things around at AOL and suggesting there was a target on his back. “Executives and shareholders are united in more or less open revolt,” wrote Kirkpatrick and Carr. While the story referred to discomfort with the departed Levin, too, it singled out Pittman explicitly. “Most of all, Time Warner executives have turned their ire specifically at one man—Mr. Pittman, a former America Online executive who became chief operating officer after the merger,” it read. “He angered many Time Warner executives with what they called his brusque manner . . . he developed a reputation for brashness, ruthlessness and success at America Online, and he applied the same tactics at Time Warner on his return.”

  Chronicling in detail Time Warner’s anger, the article summed up their message succinctly: “Now many executives from the former Time Warner wish the merger would go away, and, barring that, they wish that Mr. Pittman would.” In the article, Parsons was quoted offering a rather tepid defense of Pittman: “People get angry and that anger has to be attached to something or someone,” he was quoted as saying. “Some of it has been attached to Bob and I am not sure if it is entirely fair.”

  Well, not entirely, Parsons’s quote seemed to indicate to me—but maybe it’s a little fair! This deft response definitely did not look good for Pittman, and the long knives of Time Warner were drawn. And with Parsons firmly ensconced in the CEO position and no place higher up on the ladder for Pittman to go, what sense did it make for him to keep fighting what was, for the foreseeable future, a losing battle in which he would probably end up getting tossed out anyway? With the executive ranks blaming him and the board losing faith that he could turn around AOL, Pittman had no chance of regaining any credibility as COO. “Pittman left on his own steam, but he knew what was coming,” said one board member, who actually admired Pittman. But others on the board felt his abilities were not up to managing such a complex operation. Case, never a true ally, all but abandoned Pittman.

  Pittman wanted to announce he was leaving, but Parsons asked him to delay the news until the board could approve a new management structure in mid-July. His plan was to promote Time Inc.’s Don Logan and HBO’s Jeff Bewkes to the top of the AOL Time Warner structure, effectively splitting Pittman’s duties into two positions, both of which would report directly to Parsons. Logan would head the Media and Communications Group, the subscription and ad businesses that would include Time, Inc., Time Warner Cable, the Interactive Video Unit, Time Warner Books, and AOL. And Bewkes would run the Entertainment and Networks Group, made up of HBO, New Line Cinema, the WB, Turner Networks, Warner Bros., and Warner Music.

  Getting the pair interested in the arrangement would be difficult, given the recalcitrance both had felt toward the merger in the first place. But it was critical for Parsons to pull this off, since Logan and Bewkes were considered the best and most successful operators in the company, though they were vastly different in personality and style.

  Logan, who had been the CEO of Time, Inc. since 1994, was one of the most admired managers in the company, especially within his division, where he was openly revered for turning around the fortunes of the magazine publishing house. An Alabama native, he was the son of a housewife and a welder for the state highway department. Logan went to Auburn University as a math major and worked his way through school as a computer programmer for NASA in Huntsville. He continued his studies—specializing in abstract math—at Clemson University, and went on to pursue a doctorate part-time at the University of Houston. While in Texas, he worked for Shell Oil, creating research tools in the search for oil, but he found big-company life too slow.

  Answering an ad for a Birmingham, Alabama, publishing company called Progressive Farmer, later to be renamed Southern Progress, Logan worked first in data processing and fulfillment and later in direct marketing. Time Inc. bought Southern Progress in 1985, and Logan was running it by 1986. Admiring Logan’s reputation for consistent results, Levin brought him to New York in 1992 as Time Inc.’s president and COO. Logan got the chairman and CEO spot two years later. Logan fulfilled Levin’s expectations by goosing the magazine division’s results dramatically, turning in 41 consecutive quarters of earnings growth and tripling its cash flow.

  Logan managed all this while affecting a folksy southern image as a good old boy who just loved to go fishing. (He had even appeared on the cover of Field & Stream in a feature about jungle fish.) Pretty much everyone I asked about Logan felt the need to mention his fishing, as if it were a mysterious and complex part of his nature—imagine that, a fishing math major! In the company newsletter, Logan was quoted as noting that business was a lot like fishing, in that they both require “persistence and patience.”

  The burly Logan might have had true “down home” bona fides, but he was as smooth as any city slicker in leading the potentially divisive troops at Time Inc. His greatest strength appeared to be in leaving people alone yet demanding performance as a price for that independence. “He was a straight talker in a culture of bullshit and platitudes,” said former Pathfinder executive Linda McCutcheon. “And he believed you grew incrementally to greatness.”

  The AOLers expected more rapport with Jeff Bewkes, the glib and good-looking head of HBO. Much as everyone mentioned Logan’s interest in fishing, the expression Time Warner people invariably used to describe Bewkes was “a handsome man.” And he was indeed good-looking, slim and tall with a curious mix of Hollywood glamour and vague preppiness that suited the more conservative elements of the company. “Golden boy” had long been a defining image for Bewkes, who was a graduate of Yale University and Stanford Business School (again, that heady mix of traditional East Coast and trendy California). The impact he made was a strong one—an executive comfortable with both Hollywood talent and New York deal makers alike.

  When Bewkes first came to HBO, he worked in the finance and marketing departments. He was considered a winner even in his earliest days. “We all used to assume he would eventually be the boss,” said former AOL executive Mark Walsh, who had worked with Bewkes at HBO. “He had this air of the inevitable about him that was very appealing.” His star rose quickly and he eventually became the chairman and CEO of HBO, building a close-knit team around him that was responsible for burnishing the somewhat dull image of the pay-cable channel to an edgy sheen with such huge hits as The Sopranos and Sex and the City.

  This conspicuous success quickly attracted AOLers, who identified with Bewkes’s more outgoing style and considered his passionate, entrepreneurial nature akin to their own. They could not have been more wrong about his regard for AOL, though—Bewkes was one of the first executives to complain internally and loudly about the idiocy of the merger deal. He wasn’t shy about challenging Steve Case’s dreamy ideas of convergence in company meetings, and he could pull it off because his HBO success gave him such credibility. Bewkes’s ability to move with comfort through all parts of the company made everyone assume that he was headed for bigger things. That included AOL, which Bewkes was asked to fix in early 2002. It was a position he’d quite smartly turned down, obviously aware that grabbing on to that sticky situation would hurt him.

  Pittman had really had no choice in being the one to take on AOL—although I joked to him when he went back to Dulles that he’d just been handed a Tar Baby that he’d have a hard time pulling away from without damage. That was finally clear when the company announced his departure on July 18. As usual, his public statement had an odd mixture of spin and truth to it. “I’ve decided that after a new CEO is in place at AOL, I won’t return to AOL Time Warner as chief operating officer,” he said. “Having worked so hard to build the AOL service and brand, and after then going through the merger and the last 18 months, it’s time to take a break.” To his own staff, according to many sources, he was more honest. “B
lame me for everything,” he joked. “Because everyone else here will—it’s a tried-and-true Time Warner tradition. No one leaves gracefully.”

  Pittman felt, said those close to him, that he had operated as best he could and in good faith. Others did not agree. Managers and staff at other company divisions greeted the news of Pittman’s departure and the ascension of Logan and Bewkes with joy. “The Taliban have been routed,” joked irrepressible Time Inc. editorial director John Huey. Finally, Time Warner had taken back the company from the horrible invaders. The gloating ran rampant.

  Media pundit and New York magazine columnist Michael Wolff, who had worked with Time Warner on its various failed Internet efforts, took a dim view of the glee in his “This Media Life” column. Wolff correctly asked: What had Time Warner really won by purging Pittman—who walked away with a fortune—and where would that leave the company? “Of course, taking it out on the guy who outsmarted you does not, in turn, make you smart,” he wrote in his slap-down style. “[Pittman] doesn’t hang around a disaster area. This is show business. If the show flops, you close it. Onward and upward.”

  AOL’s early CEO Jim Kimsey, who had long been enjoying his retirement, was even more direct, dialing Pittman up on the phone. “Is this the unemployed Mr. Pittman? Because this is the unemployed Mr. Kimsey,” he greeted Pittman. “Congratulations—you moved Osama Bin Laden off the front page!”

  But while Time Warnerites rejoiced in their hope that the merger turmoil was finally over, the company’s troubles wouldn’t leave the front pages for a long time to come.

  A-O-Hell Redux

  As major as it was, Pittman’s departure was overshadowed by another development the same day it was announced—one that caused many to speculate that the two events were linked. They weren’t, but they surely should have been. On that same Thursday, July 18, 2002, that Pittman said publicly that he was leaving, the Washington Post ran the first of two explosive articles detailing what its reporter Alec Klein called “unconventional deals” that AOL had made in an effort to prop up its advertising revenue both before and after the merger.

  In fact, AOL’s unusual ad practices had actually first come under the media spotlight after a revealing and award-winning article in the Industry Standard magazine the previous fall. In that article, writer Gary Rivlin had outlined in stunning detail what everyone knew about AOL’s bad behavior and reputation in the industry. Rivlin had portrayed David Colburn and his team as “rough riders,” branding everyone they could in a maniacal ride to the top of the heap. Although he had not zeroed in specifically on the questionable accounting for those deals, he did raise serious issues about a disturbing and unethical gestalt at the online company that was celebrated and rewarded.

  Klein, the Post’s beat reporter on the company, took off from there, using internal documents, inside sources, outside accountants, and perhaps even government regulators eager to jack up the pressure on AOL, to scrutinize a series of AOL deals from 2000 and 2001, a time when things began to unhinge throughout the Web industry. His investigation represented exactly the kind of due diligence Time Warner should have done before the deal was sealed. Since a lot of AOL’s behavior was disclosed in complex filings, as Klein chronicled clearly, these seemed like obvious things for Time Warner to have looked into.

  Klein brought his first findings to AOL in mid-June. AOL hired an outside attorney, Thomas D. Yannucci, to handle the queries, hoping to dispute and upend many of the allegations Klein was pursuing, with a particular focus on those that might seem illegal but were not. The back-and-forth dragged on between AOL and Klein and his editors at the Post until the newspaper’s publication of the series.

  Titled “Unconventional Transactions Boosted Sales,” the Post’s first front-page story described in detail several AOL deals that seemed to skirt the edges of propriety. As Klein succinctly put it, “AOL converted legal disputes into ad deals. It negotiated a shift in revenue from one division to another, bolstering its online business. It sold ads on behalf of online auction giant eBay Inc., booking the sale of eBay’s ads as AOL’s own revenue. AOL bartered ads for computer equipment in a deal with Sun Microsystems Inc. AOL counted stock rights as ad and commerce revenue in a deal with a Las Vegas firm called PurchasePro.com Inc.” The bottom line was simple—in its quest to keep the momentum going, AOL had accepted less than quality revenues (if they were revenues at all) and had been extremely aggressive in accounting for them.

  Some of the deals mentioned weren’t surprising given AOL’s push for synergy—including getting the Golf Channel to advertise on AOL in order to get carriage on Time Warner cable systems. Others seemed designed to book revenue as fast as possible, regardless of the business need, such as linking AOL users to a Spanish telecom site in order to use up ads in a certain quarter rather than booking the revenue over several quarters. Still others seemed like ways to make the finances seem fatter, such as booking overall revenues garnered from eBay rather than just the fees AOL got in the arrangement. Finally, others showed off a too-creative talent for creating ad revenues from stock sales—as AOL did with PurchasePro and also from legal disputes, such as one stemming from a lawsuit with an online gambling site.

  Without these questionable revenues—however small they might have been in relation to the overall revenue number—the article surmised that AOL would have fallen short of Wall Street expectations in 2000. And that might have resulted in a termination of the merger, despite the lack of a collar and a possible fee that Time Warner would have had to pay to get out of the deal. While that outcome was hypothetical, the article deftly laid out the aggressive nature of AOL’s deal making and its increasingly desperate efforts to delay the carnage that had decimated the rest of the Internet industry. The fact that Case, Pittman, and Kelly were giving Wall Street blue-sky assessments of AOL’s prospects at the same time made the whole thing worse. Things that might have looked ambiguous in the boom now looked like malfeasance in the bust.

  AOL defended itself in the piece, noting it had “maintained a strict and effective system of internal controls” and claiming the revenues in question were “truly microscopic,” representing less than 2 percent of AOL’s overall revenue, and therefore immaterial. It also defended its accounting, noting that it was “appropriate and in accordance with generally accepted accounting principles.”

  Maybe so, but it definitely looked bad. One AOL executive not involved in any of the deals called immediately and asked what I thought would happen. I said I thought that government regulators probably had no choice but to investigate the allegations, especially since the Washington Post was their hometown paper. Some of these same regulators may have even been a source in the series, since it was obviously going to lead to a massive investigation. While there had been no “smoking gun” in the paper’s report—no explicit email, for example, where a high-ranking executive admitted to another that the deals were done to cheat Time Warner—the collective weight of the articles was undeniable.

  My AOL source agreed, although he doubted AOL would become like Enron, the scandal-ridden Texas company. Still, his indictment was harsh. “There were some wild-assed assumptions that tomorrow would bring back the highly successful formula that they milked,” said the same AOL executive. “But all they ended up doing was building a beautiful house on a faulty foundation.”

  Ted Leonsis, who was also not involved in the deals, agreed. “These ads turned out to be fool’s gold,” he said, noting he had gotten weary of meetings that were more about “burning off inventory fast” than about customers. “We stayed at the dance a little too long.”

  And, he might have added, got stuck there at the wrong time. As the AOL revelations hit the news, they got quickly sucked up into the maelstrom of Wall Street scandals over the prior nine months. From Enron’s spectacular flameout to Martha Stewart’s alleged insider trading to Tyco CEO Dennis Kozlowski’s alleged improprieties, Wall Street ethics were under fire. Across the U.S., the white-collar executives who’d
become heroes in the go-go 1990s were now widely seen as untrustworthy.

  It was, in short, a bad time to be a big company, especially one with a brewing accounting scandal. And it was a worse time to be one with a history of accounting issues. AOL had already had trouble with the SEC before—and it was generally understood that the SEC tended to be less forgiving to repeat offenders. “The line between love and hate is very narrow,” longtime AOL short-seller David Rocker told me in 2003. “The same behavior revered two years ago is now reviled.”

  The news about AOL’s questionable accounting brought a new round of I-told-you-sos among its employees, who didn’t give the online service any benefit of the doubt. To those at Time Warner, AOL was, at best, hugely aggressive in its accounting. At worst, it had used illegal means to dupe the media company into a merger.

  Parsons would straddle the fence on that issue, since he had so little knowledge of any of the online service’s deals. During AOL Time Warner’s second-quarter earnings conference call on July 24, to the dismay of AOLers, he didn’t launch straight into the better-than-expected numbers, which would have been immediately sent out over the business wires, giving the company an initial positive spin for the call. Instead, he started out praising the departed Bob Pittman, whom Parsons admired despite all, and the new executive structure, and then dropped something of a bombshell.

  “I want also to say a few words about the importance of investor trust in our accounting and related financial disclosures,” he began, mentioning the Washington Post’s two-part series. He offered assurances that outside auditor Ernst & Young had “confirmed in writing, without qualification, that the accounting for each and every one of the transactions mentioned in the Post articles, and the related financial statement disclosures for those transactions, were appropriate and in accordance with generally accepted accounting principles.