There Must Be a Pony in Here Somewhere

by Kara Swisher

  Case might have reconsidered the invitation when he heard Crawford’s definitive message: Resign. Outlining his feedback from employees, Crawford explained that neither he nor other major shareholders thought Case could be an effective chairman any longer. Case, sources familiar with the conversation said, was shocked by Crawford’s frank assessment and immediately began to argue with him. Crawford was stunned when Case told him AOL was fine before the merger announcement and that he had no responsibility at the company after the deal was done. It was not his fault that the economy had tanked. It was not his fault that both Levin and Pittman had proved to be unsuccessful leaders. It was not his fault that the Internet boom had turned to bust. Case flatly informed Crawford he was not leaving.

  The meeting ended with Crawford deeply troubled over Case’s finger pointing at everyone but himself, and the casting of himself as a victim. The gall of it rankled the longtime investor, who expected people to take responsibility for their errors, especially if you had been CEO. Yet Case hadn’t made even a slight effort at any kind of apology, claiming he was either not in control or not responsible.

  What Crawford couldn’t grasp was that Case had no intention of saying he was sorry when he was not. To Case, offering a mea culpa would have been dishonest. In addition, he felt it was more useful to figure out what to do next rather than wallow in blame. This was vintage Case, a behavior of moving on and compartmentalizing failure that had served him well for so long. Case felt he had little authority to do anything but a lot of responsibility to get it right.

  Case called Crawford soon after he returned to his California office. “How can we patch things up?” asked Case. But Crawford’s message was the same: “We can’t.”

  Still, in the same conversation, Case asked Crawford to discuss the situation further in person when he’d be in Los Angeles on a visit to Warner Bros. in September. He and Crawford, along with AOL’s Donn Davis and Capital Research and Management’s David Siminoff, decided to have lunch at a private executive dining room at the film studio in Burbank. Case was nervous as they sat down, and he quickly said that he wanted to find a way to return to a productive relationship with Crawford.

  “What do I have to do to become friends again?” Case joked. He noted that he cared deeply about AOL Time Warner and wanted to help rebuild value. But then he again asserted that the blame for the failed merger was not his, since Case wasn’t the one running the show at either AOL or AOL Time Warner. To Case, this made sense—there were a lot of mistakes to go around, but all that mattered was where the company was now and what it should do to fix matters.

  Case had no idea how badly he’d misread Crawford, who wanted neither a friend nor excuses about leadership deficiencies nor lessons about the here and now. Crawford understood that executives made mistakes, and he even thought it was okay to miss numbers—as long as you had the guts to admit that it was your fault and you didn’t point fingers. Crawford told Case that he didn’t hate him and didn’t want to be accused of going behind Case’s back to get what he wanted as a major investor, as he began to talk to AOL Time Warner board members and shareholders about his concerns. While they parted on friendly terms, Crawford didn’t have a whole lot to add to what he had previously said.

  And that was: Resign.

  Case didn’t have much to add to his prior response, either: He would not.

  Meanwhile, Back at the Ranch

  With the August 6 announcement of Jon Miller’s selection as AOL’s new chairman and CEO, the company hoped to shift the dialogue away from the stench of scandal and onto a fresh start. For a few days, at least, the tactic worked.

  The 45-year-old Miller was a veteran of several media jobs. He’d worked for Barry Diller as a top executive at USA Interactive, he’d been managing director of Nickelodeon International, he was a vice president of NBA entertainment, and he’d even been in public television at Boston’s WGBH. Most of all, his low-key, no-frills demeanor, so different from Pittman’s glamour, made him a safe choice for AOL. And given that this was clearly a big step up for him from his former jobs, it was obvious that Miller would follow the directives of the AOL Time Warner bosses who had hired him, notably Dick Parsons and Don Logan. When I first interviewed the uncharismatic Miller, he admitted to me that he was surprised—and pleased, of course—that he had been the one selected.

  If it had been up to Case, he would not have been. While Case had eventually agreed to Miller’s selection, he had lobbied for the company to consider his old friend and fellow convergence believer, Thomas Middelhoff, who had left Bertelsmann in July after many disagreements with the family who controlled the private company. The energetic and aggressive Middelhoff—who was responsible for Bertelsmann making a fortune as an early AOL investor—cut a wide swath in the new-media world, even going as far as buying a stake in the controversial music-swapping service Napster.

  But there would be no more such dreamers at AOL, only executives like Miller who were sure to behave and who steered clear of all controversy. In an AOL Time Warner press release, Dick Parsons emphasized Miller’s squeaky-clean qualities. Miller was, he said, “absolutely the right person to lead America Online into its next stage of growth . . . He is, moreover, a person of unquestioned integrity and character, and a great team player, to boot.”

  Boring and well-behaved was obviously in, with one AOLer noting that “if we could have linked him to the Boy Scouts we would have.” Thank god then for Ted Leonsis, who had remarkably remained at AOL even though both Case and Pittman had frozen him out of operations over the years. Leonsis was still widely admired for his bold ideas and ebullient personality, as well as his advocacy for subscribers—which is probably why he never left and why no one ever asked him to. But his long exile had rankled him, and he felt that Case had turned his back on AOL’s roots by backing Pittman’s moneymaking machine. Nonetheless, Leonsis still had great admiration for Case, whom he felt had only lost his way and needed to be forgiven.

  Leonsis told me as much later that month, just after I started working on this book, in a short IM session. He was in high spirits about the company’s new mission to rescue AOL from itself.

  leonsis:

  [The] pendulum went too far. 2 glasses of wine is good. 5 bottles is bad . . . we have refound our north star and inner self, like a person who self-actualizes, and has a reckoning, and comes home . . .

  swishk:

  And you are the one who survived.

  leonsis:

  I am centered, and in love . . . it is like a wife. Even if she had an affair, u couldn’t leave her . . .

  And Leonsis had shown that he could not, even turning down a chance to run Time Warner’s Road Runner in 1999 after Case thwarted him. After having been sidelined for several years, when he turned his attention almost fully to his sports teams, his “members first” philosophy had swung back into vogue in Dulles. On September 12, 2002, a reorganization of AOL’s top ranks made it clear that his comeback was total. Leonsis, who had remained AOL’s vice chairman, would now head new committees overseeing brand, product, and technology strategy.

  The September restructuring radically streamlined AOL, eliminating the positions of COO and president so that Jon Miller had clear dominance. The controversial Mike Kelly, who had most recently been the COO, was named chairman and CEO of AOL International—a move that gave him a much less visible role just as the accounting scandals he soon became linked to as former CFO began receiving more attention. AOL President Ray Oglethorpe was also slated to retire. Most “friends of Bob” Pittman, or FOBs, were soon on their way out, if they had not gone already.

  When I came to visit AOL in August 2002, I commented to Leonsis that it looked pretty lonely up on the fifth floor of AOL’s headquarters, since just about everyone who had built the company was gone. “I am the ‘Last of the Mohicans,’ ” joked Leonsis.

  Indeed, AOL was being gutted and re-formed mostly through the dictates of Logan, who now visited weekly and took real charge of t
urning AOL around. Sources involved in conversations with him noted that he was deeply critical of all that came before. He questioned the poor quality of AOL’s ad base, the weakness of its customer service, and—something especially irksome to the longtime mathematician—the existence of “too many metrics” to judge success.

  Under Logan, the initial formula to steady the ship would be drastically simplified to one main metric: Increasing profitability per subscriber, or raising a member’s lifetime value. Instead of the go-go growth of the Pittman era, which was all about slamming big numbers on the board in all areas, Logan would be all about preserving and growing the business that AOL already had. This kind of success through incremental gains was a Logan calling card. “The company had no process. It was a one-trick pony whose growth had crested,” said a person familiar with Logan’s thinking. “First, we needed process.”

  Such steadiness, as dull as it seemed, was probably just what the company needed as AOL’s problems continued to mount. In September, the company lowered its revenue guidance for the online unit due to the weak online ad market. And at the end of the month, three former executives at Homestore.com pled guilty to criminal fraud charges, agreeing to cooperate with investigators who were probing AOL. Other ad deals were cratering too, including AOL’s much touted but also questionable deal with WorldCom, which was canceled by the long-distance company’s bankruptcy judge—lopping $180 million off of AOL’s backlog of expected revenues.

  With questions about Case swirling unabated and the government investigations continuing, AOL attempted to remain focused on its mission. And as it had done so many times in the past, it would turn to the Evil Empire from Redmond—Microsoft—to help goad its employees to focus.

  Battling the Butterfly

  On October 15, 2002, in the midst of the sniper spree that was terrorizing the Washington, D.C., metropolitan area, dozens of mid-level AOL employees caught the train from Washington’s Union Station to New York City for the launch of AOL 8.0. Plugged as the beginning of the turnaround, the official program for the day included speeches, videos, celebrity appearances, and a demonstration of the new product. On the unofficial program: Corporate self-flagellation, lots of cheerleading, and some old-time redemption.

  Employees, specially invited AOL members, and the press filed into Lincoln Center’s Avery Fisher Hall, where they were handed giant foam hands to wave. A few Elvis impersonators milled about, while perched above a bank of computers, an artist spray-painted a live model wearing a white jumpsuit as part of some incongruous performance art piece. Inside the hall, the first 20 rows were abuzz. These were the true believers, the men and women who had watched AOL being pilloried over the past two years, and who would be the vanguard of the supposed comeback. As the lights dimmed, an air of expectation hung in the hall.

  The launch was, in fact, a case study in corporate culture. Apart from the caustic musings of emcee and comic Dana Carvey, who gleefully skewered the AOL service in a short monologue, it was an absolute cheer-fest, with its share of strange moments. Who could explain, for example, the choice of having one musical guest, an unknown Italian pop star, sing a song with the repetitive refrain “I surrender”? Or Dick Parsons’s introduction of “Uncle Ted,” followed by Ted Turner’s approximately four-second appearance on stage, where he blurted, “Watch out, Bill Gates and Microsoft! Here we come!” before immediately spinning around and retreating behind the curtain? Or Steve Case shaking his rear end at the crowd while Dana Carvey screamed “This is a TOS [terms of service] violation! Right here on stage!”?

  But of all the odd moments, none topped the story Case told in the midst of a saccharine segment featuring people whose “lives have been changed” by AOL. After describing the travails of Mary and Peter, a couple who had adopted two Bulgarian sons after consulting AOL’s adoptions message board, Case offered up an anecdote about meeting the boys, John and Matthew. (Case pointedly ignored Carvey as he shouted, “What happened to Luke and Mark?”)

  He had been talking to John and Matthew outside, Case said, when “[John] looked at me and asked, ‘Are you the boss?’ ” After brief laughter, the auditorium went silent, and in the split second before Case spoke again, one could almost hear people’s thoughts churning: Well, was he anymore? Then Case mercifully continued. “And I said, ‘No, I’m not the boss,’ ” he said. “ ‘The mom and the dad, they’re the bigger boss.’ ” The crowd giggled with relief.

  Toward the end of his presentation, Case grew serious. “We looked all around the world” for the perfect CEO, Case intoned. “Please welcome a champion of the members, Jon Miller!” The rows of AOL employees, most dressed in black T-shirts bearing the logo “AOL 8.0 Express. We’re On Track,” erupted eagerly into applause. Here was the man who would lead the company out of the wilderness. Here was the anti-Pittman, the back-to-basics outsider who could set them back on the proper course.

  Miller looked pale—perhaps fitting, in that he’d spent the previous two months holed up in Dulles for hours on end, trying to assimilate every possible fact about AOL and the Internet in record time. His remarks were as bland as his wan face, but he did offer up the marquee news of the day: AOL would no longer sell third-party pop-up ads on its service. It was a welcome change, although AOL would still continue to deliver its internally generated pop-ups. But was it all too little, too late?

  One week later, Microsoft attempted to answer that question. In a bubble tent erected over Central Park’s Wollman ice rink, Bill Gates introduced MSN 8.0—never mind the fact that the service had only had five versions up to that point. In every way, the tone of this launch was different from that of the AOL 8.0 launch. If AOL’s was a frat-party feel-good event, the MSN launch was a very grown-up affair, starring Bill Gates, champagne, and canapés.

  Gates, dressed casually in a blue open-necked shirt and olive pants, formed his trademark 10-fingered globe with his hands as he spoke. “Our commitment is to keep investing in this year after year as it moves to the mainstream,” he told the crowd. Later, he added that “Microsoft is not a media company. We use channels with content that partners create, managed by software that Microsoft creates,” before introducing Disney head Michael Eisner in heralding a new partnership called “Disney on MSN”—a new dial-up service aimed at Disney’s core audience of families with children. (Gates glossed over a previous MSN-Disney effort to sell a premium kids’ service that had been a bust.)

  Though the tone of the MSN launch was quieter—practically reverent, in fact, compared to AOL’s—it did have its moments of hilarity. Gates and Microsoft CEO Steve Ballmer appeared in one video dressed up as butterflies, handing out MSN CDs to bored urbanites. And in a presentation on fighting spam, Gates flashed slides of a few of his unwanted emails on the giant screen behind him. One read: “Get out of debt today!” to which the richest man in the world noted, “I didn’t respond to that one. I don’t think they had me profiled quite properly.” Another, “Are You Frustrated About Legal Concerns?” drew this comment: “I might have been interested in this if I’d gotten it a few years ago.”

  Watching the two events, one couldn’t help but think that AOL was the underdog of the two—even though it had three times as many paying customers as MSN. But the David-vs.-Goliath scenario had worked for AOL in the past, so somebody had obviously decided this “back to the future” tack was the right one for the times. At AOL headquarters in Dulles, cheap photocopies of anti-MSN slogans had been taped up all over the walls, with faux insights such as “Did You Know? In many parts of the world, The Butterfly has failed to evolve and is facing extinction.” And, “Did You Know? The Butterfly stinks and gives off an extremely unpleasant odor when disturbed.”

  But despite the temporary lift in spirits that the AOL 8.0 launch brought, the bad news kept coming through the rest of the fall. Recognizing how little had been done with the new version of AOL, Time magazine and many others reported that MSN 8.0 was just as easy to use as AOL 8.0, had better features, and was also ch
eaper. In November, Jon Miller would announce that the division’s traditional holiday parties would be canceled in 2002. Most disturbing, the Wall Street Journal warned that another massive write-off might be on the way for the company, due in large part to the declining value of the online unit.

  And on October 23, AOL Time Warner’s Parsons announced that the company would again revise its financial results following its own internal investigation of the ad deals that had drawn government scrutiny. On August 15, Parsons had pegged $49 million as the amount of questionable revenue related to three deals. But Parsons had spoken too soon—before CFO Wayne Pace could properly complete his internal audit of the online unit. The reduction in revenue was now $190 million, which would result in slicing a whopping $97 million off EBITDA. Parsons would also report flat earnings for the quarter, despite large gains at other company divisions, because of the continued poor performance at AOL.

  At the time, Parsons promised no further restatements or surprises. In fact, he noted, with some hope, that big changes were ahead, with a public strategic overview of the roadmap to fix the online division slated for December.

  The Sins of Our Fathers

  To soften up the hard ground, Dick Parsons made a speech a month later at a Variety conference in Manhattan, in which he finally said it was time to stop the bloodletting inside AOL Time Warner. In an onstage interview with New Yorker writer Ken Auletta on November 22, 2002, Parsons said that it was time to move on, and that those at the company who could not should then move on from AOL Time Warner. To those who continued complaining about their decimated portfolios, Parsons offered a crisp bit of advice. “I’d say, ‘Look, you’ve got to get over that.’ ” AOL Time Warner couldn’t, Parsons added, “go back and undo the past.”