by Kara Swisher
In yet another “surprise” of the kind that seemed to have become his signature, Parsons revealed that the company would add $45.5 billion in the fourth quarter to the already giant $54 billion charge it had announced in the first quarter. All told, the company would declare an almost $99 billion net loss for 2002—the largest in corporate history. At the same time, the company revealed that the AOL unit had suffered its first quarterly decline ever—a drop of 170,000—in its base of U.S. dial-up subscribers, which would only get worse as 2003 progressed. AOL Time Warner stock declined 14 percent on the news of the change, dragging down the whole market.
In another surprise the same day, Ted Turner announced that he would resign as vice chairman of the company. Turner had grown increasingly exasperated that he could do nothing to restore either his power or his vanished stock wealth. He was also irritated that he wasn’t even considered for the chairman position, and his fortune—still mostly in AOL Time Warner stock—was dwindling by the day, with little hope of a rebound.
In typical Turner style, he publicly flagellated himself and others about the situation, while bemoaning the fact that he had little purpose at AOL Time Warner. On the weekly TV news program 60 Minutes, Turner colorfully noted that he held a “title without portfolio, like the emperor of Japan.”
I laughed when I heard that comparison, but I wasn’t sure why Turner had expected much else, since he had ceded control long ago when he sold his company to Time Warner. As Barry Diller, well known for holding tight control over his assets, had noted about Turner’s woes in 2002, “When you sell, you sell.” To me that meant one thing: Let the seller beware.
The $99 billion charge and Turner’s resignation were bombshells, but because this is AOL Time Warner, the drama had yet to end. More accounting woes were soon unveiled, followed by the inevitable herd of shareholder lawsuits with their allegations of insider trading by the company principals. In March, for example, Parsons revealed that the company was in a dispute with regulators over $400 million in advertising revenues relating to another deal with the German media giant Bertelsmann.
In a complicated deal led by Mike Kelly and based on longtime agreements, AOL Time Warner had agreed to buy back Bertelsmann’s 49 percent stake in their joint subsidiary, AOL Europe, over time for $6.75 billion in cash rather than the $8 billion that had previously been agreed to. Bertelsmann obviously preferred cash, although AOL had the option of using stock.
One of the enticements for AOL to use cash was the price discount—but there was also a simultaneous deal for Bertelsmann to buy $400 million worth of ads on the online service. Regulators contended that the revenues were actually a “forced purchase” and should have been accounted for as a reduction in price, an interpretation AOL Time Warner disputed. Unlike some of the other questionable ad deals, this one was made after the merger, when it was harder to target only AOL executives as the bad actors. Later, the company noted it might have to cave to government demands on the issue to move forward with its cable IPO.
Other troubles hung over Parsons’s team too, including the need to sell assets in a down market in order to cut AOL Time Warner’s giant $27.5 billion in debt; the difficulty of completing a much-needed IPO of its cable division while government investigations loomed over the company; and the complexity of moving into its spanking new headquarters at Columbus Circle, which was costing the company billions. And, even AOL’s once-vaunted ability to attract subscribers took serious hits, as practices to goose numbers—such as selling accounts in bulk to marketing partners—were suspended.
“Heavy hangs the head that wears the crown,” Parsons joked at the annual meeting in May, when asked about how he felt regarding the tough tasks ahead of him. As Case had paraphrased Churchill’s famous quote, Parsons had changed Shakespeare’s well-known line from Henry IV, Part II, which actually reads, “Uneasy lies the head that wears the crown.” Parsons’s version was surely kinder to himself, since the latter version, of course, suggests a scenario where one might actually lose one’s head.
That would be the fate left for Ted Turner, who became more erratic as 2003 went on, giving some funny but ultimately sad interviews about his many losses and disappointments. In one Fortune piece in May, appropriately titled “Gone With the Wind,” he waxed on about his troubles—financial, personal, emotional, and even planetary. “I think the chances are 50-50 that humanity will be extinct in 50 years,” he declared in the article, in which he somehow also compared longtime media mogul foe Rupert Murdoch of News Corp. to Adolf Hitler.
While Turner ended up staying on the board, he ended his reign as a huge shareholder at the same time he stepped down as vice chairman. On May 5, 2003, he sold almost half his AOL Time Warner shares—50 million shares of his own and 10 million he had transferred to a charitable trust—in order to “diversify his financial holdings.” At a price of about $13.38 a share the day of the transaction, Turner would soon end up on the short end of the stick—um, stock—again. By the time of the May 16 annual meeting, AOL Time Warner stock had risen by $1 and by the end of the month by $2 from when he sold. That meant, within one month, Turner lost an upside potential of $120 million.
Perhaps I had found my answer to who had really robbed Ted Turner. There were many culprits, along with some bad ideas, an economic boom and a bust, poor business decisions, and questionable accounting.
But most of all, I would have to finally conclude, it was Ted Turner himself who had actually robbed Ted Turner.
It Never Rains in California
It was, improbably for the middle of winter, a perfect night in Silicon Valley.
The rain that had been dribbling in off the coast had cleared, and the fog was gone. It was February of 2003, and the exceptional weather was just right for the Valentine’s Day party I’d been invited to. The host was that very same venture capitalist who had offered me the $10 million napkin back in the salad days of 1999.
I walked toward his lovely home, with its pool and wine cellar and big sparkling windows that looked out onto lush lawns. The faintest scent of wet eucalyptus hung in the night air. Just beyond the house, I could see a softly lit, transparent tent that glowed with the kind of bonhomie I hadn’t witnessed in years.
Inside, the crowd was full of tech players such as Yahoo’s Jerry Yang, telecom pioneer Craig McCaw, and a passel of venture capitalists and entrepreneurs who had survived the vicious bust. But rather than looking defeated, as I’d expected them to, they were animated, they were enthusiastic—they were happy.
I was a bit surprised that everyone was in such a good mood, since the last several years had been about as kind to those gathered here as it had been to Steve Case, who had stepped down as chairman of AOL Time Warner a month before with his dreams of digital dominance dashed. It had been a very tough time to be in tech after so many up years. And no one here had much to look forward to, since little energy—or money—was flowing through the tech scene even after the years of drought. Investments in tech startups, for example, were just then hitting a five-year low from their peak—which happened to have been the first quarter of 2000, or the exact moment of the AOL Time Warner merger. In that golden quarter, a record $28.6 billion was pumped into 2,169 companies.
That time seemed a long way away for this group, but it seemed even further away for another gathering taking place at the very same moment across the country, in frigid Manhattan. There, in the Ritz-Carlton hotel in Battery Park, AOL Time Warner was holding an offsite management confab for a couple hundred senior executives. The choice of location—not far from the empty hole where the World Trade Center towers once soared—was unfortunate, and the mood inside the room was tense, especially for the group from AOL.
With Time Warner now in ascendance, it was clearly payback time. The morning started off badly, with a few Wall Street analysts giving their take on the company’s prospects. Right away, Ray Katz of Bear Stearns came out with a line that set the tone for the day: In describing the AOL unit and uncertainty
over its broadband efforts, he compared it to “the pimple on the face of a beautiful lady . . . you can’t keep your eyes off of it.”
Next up, there was an interview session led by Time Inc.’s acerbic editorial director John Huey—the same man who had jokingly likened AOLers to the Taliban when Bob Pittman left the company—where Jeff Bewkes and Don Logan talked about the future of AOL Time Warner. The trio, assessing the company’s prospects, made a number of cracks about AOL. Bewkes also offered up a zinger about Gerald Levin’s new love life, noting with mock astonishment that the austere former CEO was getting “more action than me.” It was a bit of a surreal moment for those in attendance, who did not often link Levin with sex.
“It was not a nice morning,” recalled Joe Ripp, the former Time Warner CFO who was now working at AOL. Other AOLers were similarly upset. So Ripp decided to try to change the tone in an afternoon question-and-answer session.
After checking with Parsons beforehand, Ripp stood up in the session and asked him how he felt about AOL. Ripp attempted to smooth things over, telling his former Time Warner colleagues, “I’m now [at AOL], and I see 19,000 people working hard every day . . . and I was from Time Warner and I know you all have pimples on your butts.” The ever-diplomatic Parsons gave a positive answer, and he offered an honest yet logical appraisal of the bad feelings many in the room had toward AOL. It wasn’t that Time Warner people didn’t like AOL employees, Parsons suggested, but that they were angry with them. And it was easier to direct anger at people than at an institution.
Parsons’s assessment couldn’t have been more wrong: The Time Warnerites still couldn’t stand AOL. The group got even bolder, especially after Parsons soon miscalculated and took a question from Warner Bros. executive Alan Horn, who expressed a desire to lop the AOL clean off the company name. In a kinder suggestion, Warner marketing honcho Brad Ball suggested a name change might actually help AOL recover its tarnished brand name.
Before Parsons had a chance to close down this line of discussion, others jumped in, and Horn was soon enough lecturing the group on how it should be an honor to have your name on a corporation, and how he didn’t think AOL’s name was appropriate. This struck many present as absurd, considering the thuggish and excessive reputations of many in Hollywood. As Ted Leonsis put it, “I found it ironic to have a movie studio executive talking to me about integrity, honesty, and lifestyle.”
Mercifully, when Horn asked to put the name change question to a vote, Parsons cut him off. Despite Parsons’s efforts, the AOL group was shell-shocked at the continuing acrimony. AOL head Jon Miller was particularly dispirited, and later described to me the AOLers’ desperation to get away from the event and the dinner scheduled for that night: “We’re all looking at each other and thinking, ‘So, what restaurant do you want to go to?’ ”
The AOLers did end up staying for the group dinner—only to get ribbed some more by comedian Wanda Sykes, who noted that AOL’s table behind the small WB network was a very bad sign. She compared Steve Case to Joe Millionaire: “He’s good-looking and nice, but he ain’t got no money!” Sykes joked. She also noted that Case was not there, but if he were, the group could come up on stage and “kick his ass.” Sykes also got a good one off on Parsons, noting that there was no need for affirmative action “when a black man loses $98 billion and he doesn’t lose his job.”
Despite the comedy, Leonsis and others were still disgusted, even after a few Time Warner executives came over to the AOL table to apologize. “Well, that was certainly motivating,” Leonsis noted dryly, before warning the executives that they should be careful what they wish for. “What if we all go home and quit, and say, ‘If you guys are so smart, why don’t you run it?’ ”
The AOL group being harassed in Manhattan would surely have gotten a much better reception at the party going on in Silicon Valley. While the tech industry had always disdained AOL for its simplistic technology, many at that party and throughout the sector still wouldn’t think of slapping around AOL in such a manner. After all, AOL had managed to do what no one else had done: Bring tens of millions of mainstream customers online. By popularizing the online experience, AOL had solidified its place in tech history.
And without AOL, the entrepreneurs and investors of Silicon Valley knew that many businesses that had survived the bust—Yahoo, eBay, Amazon, and others—would never have been as powerful as it looked like they would surely become in the future. And they couldn’t help but admire the money AOL had made for so many in the market. Even taking into account the downturn and all the stock declines, $1,000 invested in AOL at the end of 1992 was now worth almost $58,000. Of course, if you had put your money in during 2000, you’d be down almost 50 percent, so it was easy to understand the Time Warner rancor.
But this group didn’t seem to care about that, or about the blame being heaped on Steve Case. Yes, Case might have failed—but failure was a familiar part of the tech scene, and it was more often celebrated than maligned. I often found myself amused at the constant rewriting of history that took place in Silicon Valley, and at the way techies always managed to make utter disaster seem like nothing more than a learning experience.
Failure was arguably seen as admirable, since only those who had lost something were of value to the next phase of innovation. No one was better equipped to handle problems than someone who had been burned once. At the party that February night, numerous guests told me they intended to ask Case and other seemingly disgraced AOLers to serve on the boards of the various startups they were cooking up. They wondered what Case would do next, and compared him to another tech phoenix, Apple’s Steve Jobs, who had returned in triumph long after many had counted him out. Most of all, it was clear the group at the party had a high regard for Case’s chutzpah—even if it hadn’t helped him much at AOL Time Warner. For these risk-takers—or, more accurately, these people who considered themselves risk-takers—Case’s catastrophe was just another bump in the road.
Even so, not everyone at the party felt that way. I ran into one old-style venture capitalist who hadn’t much liked the whole wacky dot-com explosion even when it was happening. I’d first met him when I was working on aol.com, and he had been grumpy about AOL then too. He didn’t like the company from the start, because of its aggressive accounting, shifting business plans, and overblown stock.
“I just don’t get it,” he’d told me in 1997, just as AOL was really soaring into the market stratosphere. Now, with AOL in ruins, he pointed his finger at me and teased: “See, I was right! It was all craziness.” He left out, of course, the fact that his firm and many others had made a mint on that very craziness before everyone had wised up.
But he was, I guess, echoing a now-common sentiment that another legendary tech financier named Don Valentine had offered up at a public forum on the pioneers of the venture business at a computer history museum in Silicon Valley in October 2002. Speaking about the bust and the insanities of certain digital investments, Valentine was quoted by the Boston Globe as having said that aliens had come to the tech industry and drugged everyone. “We all took stupid pills and now we’re all better,” he joked.
“All better,” of course, is a relative term. Ted Turner had still been robbed. Beverly Sills was presumably still confused. The once admired architects of the AOL Time Warner merger were still dogs. And I was still flummoxed.
When I first started to search for answers to the ultimate legacy of AOL, I asked media columnist Michael Wolff for his take. He and I had long disagreed about AOL, but I always admired his sharp analysis and point of view. “We can go on arguing this point,” he emailed me flatly. “[But AOL] was always more an illusion of a company than a real company.”
Part of me, I had to admit, knew he was right. But at that Silicon Valley party, looking back on the clear proof that so many lives have already been changed in profound ways by email, the Web, cell phones, and a plethora of interactive devices, and with the excitement and new ideas about the digital future still swirlin
g around in the warm night air, I had to admit I was still a believer. And no matter the cost of its failure, AOL might still be an important factor in shaping the future—a future that will continue to be profoundly changed by technology.
Yes, a lot of what AOL and Steve Case had promised was bunk, and they had been found out and punished. And a lot of what the people at the party were so excited about—wireless networks, fully electronic markets, boundless pools of interactive information available everywhere—might turn out to be more of the same.
But I also believed that these kinds of idealistic visions were achingly American, and something that no amount of naysaying would ever stop. They’re hope and hype and lies and truths, all rolled into one—so much so that it’s simply impossible to separate them.
Because no matter the regrets, the rage, and the recriminations, on a lovely night such as this in Silicon Valley, it was just too easy to take stupid pills again and dream all new dreams.
Epilogue
A PORTFOLIO OF PERSPECTIVE
Watching the Signs
For months, whenever I went to do interviews at Time Inc. headquarters, in the Time-Life building on the Avenue of the Americas, I walked right by one particular sign in the lobby without paying any attention.
But on one of my last visits I finally noticed it—a window ad with a motto that all these people, so battered by the AOL Time Warner merger debacle, had had to put up with all this time. Plastered in front of a walk-in Fidelity brokerage was a huge poster with this advice: “The most valuable thing you can put in your portfolio right now is perspective.”
The thing is, I’m not sure there is enough perspective in the world to assuage those who had suffered under the disastrous marriage with AOL. After talking to many people for many months about the merger and its aftermath, I’d concluded that any reflection on the benefits AOL might bring to the company would still be a long time in coming. This was especially true for the Time Warner side of the company, which remained paralyzed by anger and decidedly unable to embrace the digital future. An “imposed narrative”—a phrase I had heard writer Joan Didion use to describe a story that had become cast in the cement of conventional wisdom—had been set concerning Time Warner’s forays into cyberspace: They were all a terrible mistake, most especially its union with AOL.