AOL
You Got Mauled!
AOL Time Warner has a skilled new team, but getting the dents out won't be easy.
FORTUNE
Monday, August 12, 2002
By Stephanie N. Mehta
To explain his plan for the executives who run AOL Time Warner's seven big divisions, CEO Dick Parsons borrows a mantra from FedEx: "Operate independently, but compete collectively." Not that there was anything wrong with Parsons' old mantra--back in December he said his motto was "Underpromise, overdeliver"--but if ever there was a company in need of fresh marching orders, it's AOL Time Warner.
In the seven months since Parsons was named CEO in a surprise management shakeup, the company's stock has dropped 67.7%; management has revealed that problems at the America Online unit were worse than even the skeptics believed; and operating chief Bob Pittman, the executive dispatched to fix AOL, has resigned under pressure. And to no thinking person's surprise, the units that make up the parent company--publishing, films, music, television, online, and cable--have made scant progress in delivering on the synergies promised by the 2000 merger of Time Warner and AOL, prompting calls for a breakup.
So Parsons is shaking things up yet again. With Pittman out, he's divided the company into two big chunks and asked proven insiders Don Logan, who'd been chairman and CEO of Time Inc. (FORTUNE's publisher), and Jeff Bewkes, who'd been chairman and CEO of HBO, to oversee the groups. Among their challenges: to figure out ways to deliver on the second part of Parsons' mantra, the bit about working together to outfox the competition. "Every one of our businesses is very strong," Bewkes says. "Because we do have them together, what new businesses can we create using several of our businesses?"
Before it can create new businesses, AOL Time Warner has a lot of repair work to do to placate weary investors. The day after AOL announced the management changes, the price of its shares dropped 7%, to close at $11.58. And another crisis may be looming, if indeed the cable business is about to go the way of telecom (see Broadband Bust-Up). Luckily for Parsons & Co., there's little debate over what steps the company will need to take to win back investors' confidence.
Full Disclosure For years the America Online unit has been dogged by charges of aggressive moves to bolster revenue, most recently in a series of Washington Post articles (see also Do AOL's Ads Add Up?). While executives have insisted the AOL unit has done nothing improper, analysts have renewed their cry for heightened financial disclosure, particularly regarding AOL. Sanford Bernstein analyst Tom Wolzien published a report calling on the AOL unit for eight additional categories of information, including revenue from commissions, advertising backlog, and services billed to other AOL Time Warner units. "We already started with a lot more disclosure when we released first-quarter earnings," Parsons says, pledging, "You'll see even more as we go forward."
Reducing Complexity Parsons has made simplifying the corporate structure one of his top priorities. The elephant in the room is Time Warner Entertainment, a complex alliance with AT&T. AT&T Broadband, soon to be merged with Comcast, would like to sell its stake to AOL Time Warner, but the two sides haven't been able to agree on terms. Parsons' challenge will be to work out a deal without increasing his company's debt burden, now $28 billion. AOL Time Warner recently secured a $10 billion line of credit, a cushion and affirmation from lenders that Parsons says few give AOL credit for.
Getting Along Analysts will be watching the Bewkes-Logan relationship closely. This goes beyond touchie-feelie management issues. It goes to whether the company as a whole should be assigned a value greater than the sum of its parts. While Bewkes is gregarious and Logan is reserved, they are said to share great operating skills and an allergy to the kind of top-down management that sets unrealistic goals for divisions. They'll need to work together to fight ingrained skepticism on Wall Street. "If the company returns to the old time, the fighting duchies of the 1990s, then this thing doesn't deserve to be valued any higher than any conglomerate of disparate parts," says Sanford Bernstein's Wolzien.
Fix AOL Okay, so this is already one of Parsons' goals, but it is a toughie. The online unit lies in Logan's new domain. Analysts say AOL needs to figure out a way to keep its dial-up users happy while making sure it is serving a growing number of customers who want high-speed access--especially in markets where sibling Time Warner Cable doesn't offer fast-modem services. It also has to make itself attractive to users and build a rate base--not unlike, say, a magazine--to attract more advertisers. It may be hard for AOL to accept an outsider, but Logan is no Luddite. A major in pure mathematics, he worked his way through Auburn University as a Cobol programmer at NASA's Huntsville, Ala., facilities.
If Parsons and his team can address all these issues, AOL Time Warner perhaps can start to turn much of its focus back to the consumers who buy its magazines, watch its movies, and surf its sites. And if they can build new businesses out of these assets, they may even start to fulfill the promise of this star-crossed merger. |
