Over Lunch, at the Bar And Over the Cubicle Wall

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The case against Case.
So Steve Case published a piece in The Washington Post yesterday making his case for why Time Warner should let AOL go, cause, like, you know, Time Warner management has really been holding back AOL’s potential to be the next Google (www.washingtonpost.com). He proposes breaking the company into four units, a plan that sounds almost identical to the one now being proposed by corporate raider and Time Warner nemesis Carl Icahn.
Photo: AP
Steve Case

Let’s review a little history of Steve Case and his relationship with Time Warner, shall we? Only six years ago, as co-founder of AOL, Case sat atop a dial-up Internet service provider that made its fortune by making it so easy for the layperson to get online that millions of consumers were willing to pay a yearly fee to not have to figure it out themselves. But come about 1999, it became clear the future of dial-up was limited as was the subscription-based model, as those millions found that getting to this newfangled Internet actually wasn’t all that hard and they really didn’t need a guide. What really mattered was what people would get online, not just the ability to get there. More important, advertisers wanted to be near compelling content that got lots of traffic. So Case got together with Gerald Levin, the Time Warner CEO who was looking for a way to burnish the legacy he would leave behind when his tenure ended.

In January 2000, AOL bought Time Warner in a $184 billion deal, the largest media merger in history. AOL shareholders got 55% of the combined AOL Time Warner, even though at the time AOL accounted for only 20% of the revenue. Case became AOL Time Warner's chairman. Pretty impressive, right? Then he proceeded to lead this giant to one of the most spectacular falls ever witnessed.

By January 2003, he was announcing his resignation as chairman, but only after a series of SEC investigations revealed some difficult-to-explain accounting within AOL’s advertising revenue. And only after he spent two years wallowing around and failing to find a strategy that would prove all the divisions could work together. And only after he had already sold off company stock that some estimate netted him well over $100 million.(Levin, it should be noted, actually ended up losing money, as did many of the Time Warner employees whose retirement plans depended heavily on company stock.)

In October 2002, AOL Time Warner, after struggling to prove for two years that the merger would yield the promised growth, finally posted somewhat improved third-quarter results. But the news came along with the revelation that it was restating results for the last two years to eliminate $190 million in overstated advertising and commerce revenue from AOL for the quarters ended Sept. 30, 2000, through June 30, 2002. The move eliminated $168 million of its advertising and commerce revenues for that period, or 1% of the division's revenue and 3.4% of its ad/commerce revenue. The remaining $22 million in revenue involved AOL transactions where advertising was delivered by other AOL Time Warner units.

Slightly more than half of the revenue overstatement occurred since January 2001, when AOL acquired Time Warner. Ad Age reported at the time that the restatement reduced net income for the affected quarters by $46 million. This all occurred on Case’s watch, mind you.

Here’s what one senior executive at AOL Time Warner told Ad Age in January 2003, when Case resigned as chairman: “From most parts of the business, there’s no love lost. His vision coupled with his profiteering while everyone else got hammered, I think, didn't endear him" to non-AOL staffers. Another exec said he was glad Case knew it was time to resign, adding he “didn't have a hands-on feel for the other businesses” at AOL Time Warner. The merger proved so unsuccessful, the company finally took the AOL name off the door and reverted back to the Time Warner name.

Steve Case only recently resigned as a member of the Time Warner board of directors, but he remains one of its largest individual shareholders. We completely believe him when he says he has not talked to Carl Icahn about his plan, and that he arrived at this conclusion all by himself. Call us cynical, but this seems less about one man looking out for a media giant planning for its future than how that same one man can get yet another boost to his portfolio.

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