On the day the merger was announced in January 2000, Bear Stearns media analyst Scott Ehrens told CNN the combined companies would comprise an unprecedented powerhouse. "This alliance is unbeatable," Mr. Ehrens said. "Now they have this great platform they can cross-fertilize with content and redistribute." But AOL Time Warner never figured out how to live up to that vision, and now it appears determined to get out of the distribution business altogether.
Whether one blames unresolved fiefdoms, the myth of corporate synergy, the premature gushing over convergence or the initial exuberance of a newfangled distribution -- the internet -- the historic alliance just never panned out. Now, it's separating AOL's subscription and audience businesses, giving Time Warner "the necessary flexibility to do something strategic with either of these businesses today," CEO Jeff Bewkes told analysts. Many investors will cheer if "something strategic" happens to AOL.
Of course, it wouldn't be the first time people cheered.
"History has a way of changing things around in people's minds," said Jack Haire, a 28-year veteran of Time Inc. who now works for CNET. "What people today don't remember or realize, but I remember very clearly, is how excited everybody was when this first happened. Your brethren in the press thought this was a very bold move. AOL was not the third, fourth place or whatever it is today. It was the leader."
Even Ted Turner -- the founder of Turner Broadcasting Systems who sold his company to Time Warner in 1996 to become its largest shareholder -- didn't smell a skunk. "I smelled it a little bit but I didn't smell it enough to try to block it," he told TV host Charlie Rose last April, in an interview after he had stepped down from the company's board. He said, at the time, his friends and advisors all told him the AOL deal had to be done.
What immediately became apparent were the philosophy and personality clashes between the parties. AOL was aggressive, even brash, and lived for the stock price. Time Warner moved more slowly and talked more about building businesses or shareholder value.
Problems went beyond just a clash in styles. The internet bubble was bursting -- in the year between the merger announcement and its eventual consummation, the deal lost $60 billion in value. The web was becoming a more open place and AOL's walled-garden approach soon looked outdated. And AOL's subscriptions business was alternately a cash cow and a ticking time-bomb as consumers replaced dial-up internet service with faster connections from cable and phone companies. In December 1999, the month before the merger, Time Warner shares were trading above $70. By April 2002, the share price fallen below $20 and, except for a very few instances since then, has remained there.
Former AOL Interactive Sales Chief Myer Berlow, who now heads a Boston nanotechnology firm, said Time Warner should have acted more definitively -- and faster. "If you own an SUV and you know the long-term prospects for an SUV are not positive because the price of gas is going up, what do you do?" he said. "You figure out a way to make money, put in a hybrid motor or electric motor. Or if you're a forward-thinking company you sell it while it still has value. But what you don't do is drive it in the mud and wait."
The loss in value was especially harsh for Time Warner vets. By the end of the first year, Gerald Levin, who had led the company into the deal as its CEO, had announced his retirement. By the end of 2002, new CEO Dick Parsons had written down a loss of $99 billion. Soon the deal had fallen apart enough that Time Warner executives could flex their muscles and say: "We're taking this back." Time Warner dropped AOL from its name in 2003. Later Mr. Parsons spent considerable time fending off a challenge by Carl Icahn, who publicly pressed for Time Warner to be broken up.
Finally in 2006, AOL Media Networks was generating enough annual ad revenue to give the company the confidence to switch models and stop prioritizing subscription fees.
One company hand lamented that the whole episode had "just about ruined" Time Warner. It distracted management and limited the company's ability to make acquisitions with stock. It encouraged the company to sell its half-stake in Comedy Central. "The net-net of this today is it's a much less powerful, much less dynamic, much less elastic and growing organization," he said.
That's not how the Time Warner of 2008 wants you to see things. "Time Warner management has acknowledged many times the negative impact of the AOL deal after the internet bubble burst," said Ed Adler, exec VP-corporate communications. "We moved on after 2001 and undertook what was widely acknowledged as a difficult turnaround over a period of years."
For the past seven months, Mr. Adler said, Mr. Bewkes has moved fast to restructure the company, reinvigorate its businesses and generate brands and content such as Warner Bros.' "Dark Knight" and "Star Wars: The Clone Wars"; HBO's "John Adams" and "True Blood"; TMZ.com and "TMZ on TV"; CNN and CNNMoney.com; "The Closer" and "Saving Grace" on TNT; and Time Inc.'s People and People.com. "We're continuing our transformation toward an even more content-focused company with strong brands and improving prospects for growth," Mr. Adler said.
Indeed, one of Mr. Bewkes' first big moves was to complete the spin-off of Time Warner Cable, the unit that has all those wires leading into consumers' living rooms. "Jeff has the view his core business is content and production," said a former Time Warner exec. "Distribution assets are not strategic in that world view."
One can argue that for a while premium content looked like it was going to be AOL's niche -- from the Live 8 concerts to a highly produced reality show with Mark Burnett to an ad-supported comedy site with HBO -- the first time marketers would be able to buy ads next to HBO content, it touted.
But today, AOL's momentum is clearly in its third-party ad-network business, Platform A, which essentially monetizes other people's content. That is where the bulk of the investment has been made and it's arguably the more valuable bit for impending acquirers Yahoo or Microsoft, both of whom are building third-party ad networks.
An Aug. 7 note from Citi Investment Research suggested that Time Warner would indeed do itself a favor if it finally parted ways with AOL and returned its focus to content businesses such as movies, TV and publishing. "If we're right, Time Warner is getting close to an outright sale of AOL," the note reads. "And if the division fetches the value we suspect -- of about $12 billion -- then we think there's about $2.50 of near-term upside in Time Warner." At the end of last week, Time Warner shares were trading at about $15.
Another $2.50 per share is nothing compared with Time Warner's lofty expectations in 2001. But after all that's gone on since then, it is probably enough to make this merger history.