The energy level of the fast-talking co-chief operating officer of AOL Time Warner--the go-to-guy for many of the new company's integration challenges--is formidable enough without it, thank you. Today, he's executive-casual--cream-colored shirt, no tie, top button undone, jacket tossed over the chair to the left of his desk--but his cadences still sometimes slip into evangelist's stream-of-consciousness speed-drawl.
Mr. Pittman, 47, is a Mississippi-born preacher's son, but his is a different pulpit. It will require all of his considerable selling skills. In addition to overseeing the biggest merger of all time, he's attempting to graft an America Online advertising-cum-partnership strategy across the entire portfolio of the world's largest media company.
He needs to deliver on the promises of large-scale cross-media ad packages that have long bedeviled the industry while not unduly alienating agencies, some of which seem less than thrilled about a structure that, despite Mr. Pittman's avowals to the contrary, at times appears to end-run their role. There are also operational nuts and bolts to tend to. As one business-side staffer puts it, the net effect of being inside the newly merged company is akin to flying a plane while it's still being built.
Mr. Pittman, a creator of MTV, paints a picture of AOL Time Warner as a gleaming new machine. He views it as naturalists see a redwood forest-an ecosystem big enough to change the surrounding climate to one that best suits it. When one sits across from him in his Manhattan office 29 floors above midtown Manhattan, his words whip-cracking off his conference table's black granite top, it's hard not to be swayed by his conviction.
Upon leaving such rarified air, though, one hears the groaning gears down below as much of the company readjusts to a new operating philosophy and units scramble, sometimes desperately, to make aggressive growth numbers in a slumping economy.
WOWING WALL STREET
AOL Time Warner last month gave Wall Street a welcome shot of relief by making its first-quarter estimates when many other blue-chip media companies substantially reduced expectations. It's not an overstatement that AOL Time Warner has Wall Street analysts dewy-eyed with joy; as of late April, 33 of 36 analysts had the company pegged as a strong buy. This despite the formidable challenge AOL Time Warner faces to grow revenue 12% to 15% by the end of the year, to around $40 billion, and earnings before interest, taxes, depreciation and amortization 25% annually. (The stock, at $50.65 on May 3, hit a post-merger high of $55.75 in January 2001.)
One of Mr. Pittman's points clearly resonates with analysts: Robust subscription-based services within AOL and cable systems can substantially offset ad markets' cyclicity. The $2.1 billion the entire company took in from advertising made up just 23% of AOL Time Warner's first-quarter revenue stream. Subscription revenues, which make up 42% of the total were up 9.3%-a leap greater than any ad spending increase in 10 years, said analyst Lanny Baker of Salomon Smith Barney, San Francisco.
So far, the company's first eight cross-media ad deals announced by mid-April are pegged by analysts to be worth about $100 million over their duration (many are multi-year agreements). Its ninth deal announced April 26, is an extended technology and advertising partnership with watchmaker Swatch, valued by one senior AOL Time Warner executive between $25 and $50 million. (See chart below.)
These deals result from brainstorming by AOL Time Warner's Advertising Council-composed of each division's top sales executive. But Mr. Pittman's approach reflects AOL's beginnings. Outsiders to agency culture (even today, with well under 10% of its ad revenue coming through agencies), AOL is sold by going straight to the top.
"We generally do these issues at the COO or CEO level within the company," Mr. Pittman said of the cross-media approach. "It's a matter of coming in, talking to customers, and saying `What big strategic issues are you wrestling with?"'
Like AOL, the new company seeks to "partner" in this arena with companies it has existing supplier relationships with-such as its deals with Compaq Computer Corp. and Net infrastructure providers Foundry Networks. Mr. Pittman rightly points out the company's massive purchasing base-it spends $30 billion a year on salaries and supplies-gives the company the potential for a broader definition of partnerships, which some analysts say seem suspiciously similar to barter. "Maybe we don't have a vendor who gives us the lowest price," Mr. Pittman said, "but maybe we have a vendor who's giving us the lowest price when you add to it how much they are spending on advertising ... We have to think holistically."
Some of which is fodder for agency-side criticism. Mike McHale, a group media director at Publicis Groupe's Optimedia, New York, who buys for BMW and British Airways, said the CEO-to-CEO approach "is why none of us little media directors have gotten to see this integrated thing yet." The Advertising Council began brainstorming potential packages well in advance of the $124 billion merger's completion this January.
Even in the company, there's some skepticism. One executive within AOL Time Warner argued the CEO-to-CEO approach may not be built for the long haul. "I'm not sure that [approach] is going to produce that much" long term.
Moving to a true multiplatform framework also would take some cross-selling weight off top execs' shoulders-to say nothing of Mr. Pittman's, who said he's the "account executive" on the biggest accounts and fields such client calls at home after hours.
Already, there are internal discussions to form an Advertising Council offshoot to dream up potential cross-media packages. The reasoning is that the Council has plenty else to focus on without taking on more selling responsibilities. Council members include Brad Ball, president-theatrical marketing; Myer Berlow, president-worldwide interactive marketing, AOL; Larry Goodman, president-sales and marketing, CNN; Dave Long, president-media sales and marketing, Time Inc.; Paul McNicol, senior VP-interactive marketing, AOL; Jed Petrick, exec VP-media sales, The WB; Dan Romanelli, president, Warner Bros. Consumer Products; Bob Schneider, senior VP-worldwide corporate promotions, Warner Bros.; Mayo Stuntz, chief operating officer, AOL's interactive-services group.
Some of the headaches of coordinating advertiser relationships when deals can potentially be struck at every level-up to the CEO-have been alleviated, Mr. Berlow said, by the every-other-weekly Council meetings. "It keeps us from tripping over each other," he said.
And advertisers seem as hungry to make those deals as AOL Time Warner is. "There has not been one advertiser that we've either pursued or that has called us and not said, `What about [the new company]? How do we take advantage of it?"' said Joe Uva, president of Turner Entertainment Sales.
As many as six more cross-platform deals could be announced by the end of the second quarter, said one executive familiar with them. The Ad Council recently made the troubled automotive category a target, though Mr. Pittman conceded it could take up to a year for much larger packages to be finalized.
Big numbers routinely get thrown around at AOL Time Warner: $100-plus million in cross-media ad deals; the 28.8 million worldwide subscribers to AOL-and, Salomon Smith Barney's Mr. Baker said-the potential to end up with 40 million subscribers in the U.S. alone. In a figure seized on by the magazine industry, desperate for new sources of magazine subscriptions, America Online generates 100,000 subscriptions for Time Inc.'s titles each month-which, said Mr. Pittman, are all industry-grail "evergreens," or automatically renewing subscriptions charged to consumers' credit cards.
But 1.2 million subscriptions annually is a drop in the bucket for a publishing division that claims more than 42 million subscribers. Back in the mid-`90s, when stampsheet purveyors Publishers Clearing House and American Family Enterprises thrived, they generated as many as 5 million subscriptions for Time Inc., said a former company executive. And that 5 million figure doesn't include the 18 newly acquired titles in its Time4 Media unit (formerly Times Mirror Magazines), which were heavily dependent on stampsheet subscription sources.
Similarly, $125 million to $150 million in total commitments from nine companies in today's market is nothing to sneeze at-"I would say most people would lust after that," declared Mr. Pittman. But those are long-term figures and only equate to between 5% and 7% of AOL Time Warner's first-quarter ad revenue. Other megamedia giants like Viacom, via its Viacom Plus unit, and NewsCorp's NewsCorp One have teed up several deals in the $5 million to $15 million range, though they've been at it longer.
Mr. Pittman won't quantify the importance of cross-platform ad deals. "It's important," he said, "but there's a million other things in the company that are important to us." It seems clear, however, that AOL Time Warner's hopes in this arena are greater than those of, say Walt Disney Co.'s ABC, where President Alex Wallau has said such deals might one day make up 1% to 2% of his company's ad revenues.
Asked how long before the cross-platform sell was embedded within the company's DNA, Mr. Pittman said that at AOL it already was, but that it would take "a couple of media cycles-a couple of years" for the rest of AOL Time Warner to catch up.
Despite such claims, the importance of the cross-sell to AOL Time Warner's success "probably is" overstated, said Salomon Smith Barney's Mr. Baker. "There's no advertiser buying Time who hasn't thought at some point about buying AOL." One danger: Many of the cross-sell deals merely become in-house discounting.
THE BOTTOM LINE
"The bottom line is this: They are on target to make their revenue and cash flow targets for 2001," said John Corcoran, a Boston-based analyst with CIBC Oppenheimer. "If it slows very much from where we are now, it will become increasingly difficult to achieve revenue and cash-flow targets."
Voices inside the company already testify to some strain. "Let me put it to you this way," said one company executive. "The company did everything it could to make its numbers [in the first quarter]. The question is how long it can do that."
Part of it is cost-cutting, with the company promising $1 billion in cost savings in '01. It's not hard to find executives throughout the company who expect layoffs and buyouts beyond those that have taken place-2,400 in January company wide-and the around 800 buyout offers expected at Time Inc. later this month. "I don't think you've seen anything yet," warned one.
Mr. Pittman said all such decisions are up to divisional CEOs.
The aggressive profit numbers for 2001 were set last fall, before the depth of the current ad slowdown was apparent. Two Time Inc. executives said Time Inc. CEO Don Logan, when the extent of that downturn became clear, asked Mr. Pittman for more breathing room on the numbers-a request they say was denied. Mr. Logan said that's an "inaccurate portrayal."
"The question was raised," to a group of top company executives, "because the deal closed later: Should we revisit targets? Will we get all the synergies we talked about?" Mr. Logan said. The group, which included Mr. Pittman, CEO Gerald Levin, and Co-Chief Operating Officer Dick Parsons, decided no revision was needed.
Mr. Pittman said the process of arriving at target numbers is collaborative with divisional CEOs. "These numbers are not magical numbers handed out by the Ouija board at the finance department," he said. "Every quarter I've done in this business has been a hard quarter-I've never had an easy quarter in my life," he added. The advantage of AOL Time Warner's structure is getting CEOs to focus on the big picture-another hedge, in effect. "If we think about the business holistically, when a guy's got a little extra [beyond quarterly goals], he says: `Ah, [another CEO] is down, I'll cover some of it."'
This is precisely what rankles some company executives. "In some areas, they feel businesses are being compromised," said one, because "too much is being tapped to support other areas." This change from Time Warner's modus operandi, in which executives got bonuses for departmental, not company-wide performances, has been a post-merger chafing point.
Mr. Pittman downplayed tensions among company units. "Oh, the DNA is different everywhere," he dismissed. "What we do here is worship consumers."
Referring to readers or viewers as consumers, though, is exactly the kind of talk that makes some Time Warner executives instinctively cringe. Yet another obstacle for Mr. Pittman to overcome. Observers don't expect him to fail. But few deny this transition still has far to go, in an environment that leaves little room for error.
Contributing: Mercedes M. Cardona, David Goetzl, Wayne Friedman, Catharine P. Taylor