AOL Time Warner still faces hurdles

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Now that it's real, AOL Time Warner faces the daunting challenge of making good on its promise to dramatically transform the advertising and media landscapes. But the obstacles remain as vast as the megamerger's potential.

Amid aggressive goals for revenue and profit growth, impending layoffs, a softening economy and--oh yeah--the anxious stares of the media and advertising universe, AOL Time Warner must build on the groundwork laid over the last year for the cross-platform ad packages the newly minted media giant will begin to sell this week. For all the talk about how the deal-valued at $124 billion according to Bloomberg, and finally approved late last week by the Federal Communications Commission--will change the way the industry conducts business, the revolution won't be televised (or even Webcast) until the company pulls off some semblance of a significant cross-media deal.

The internal brain trust for the cross-media ad sales is the new media giant's Advertising Council. It consists of Dan Romanelli, president, Warner Bros. Consumer Products; Jed Petrick, exec VP-media sales, The WB; Bob Schneider, senior VP-worldwide corporate promotions, Warner Bros.; Larry Goodman, president of sales and marketing, CNN; Steve Heyer, president, Turner Broadcasting Systems; Dave Long, president of media sales and marketing, Time Inc.; Myer Berlow, president of interactive marketing, AOL; Mayo Stuntz, Chief Operating Officer, AOL's interactive-services group, and Paul McNicol, senior VP-interactive marketing, AOL; and Brad Ball, president, theatrical marketing, Warner Bros.

The Council has met at least monthly since the merger announcement a year ago, with occasional drop-ins by Bob Pittman, co-chief operating officer of the merged company and the point man for integration. Those meetings have puzzled out potential strategies and likely partners for substantial deals. Executives from both companies have met with representatives for major advertisers as well, meetings both sides characterize as "preliminary."

If the company is to meet its aggressive growth goals-12% to 15% for revenue (to $40 billion) and 30% for earnings in the first year (to $11 billion)-the benefits of cross-media sales need to be realized quickly. The company expects advertising to account for 20% of revenue.

But despite years of attempts, no media group has set the world on fire with successful large-scale cross-media marketing programs.

Messrs. Heyer and Berlow are expected to take lead roles in brainstorming packages. Mr. Heyer's cross-platform experience comes from overseeing an integrated-sales unit called Turner Solutions. Similar units within all company divisions will serve as advertiser liaisons to the Ad Council.

AOL Time Warner units netting the most business from individual advertisers are expected to lead the company's efforts with those advertisers. Mr. Pittman has stressed the lack of duplication between the client lists of AOL and Time Warner, and the opportunity to leverage relationships to squeeze more money out of those marketers.


The hurdles, though, are huge, and include internal issues such as revenue sharing. The solutions there, said Time Inc. Chairman-CEO Don Logan, "will depend on the deal." He expects "every" cross-platform deal "to be a custom proposal, and we'll figure out how to divide the revenues" without internal rate cards. The custom approach, though, conflicts with desires voiced by some advertiser-side executives, who stressed the need for cross-media "templates."

Another task for the combined company is to introduce America Online to the agency world. Analysts reckon less than 5% of the online service's ad revenue comes through agencies. And while direct client links will come in handy in pushing through complex cross-media packages, AOL will need to build stronger ties to the agency community.

The structure of the new company's sales forces is yet another issue. AOL floated the idea early on of a centralized sales team, said one executive familiar with the talks. But the prospect was quickly quashed by Mr. Logan; he insisted last week the centralized sales force was just one of "a hundred" ideas floated but never seriously considered.

A decade ago, before Mr. Logan arrived, Time Inc. created a centralized sales force across magazines. The experiment proved unpopular inside and outside the company and was called off. "The result was horrendous margin erosion," recalled a Time Inc.-er from that time.

Past attempts to realize ad synergies via Time Inc.'s mergers, with Warner Communications and Turner Broadcasting, were also disappointing. "The promise was simply never fulfilled," said a Time Warner executive, "which is why you're not hearing us at the moment creating unreal expectations."

Outsiders use hotter rhetoric. AOL Time Warner is "the most extraordinary media situation I can envision," said Charles Rutman, managing director of Carat North America, New York.

Bigger, though, isn't always better. "Not only Time Warner, but a lot of media companies, are still not structured internally to address these multiplatform, 360-degree communications alternatives from a sales base yet," said Bob Mancini, senior partner, Ford Motor Media. But sellers say it's buyers who lag. "Most agencies and clients are not equipped to buy" such packages, said Mr. Logan. "It's a situation we both have to work on."

Mr. Logan conceded that given AOL Time Warner's "aggressive targets and goals," the divisions "know we have to work together." Mandates and new mind-sets, though, may not overcome the hazards of a softening economy-one in which double-digit profit growth is expected even from some of the company's most mature magazines.

"We expect our people to find ways of delivering," said Mr. Logan. Since the profit improvements probably can't be reached through top-line growth alone, cost-cutting is certain. CNN this week is expected to lay off up to 25% of its 4,000 workers.

That puts additional pressure on the Ad Council to deliver. The optimists on the sidelines note AOL Time Warner is the right company to force through changes in the business of buying and selling media. But others fret over the pitfalls and the potential for logistical nightmares and turf battles.

One thing's for sure, said Mr. Logan: "It's a new day-a new era-and things will be different."

Contributing: Wayne Friedman

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