If America Online were a horse, you get a sense these days that many Time Warner employees would like to see the poor thing taken out back and shot. "My stock options might be worth something today if it weren't for AOL," says one Time Inc. journalist.
Indeed, America Online is dragging down the value of the merged company, AOL Time Warner (See BW Online, 8/5/02, "What's AOL Time Warner's Net Worth?"). Many investors and people inside Time Warner say they wish the marriage of Old Media and New had never happened.
"BLACK HOLE" BLUES. AOL's stock has fallen 80% in value since 2001's high of $55 a share, due mainly to poor advertising and slower subscription growth at the America Online division. And that was before disclosure of federal civil and criminal probes into AOL accounting practices. That hurts Time Warner employees even more than their AOL (AOL) counterparts: Time Warner shareholders received 45% of the stock in the new company as part of the deal (AOL investors got 55%), even though Time Warner is by far the bigger company.
Clearly, Old Media will prevail over New Media going forward. But with Time Warner execs fully in charge, do they have a shot at reversing the steep slide at America Online? The skepticism in the market is certainly valid. After all, the Time Warner executive now responsible for America Online, Don Logan, once famously referred to the Internet as a financial "black hole." Moreover, as the head of Time Inc. magazines, Logan is known for his lack of patience with media properties that don't pull their financial weight.
Logan may not have the answers yet, but he does appear to be a wise choice to oversee the AOL service. Logan now oversees not only the magazines but also America Online and Time Warner Cable. He doesn't have much personal Internet experience (other than running the now defunct Pathfinder site -- a financial failure for Time Inc.), but he does possess an extraordinary understanding of the advertising market and subscription-based businesses, analysts say. And ads and subscribers are the lifeblood of AOL as much as they are for Time Inc. magazines.
PAPER MONEY. "We've often heard the argument that magazines are a fading business, much the same as we're hearing now about AOL's dial-up Internet access," says Dan DeMonica, portfolio manager for the Armada Large-Cap Value fund. (DeMonica recently sold his fund's stake in AOL on word of the federal probe into AOL's accounting.) "Yet Logan has proven that magazines still can be very profitable," he adds. "I have every reason to expect he can do as good a job turning around AOL as he's done with Time Inc. He's a proven manager who has faced similar challenges before."
And despite AOL's woes, it should still deliver more than $1.8 billion in cash earnings this year, analysts say. That's about 18% of AOL's overall expected earnings for 2002. With that much still being contributed from AOL, Logan won't be giving up on the flagging Internet unit anytime soon.
His first order of business is a new CEO for the AOL division, which hasn't had its own chief executive since Barry Schuler stepped aside in April. Schuler was replaced temporarily by Robert Pittman, the chief operating officer of AOL Time Warner and the architect behind America Online's stupendous growth in the 1990s. Pittman resigned from the company in late July, seemingly under pressure from the board, which was concerned for the division's disappointing performance.
PROTECTING THE BASE. With those execs out, Logan and his boss Richard Parsons, CEO of the combined company, have been interviewing candidates for the America Online job and should be naming a new CEO very soon. One person known to have been considered is Jonathan Miller, former CEO of USA Interactive's Information and Services Group. He left Barry Diller's USA network in June.
At this point, the betting is that an outsider will get the job. But Logan will still play a strong hand in overseeing the Internet unit. He understands the value of having 35 million paid subscribers relying on AOL. If he can muster enough interest from those customers to switch from slower-speed dial-up Internet connections to the much faster and ultimately more profitable broadband being offered by AOL, he can lock in much of that immense online subscriber base for life, many analysts believe.
"This is not an Internet job so much as a circulation and marketing job," says Porter Bibb, managing partner of Technology Partners Holdings LLC, a media investment and consulting firm. "The main responsibility will be to maintain that huge membership base at the AOL service while switching as many customers as possible to AOL broadband (faster, higher margin Internet service)."
A DESK TO FILL. Bibb thinks AOL will ultimately give up on Pittman's postmerger strategy of cross-platform advertising -- getting companies to pay for advertising across several AOL Time Warner content mediums. "It has never really worked anywhere. It goes against the nature of how ad salesmen do their jobs," he says. (Bibb was the first publisher of Rolling Stone and the author of a biography on Ted Turner.)
The first goal after hiring a new CEO for America Online will be crafting a cohesive strategy that both investors and employees in the outfit's Dulles, Va., headquarters can wrap their hopes around. Resurrecting growth at the AOL division will be a difficult task -- no doubt compounded by the fact that employees in Dulles say that morale there "is in the toilet." Still, it isn't impossible.
Logan declined to be interviewed for this story. But there's certainly no shortage of media experts who say he's a perfectly capable executive for the job. Says Bibb: "He's a wonderfully wry, old Alabaman who's probably saying: 'We've made it work in magazines, we're gonna make it work for AOL.'" By David Shook in New York