Exec shakeup another troubling sign at AOL

By David Lieberman and Paul Davidson
USA Today

The shakeup at AOL Time Warner, which has headquarters in New York's Rockefeller Center, elevated two executives from the traditional media — or Time Warner side — to positions that in effect make them co-chief operating officers. Associated Press

The world's No. 1 media and Internet company doesn't look so grandiose these days. Indeed, investors wonder whether the merger of AOL and Time Warner, which looked so majestic when it was announced in 2000, might go down as the worst deal in history.

America Online, the Internet operation that former CEO Gerald Levin called "the jewel in the crown of the company" — worth more than his publishing, Hollywood, cable TV and music operations combined — has become a huge thorn in Bugs Bunny's paw.

With the Internet service's ad sales in a free fall and subscriber growth flattening, investors have driven AOL Time Warner stock down 70 percent in the last year.

That contributed Thursday to the most important structural change at AOL Time Warner since the media and Internet companies merged in Jan. 2001. Chief Operating Officer Robert Pittman, who came with AOL, is out, replaced by executives from two of Time Warner's more mature businesses.

And with Time Warner's victory over AOL unconditional and complete, some wonder whether even Chairman Steve Case, who ran AOL, might stay.

"Reality is finally descending, and the (Time Warner) guys who control 80 percent of the cash flow want to take back control of the company," says Blaylock & Partners analyst John Tinker. "The AOL guys have to decide: Are they in or are they out?"

Pittman's departure has seemed inevitable for months, although the company consistently pooh-poohed speculation. Yet last week the executive who helped to bring us MTV and Morton Downey Jr. grumbled to executives in Sun Valley at the Allen & Co. media conference that he was being blamed for problems he didn't create.

Pittman, still in charge for now, says he'll go as soon as a CEO is picked for America Online.

"Having worked so hard to build the AOL service and brand, and after then going through the merger and the last 18 months, it's time to take a break," he said in a statement.

Few expected the one-time AOL marketing whiz to last long after he was passed over for the top job. His one-time co-COO, Richard Parsons, a Time Warner veteran, replaced Levin as CEO in May.

America Online now falls under the control of Time Inc.'s Don Logan, 58, a good old boy from Alabama who became chairman of a new Media & Communications Group. He also oversee Time Inc., Time Warner Cable and the AOL Time Warner Book Group and Interactive Video unit.

Meanwhile, the flashy entertainment properties go to HBO's smooth, square-jawed chief Jeff Bewkes, 50. As chairman of a new Entertainment & Networks Group, he has HBO, New Line Cinema, The WB, the Turner Networks, Warner Bros. and Warner Music.

"Don and Jeff have each proven that they can generate consistent, solid growth over changing economic cycles in businesses such as those they now oversee," CEO Parsons said.

Chairman Case added that the new team should "enhance collaboration and innovation throughout AOL Time Warner and deliver fully on the promise of this unique company."

Logan and Bewkes also start off with a lot of fans on Wall Street.

"Jeff and Don are terrific executives," says WaterView Advisors' Frank Biondi, the former CEO of Viacom and Universal.

Logan gave editors and publishers lots of leeway and built market share for the No. 1 magazine publisher by launching variations of existing favorites. His creations include People en Espanol, Time for Kids and Teen People.

And Bewkes developed strong ties to Hollywood and used his promotional savvy to accelerate HBO's evolution from a movie rerun service into a haven for sophisticated adult-oriented programming. Hits he cultivated, including "The Sopranos" and "Sex and the City," redefined the limits of on-screen violence and sex — and boosted subscriptions 28 percent since he took over in 1995 to 38.5 million.

Their experience and credibility is important: Company watchers have lost trust in AOL Time Warner as the company testily refused to discuss important issues or disclose key numbers.

Up to now "anybody who said a negative word about AOL was put into a deep freeze, and I attribute that to Pittman and Case," says Vogel Capital Management's Harold Vogel. But Logan and Bewkes "are guys with credibility. They're mature and not given to hyperbole."

The executives also were never dazzled by the plans to merge Time Warner with AOL.

"Jeff was very negative about the deal," says former HBO and Warner Music chief Michael Fuchs, whom Levin fired in 1995. "As the AOL stock started to fall, there was a chance to get out with a $4 billion kill fee. So if you ask, who had the good judgment and courage to call it, it's Jeff."

For now, Logan and Bewkes warily shy away from saying anything controversial — including their thoughts about what AOL Time Warner should or shouldn't do.

"Whatever thoughts I have aren't worth a cup of coffee at Starbucks, let alone the cheaper joints," Logan says.

But they aren't see-no-evil cheerleaders. For example, he acknowledges that AOL's "whole model has to be rethought."

While rumors of a spinoff of the AOL unit continue to fly, the market likely will not "be clamoring for it" in light of the Internet malaise, First Albany analyst Youseff Squali says.

The advertising recession hit America Online particularly hard. Its ad revenue fell 31 percent in the first quarter — 37 percent if you don't include deals with other Time Warner units.

The advertising picture is made muddier by a "Washington Post" report Thursday that said AOL artificially propped up its ad revenue in 2000 and 2001 as dot-com companies imploded.

AOL executive vice president John Buckley says the ads followed generally accepted accounting principles and notes the questioned deals comprise less than 2 percent of ad revenue during the period.

But analysts feel burned. "The refusal to provide information has made projecting numbers very difficult," says Sanford C. Bernstein's Tom Wolzien. "They haven't provided a sufficient basis to know what the recurring numbers are."

An AOL official says the company has hired new advertising and marketing managers and "gets the message" that it must be straightforward in reports.

And while AOL still dwarfs competitors, with 34 million subscribers worldwide and service to nearly half of all U.S. Web surfers, it can't afford to be cavalier about subscriptions. Investors grew alarmed this year as AOL added just 1.4 million subscriptions in the first quarter — with much of the growth coming overseas.

Part of AOL's problem is the loss of its dial-up customers to cable and DSL broadband services. AOL has failed to strike deal with big cable companies, such as Comcast and Cox.

AOL also has not released early figures about how many Time Warner Cable customers subscribe to AOL's high-speed service, leading most analysts to assume the response has been lackluster.

The company says that'll change soon. "You'll see a greater emphasis on the marketing benefits of AOL with higher speeds," says Buckley.

But even the prospect of more broadband subscribers falls far short of the dreams executives initially had to charge as much as $159 for AOL add-on subscription services for music, movies, games and other Time Warner content. That vision collapsed as growing numbers of consumers began to download music for free, often in violation of copyrights.

And reviews have been tepid for the company's new version AOL 8.0 service, due this fall with upgraded chat features and better spam and parental controls. "It's a marginal help," says GartnerG2 analyst James Brancheau. "But they don't add up to the next big thing."