July 30, 2002

Steve Case Is Really Smart

I have always thought that AOL Czar Steve Case's purchase of Time-Warner was a true act of business genius. If the synergies between access, bandwidth, and content turned out to be there, the unified company would make a fortune. If the synergies did not turn out to be there--or if people came to their senses about valuations--or if something else happened to prick the bubble--then AOL's shareholders would not only own a dial-up internet service provider but also real, live media properties with real, live, actual earnings.

Either way, a win-win situation for Case and his AOL tribe. By contrast, it was a win for Time-Warner only if the synergies really were there. Their genius in agreeing to the merger is no longer so apparent today.

Here, Doug Rushkoff puts his version of this point very, very well:

:: Douglas Rushkoff - Weblog ::


Back on the day when AOL bought Time/Warner, the New York Times asked me to write an OpEd for them. "What does it all mean?" my assigning editor asked.

What I wrote was that AOL's purchase of Time/Warner heralded the end of the dot.com bubble. AOL was cashing in its casino chips. And just like the gambler who trades in his colored plastic disks for real cash, AOL's Steve Case understood that his run was over and that it was time to trade in his stock certificates for those of a company that had genuine assets.

The New York Times refused to run the piece. (I did get the "kill" fee.) They told me I was misreading the landscape to such an extent that for them to publish such a view would be irresponsible. See, all the experts - at least all the experts who the Times was listening to - believed that the AOL purchase of Time/Warner indicated "new" media's domination of of "old" media. Interactivity would take over. Time/Warner's only hope of getting in the game was to be absorbed by a new media company.

Of course, what was really happening was that Time/Warner, after having failed in its many efforts to establish a profitable foothold on the internet, decided they had to get "interactive" by any means necessary. Its share price had been driven down, at least in comparison with all those NASDAQ tech stocks, by Wall Street's focus on the dot.com universe. Acquisition of an Internet company was out of the question; the only road to interactivity was assimilation.

Meanwhile, AOL a company with few tangible assets other than a new subsciptions rate had already begun to slow, understood that the pyramid scheme on which its fortunes were made had run its course. (Today's SEC inquiry into the company's accounting practices appear to indicate they knew a whole lot more than that.) They needed to use their absurdly and temporarily inflated stock price to buy something real. No - they didn't go buy another fake Internet company. They bought a company with real, calculable assets such as a cable network, a film library, a host of magazines, and television stations.

They let many of the best staff members at their magazines go (print publishing? obsolete medium!), and changed the corporate culture at Time/Warner to such an extent that former Chairman Gerald Levin left in what can only be interpreted as a sickened disgust. (In his farewell speech, he quoted a Bible passage about the need to maintain an ethical template.)

Finally, AOL management admits that their lofty predictions of the "synergy" dividend were vastly inflated. The Board has put old Time/Warner execs back in charge of the company, and is hoping that AOL/TimeWarner may, someday, become as good and real a conglomerate as Time/Warner was in the first place.

And - once again in sad ignorance of what the Internet is and could be - the financial gurus are telling us that AOL's failure means that old media is once again conquering new media. Order has been restored.

What they don't get, and what real Internet enthusiasts have been saying since AOL took off in the early 90's, is that a company like AOL never had a future. AOL was a training ground. An introduction to the Internet for people who didn't know how to deal with ftp protocols. None of us thought it could last, because once the technological barriers to entry for the Internet had been lowered, no one would need AOL's simplistic interface or it's child-safe, digital content wading pools. People would want to get on the *real* Internet, using real browsers and email programs.

AOL's demise may represent the power of old media - movies and magazines are a much more sustaining and profitable form of content than anything to be found online. But it also represents the power of new media: the Internet is a living culture, not a shopping mall, and any effort to make it safer, easier, or more predictably mainstream is not only shortsighted, but unnecessary.

8:16 AM | link | comment

Thursday, July 18, 2002

Posted by DeLong at July 30, 2002 09:11 AM | TrackBack


Definitely. I once saw Michael Eisner shake his head about how Case had turned nothing -- a struggling electronic game room -- into ownership of both Time Inc and Warner, two companies that had spent most of a century building up troves of assets.

And Case had to manage his way through one crisis after another when AOL was prematurely called dead to do it. He beat off Microsoft head-to-head, and beat off IBM and Sears when they put maybe a billion dollars into Prodigy. He survived AOL being "America On Hold" to co-opt the web. Then he was one of the few internet stars to resist the temptation of thinking he had repealed the laws of economics and cashed in on top. He even took a subsidiary job to Levin in the new company to do it (though who's there now?)

Eisener said Case was the biggest success he could think of (Gates had a lock-hold on an essential product, Case had nothing unique) and that it was curious how everyone seemed to insist on underestimating him personally and selling him short as he notched up one success after another. (Sort of the Ronald Reagan of business. ;-) )

Posted by: Jim Glass on July 30, 2002 09:55 AM

Case pulled off the dream merger. Levin made a terrible mistake for TW. But, if memory serves Levin was offered a huge incentive if the merger was completed. There are often times endless incentives to top executives to expand though there are no incentives to share holders or employees let alone consumers.

Posted by: on July 30, 2002 10:16 AM

The AOL-TW merger did indeed mark the end of the dot.com bubble. Case understood and used a grossly inflated stock to buy a subscription and production base far more valuable than AOL's. Imagine Disney being bought by Yahoo.

Posted by: on July 30, 2002 10:47 AM

In 2000, Gerald Levin was one of the 10 highest paid executives in America.

Paul Krugman notes: "Gerald Levin engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage."

Posted by: on July 30, 2002 11:33 AM

Here in Dallas, the similar "case" is Mark Cuban's purchase of the local

basketball franchise -- the Mavericks.

In hindsight, the view of so many smart guys getting OUT of the dot.com industry should have tipped us all off.

Posted by: Melcher on July 30, 2002 12:04 PM

Melcher - right you are -

Cuban remarked to a New York Times reporter that he had trouble sleeping after Yahoo bought his company until the expiration of the time at which he could sell his Yahoo stock.

Posted by: on July 30, 2002 12:10 PM

Simply knowing the absurd story of how Henry Blodgett came to Merrill Lynch was enough to tell us how much of a bubble was being created.

Posted by: on July 30, 2002 12:12 PM

One of the most insightful technology journalists,

Bob Cringley also thought that the AOL/Time Warner deal was insurance for AOL. He wrote about this in his web column at the time, but also spoke of how CBS canned him as a `industry expert' about the deal when he told him his view on it.

What's interesting is that most current journalists writing about the situation slam the AOL people. Why? The AOL folk failed to live up the the mainstream media's own (false) expectations of the merger. History isn't written by the victors, it's written by the journalists.

Posted by: Amit Dubey on July 31, 2002 02:19 AM

Amit, it is tough to think straight through a craze. Buffett and Munger told us in 1999 and 2000 that the internet was a boon for consumers rather than producers. Fortune ran a speech by Buffett in December 1999, that marked the end of the investment craze. Few noticed.

Posted by: on July 31, 2002 09:07 AM

The question about Case now, is whether AOL can be competitive enough in broadband to hold subscriptions. After the AOL dial-up e-mail hold is broken there may be no regaining a subscription. My guess is AOL will see its market share decline more and more rapidly unless it quickly finds a way to be much more competitive.

Posted by: Arthur on July 31, 2002 12:58 PM

>>In 2000, Gerald Levin was one of the 10 highest paid executives in America.

Paul Krugman notes: "Gerald Levin engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage.<<"

Just remember that Levin got paid in AOL stock that he held, and that his great compensation payment has shriveled up proportionatey. So most of his own wealth is gone for cyberpottage as well. Krugman and others who mention him in this regard might mention this too, as a matter of fairness.

He may have been a bum judge of merger opportunities but he believed in what he did and kept his own money in it. He wasn't a take-the- money-and-run guy like so many of these CEOs are being made out to be, and a few were.

Posted by: Jim Glass on August 2, 2002 03:45 PM
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