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<nettime> Dotcom Observatory Special: AOL Watch
geert lovink on Thu, 16 Jan 2003 22:23:38 +0100 (CET)

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<nettime> Dotcom Observatory Special: AOL Watch

(The recent resignation of AOL boss Steve Case is a significant moment in
Dotcom History. AOL's merger with TimeWarner, early January 2000, is usually
described as the ultimate height of dotcommania--and the beginning of its
demise. Over the last year I have sporadically collected material about the
steady downfall of AOL. The AOL story illustrates how the Internet is
levelling off and how the mythologies of eternal growth backfire on the
gurus (and their workers). I started this micro AOL investigation when I
couldn't find a critical forum about AOL. Perhaps they exist but do not show
up on Google. I may have looked in the wrong corner. Does anyone know
(insiders') online resources devoted to 'AOL watching'? There is AOL Watch
(http://www.aolwatch.com/) of course... Ciao, Geert)

1.   Slowed by a Flawed New Media Idea, AOL Hopes for Comeback (NYT)
3.   AOL Said to Take $10 Billion Charge
4.   AOL to Build $483 Million Movie Studio in China (Reuters)

5.   Accounting woes loom over AOL
6.   Could America Online get Netscaped? (WSJ)
7.   AOL All Over
8.   AOL, AT&T Alter Cable TV Alliance (LAT)
9.   New Software (and Bosses) at AOL (NYT)
11. AOL And Time Warner: Better Off Divorced (Forbes)
12. You've Got Losses (WP)
13. Will AOL Go The Way Of The Model T? (Forbes)
14. The Engine Stalls At AOL (Time)
15. AOL's '90s Nostalgia Suit (media unspun)


1. Slowed by a Flawed New Media Idea, AOL Hopes for Comeback

January 14, 2003

 AOL Time Warner, the world's largest media company, stands today as a
 casualty of the salesmanship of Stephen M. Case and the credulousness
 of the Time Warner executives who bought into his sparkling vision of
 synergies between the old media and the new.

 Now, Mr. Case has resigned as the company's chairman, the vision has
 dimmed and executives from the Time Warner side of the combined
 business -- filled with remorse if not resentment at having sold to Mr.
 Case's America Online at the height of the Internet mania -- face the
 task alone of resuscitating the company.

 The AOL online service was supposed to be the engine of growth for the
 merged company, offering lucrative new ways to market the products of
 Time Warner's sterling brands, from Time, People and Fortune to Warner
 Brothers and CNN. It was meant to be the business equivalent of pairing
 Fred Astaire and Ginger Rogers: AOL would give Time Warner sex, and
 Time Warner would give AOL class.

 But nothing has turned out as planned. With online advertising in a
 deep slump, online subscriber growth waning and lingering questions
 about its accounting, AOL is an anchor dragging down the combined
 company. Analysts say that its woes overshadow the generally strong
 financial performance of the traditional media properties in the Time
 Warner stable.

 "If the America Online division wasn't experiencing such negative
 growth, the overall AOL Time Warner would have industry-leading growth
 rates," said Jessica Reif Cohen, a Merrill Lynch media analyst.

 Mr. Case's resignation thrust the selection of a new chairman to the
 top of the agenda when AOL Time Warner's directors meet this week.
 Meanwhile, the turmoil in the company's executive ranks continued
 yesterday as Walter Isaacson, the chairman of CNN, said that he would
 resign after an 18-month tenure during which the network fell behind
 the Fox News Channel in the competition for cable viewers.

 The 44-year-old Mr. Case, a former Pizza Hut manager who brought e-mail
 and Web browsing to the heartland, plans to remain on the AOL Time
 Warner board. But it is mainly Time Warner veterans, led by Richard D.
 Parsons, the AOL Time Warner chief executive, who are left to chart a
 new course of growth for the company. Investors were little moved by
 Mr. Case's departure, with AOL Time Warner shares closing up 15 cents,
 at $15.03.

 Mr. Parsons said yesterday that there would be no deviating from the
 path that the company said last month that it was starting down with
 America Online: to push harder into the business of selling fast
 broadband connections to the Internet and the new services they make
 possible; to maintain its profitable dial-up service; and to count on a
 recovery in the online advertising business.

 He has no plans, he said, to either sell the America Online operation
 or drop AOL from the company's name. "I believe that AOL is one of the
 most powerful and respected brands in the country," Mr. Parsons said.
 "You can't escape AOL, it's so ubiquitous; it's almost synonymous with
 access to the Internet. Why would I want to do something that trashed
 one of our most powerful consumer brands?"

 Yet analysts who blamed Mr. Case and Mr. Parsons's predecessor as chief
 executive, Gerald M. Levin, for overselling AOL's growth prospects
 argue that it is management's duty now to lower the company's
 expectations for the online business.

 "If AOL continues to tilt at windmills in terms of trying to generate
 spectacular growth, I think it will be a waste of shareholders'
 capital," said Jordan Rohan, an analyst at the Soundview Technology
 Group. "If they begin to treat AOL as a mature business and focus on
 consistent returns, I think they can succeed. Case's departure could
 accelerate that shift."

 Other analysts said that Wall Street was waiting to see if the agenda
 laid out by Mr. Parsons -- a plan that Jonathan Miller, the chairman of
 the AOL unit, must execute -- gained traction. "If it's not successful,
 then there's no reason not to sell it," said Richard Bilotti, an
 analyst at Morgan Stanley.

 The gulf between the starry hopes for America Online and today's turgid
 reality started to become apparent, analysts say, by the middle of
 2001, only six months or so after the completion of the merger.

 America Online's future, they say, was clouded by a group of related

 The first was the slowing growth of America Online's subscriber base.
 America Online's subscription rolls averaged more than 50 percent
 annual growth from 1995 to 2000, climbing from about 3 million
 subscribers worldwide to almost 27 million users.

 In the second half of 2001, however, that growth began to level off.
 The company ended that year with 33.2 million users -- a growth rate of
 24 percent. And by the end of last September that figure had grown only
 slightly, to 35.3 million, slowing the growth rate to about 8 percent.

 That slowdown was perhaps inevitable, since by last year, most
 households that wanted Internet access already had it. A second problem
 was less predictable. The collapse of the dot-com bubble decimated
 America Online's advertising and electronic commerce revenues.

 After reporting $2.3 billion in ad and online commerce revenue in 2000
 and $2.6 billion in 2001, the company estimates that the figure
 declined to about $1.6 billion last year. Online ad and shopping
 revenues, the company says, will probably fall a further 40 percent to
 50 percent in 2003.

 In all, the company estimates that total revenue for America Online
 declined to about $8.9 billion in 2002, down almost 6 percent from more
 than $9.4 billion a year earlier.

 Reviving the online business is just one challenge facing Mr. Parsons
 and his team. In the coming months, the company will decide whether to
 spin off at least part of its Time Warner Cable unit as a way to raise
 money that would help pay down some of AOL Time Warner's enormous debt,
 which exceeds $26 billion.

 Analysts say that AOL Time Warner must also resolve federal
 investigations into America Online's accounting practices to regain
 investors' faith. And management, they add, still must try to find the
 synergies that Mr. Case and Mr. Levin imagined when they struck the
 merger three years ago -- a task that requires the hard work of making
 Time Warner's notorious fiefs collaborate among themselves and with the
 managers who are running America Online.

 Mr. Case's place in the history of the media business will probably
 await the outcome of all those undertakings. Was Mr. Case, the
 principal architect of the troubled AOL Time Warner merger, a cynical
 opportunist who got his comeuppance or a new-media visionary whose
 timing proved unfortunate?

 If Mr. Case was guilty of hubris, then the Time Warner management team
 was guilty of ignorance and credulity, according to industry analysts
 and academics.

 Time Warner's senior management, it seems, had little knowledge of the
 technology behind Mr. Case's vision of the digital delivery of all
 forms of media -- from e-mail and instant messages to movies and music --
 onto televisions, computers, handheld devices and cellphones.

 The technology continues to hold great long-term promise -- including
 the growing adoption of high-speed, broadband connections to the
 Internet through cable television modems or high-speed telephone lines.
 It is happening -- with new households signing up at the rate of 100,000
 a week.

 But the rollout of broadband, and other step-by-step developments,
 suggest that the digital future of media proclaimed by Mr. Case and
 others will come at the pace that most technologies advance into
 society -- as an evolution, rather than a revolution. This common-sense
 perspective, to be sure, was not so common a few years ago, before the
 dot-com crash.

 "A lot of people believe in the behavior on Wall Street even when it's
 irrational," said Michael Hawley, a professor at the Massachusetts
 Institute of Technology's Media Laboratory. "And Steve Case was riding
 the fastest horse in the online world."


      D I T H E R A T I
      see the digerati dither, daily


      "There's no question that this merger so far has been a
      disappointment. If you look out 10 to 15 years, I think
      people will look back and have a different view on this

          Departing AOL Time Warner chairman Steve Case, on how
          he expects history to vindicate him, San Diego Union-
          Tribune, 13 January 2003



AOL Said to Take $10 Billion Charge
As its corporate parent readies its annual earnings report,
a news report says it is preparing to take another write-down
related to the lowered value for the AOL unit.


Friday October 25, 7:37 PM

AOL to Build $483 Million Movie Studio in China

 Media titan AOL Time Warner Inc plans to invest $483 million to build
 an outdoor movie studio that is also expected to become a tourist
 attraction, the official Xinhua news agency said on Friday.

 Company executives toured Linan city in China's eastern province of
 Zhejiang and met its mayor during a trip aimed at finding a suitable
 location for the massive filming base, it said.

 The big-budget studio would be the largest-ever foreign investment in
 the film industry, surpassing Rochester, New York-based Eastman Kodak
 Co's $4 million stake in a Shanghai cinema.

 AOL Time Warner, the world's largest media firm, and government
 officials were not immediately available for comment.

 China promised it would allow more foreign investment in its film
 industry when it joined the World Trade Organization ( news - web
 sites) last year.

 Warner Bros film studio, an AOL subsidiary, said in July it had struck
 a deal to edge into the Chinese movie market by buying a stake in
 Shanghai Paradise Film Distributing Co, which owns a 1,400-seat theater
 in Shanghai.

 The Warner Bros stake in Paradise Cinema was below a 49 percent ceiling
 set by the WTO agreement, official media have reported.


5. Accounting woes loom over AOL

From: "CNET News.com Investor"
<Online#3.28617.323539343131.1 {AT} newsletter.online.com>
Sent: Wednesday, October 23, 2002 9:07 AM

AOL Time Warner said it will update Wall Street analysts on an
internal investigation of accounting practices at its troubled
America Online unit when it reports third-quarter earnings
Wednesday. The probe is not expected to result in a dramatic
restatement of AOL's past earnings, having so far focused on
just three deals totaling $49 million. Still, investors are
watching the investigation closely at a time when accounting
scandals have rocked Wall Street.
Visit: http://cl.com.com/Click?q=ae-jOB6QMBFESRS103QXL0uls8pkdRR


6. Dialing In: In Internet Access, AOL Begins to Feel Microsoft's Breath

Software Giant Keeps Plugging Away, Just as It Has Done In Tackling Other

Each Trots Out New Versions
By Julia Angwin And Rebecca Buckman

10/14/2002, The Wall Street Journal, Page A1

Could America Online get Netscaped?

In the late 1990s, Netscape Communications lost its seemingly unbreakable
lead in Web browsers under the weight of a relentless assault by Microsoft
Corp. Microsoft turned its Internet Explorer into the industry standard in
part by steadily adding features. Netscape has been reduced to 12% of the
market, now as part of AOL Time Warner Inc.

America Online is facing a similar assault from a Microsoft Internet-access
service that has long trailed far behind. No one is accusing Microsoft of
antitrust violations, as in the browser wars. But just as in that battle,
Microsoft is steadily adding features and slowly gaining ground. Now it's
about to launch a new version that could increase its competitive threat.

For America Online, this couldn't come at a worse time. The country's
leading provider of consumer Internet access is trying to emerge from what's
been an annus horribilis. Subscriber growth is slowing, advertising revenue
and profits are plunging, and past accounting is under investigation. All
this has pummeled the stock of parent AOL Time Warner, reinforcing the
conviction among veterans of the media giant that they made a big mistake in
merging with AOL.

Fixing America Online is thus a critical task for AOL Time Warner Chief
Executive Richard Parsons. But just as a new team he installed at the unit
settles down to work, up pops a new challenge to be fended off. Microsoft's
MSN 8, due out Oct. 24, will include features, such as fancy parental
controls and a "spam" filter, that go beyond America Online's. And Microsoft
can also always find new ways to use its ubiquitous Windows software, which
runs most computer desktops, to promote the new MSN.

AOL is also launching a new version, AOL 8.0, due out tomorrow. Both
companies plan big marketing splashes. But Microsoft's will have a heftier
$300 million budget, befitting a company that is cash-rich in contrast to
the heavily indebted AOL Time Warner.

Spam filters, which screen out unwanted e-mail solicitations, and other
user-friendly features are the domain America Online used to rule, as it
gently led the masses through the intimidating ways of a new medium. America
Online was also adept at marketing; Microsoft remained the techie maker of
office products.

But America Online got a little distracted. As online advertising rose in
the late 1990s, America Online focused heavily on selling ads. It paid less
attention to constantly updating its service to make it more relevant and
interesting for customers. "We became a by-rote company," says Vice Chairman
Ted Leonsis, who says the company is now in "redemption" mode. AOL was able
to largely ignore Microsoft's attempts to compete, as they seemed to fall
flat again and again.

Then two years ago, the online advertising that AOL focused on began to
crater. And in a tortoise-hare scenario, Microsoft has been slowly gaining
market share. America Online's subscribers remain far more numerous -- 26.5
million in the U.S. and 35 million world-wide, compared with MSN's nearly
nine million, mostly in the U.S. Also, America Online's lead over MSN in
total U.S. subscribers has widened to 18 million from 16 million over the
past 2 1/2 years, according to market researchers at IDC.

At the same time, the market has grown fast enough that even though AOL's
lead by number of subscribers has grown, its market share -- now at 31.4% --
has slipped, according to IDC. MSN's has surged to 10.2% from 5% in early

America Online's instant messaging has helped it prevent defections, because
customers are reluctant to lose their "buddy list" of friends to whom they
can send fast notes. But MSN has introduced its own instant-messaging
product. It's the typical pattern of Microsoft: Late to a market, it
patiently spends the time and money to try to become No. 1, just as it did
in word-processing and spreadsheets.

Microsoft plans a lavish launch for MSN 8 in New York next week, including a
Central Park performance by rocker Lenny Kravitz, whose "Fly Away" has been
licensed as the product's theme song. In one goofy marketing moment, an
actress dressed as a butterfly (MSN's symbol) will pop out of a huge cocoon
in Superior, Wis., announce a "superior" Internet service, jump into a
Toyota (a Microsoft sponsor) and say she's driving to New York. There,
another butterfly will leap out of a billboard in Times Square.

The unveiling of AOL 8.0 will be no less glitzy, starting with a launch
party at New York's Lincoln Center tomorrow with a performance by Warner
Music artist Alanis Morissette. Among 1,500 subscribers at the event will be
five Harry Potter lookalikes, some Elvis impersonators and a busload of
retired cops.

AOL's new product is an incremental upgrade, hastily put together in the
stretch since April when AOL first began to shake up its management. AOL 8.0
does have many new features, including a way to find people to chat with
online and an alert that lets users know if they're receiving an incoming
phone call while they're online. Emulating television, AOL 8.0 will have
online "shows" that run at certain times of the day.

The company will spend more than $100 million on the launch, aiming not only
at winning new customers but at retaining those it has. After years of being
in the growth business, America Online increasingly finds it also has to
play a defensive game, fighting to keep its subscribers from defecting.

The number of people signing up for new Internet connections in the U.S. is
slowing to a trickle. And various players are taking a share. United Online
Inc. has built a roster of about 1.7 million subscribers to a $9.95-a-month
service. EarthLink Inc. is also entering the market's low end by acquiring
PeoplePC Inc., which sells computers, with Internet service included, for
just $24.95 a month.

The fastest-growing part of the Internet-access market is high-speed, or
broadband, service. Both America Online and Microsoft are lagging in this.

America Online has one broadband edge: Its parent company owns the
second-largest cable company, Time Warner Cable. But broadband isn't as
profitable as dial-up service. America Online's profit margins on broadband
may be as low as 18%, compared with 55% on dial-up, says Jessica Reif Cohen,
a Merrill Lynch analyst. And at America Online, there's great pressure not
to undercut dial-up income. This isn't a problem for Microsoft, because MSN
isn't profitable.

Microsoft may benefit, too, from its past investments in cable providers. It
poured $1 billion into Comcast Corp. in 1997 and $5 billion into AT&T Corp.
in 1999. When Comcast agreed to buy AT&T's cable division, Microsoft got
them to agree to provide it with high-speed Internet access on the same
terms as anyone else. Result: When America Online, after long negotiations,
struck a broadband-service deal with AT&T and Comcast this year, Microsoft
automatically won the right to the same terms.

A key battleground for Microsoft and America Online will be in the broadband
arena of so-called bring-your-own-access services. Rather than selling
broadband connections directly to consumers and competing with the cable and
phone companies, Microsoft and America Online are both aiming to sell
broadband customers on the idea of paying an extra monthly fee to access
their Internet features. America Online has a lead here, with more than a
million customers who pay $14.95 a month to access the America Online chat
rooms, e-mail and other features. Microsoft has just announced a
$9.95-a-month version aimed at people who want to pay extra for Microsoft's
technical features.

Merrill Lynch's Ms. Cohen says that AOL, to maintain its profitability in
broadband, will have to charge customers fees for add-on services such as
music and movies. This was supposed to be AOL's secret weapon -- the rich
content of merger partner Time Warner, with its music, film-making,
TV-production and publishing empire. But it has become clear that these
divisions won't freely share their wares, and Mr. Parsons won't force them.

He has been telling investors that to flourish in a broadband world, America
Online must transform itself into the online equivalent of Home Box Office,
with premium features unavailable elsewhere. The comparison rankles some
staffers at America Online, who think it means they're somehow expected to
come up with hit content like "The Sopranos."

America Online executives aren't sure, in any case, that there is a "killer
app" for broadband the way e-mail hooked people on the Internet. "AOL has
never been about one feature," says Lisa Hook, president of AOL Broadband.

So America Online is focusing on developing what it calls "social media,"
meaning the ability to interact about a topic online. For instance, it's
working on a "First" program that will offer a sneak peek at new songs,
books or movies ahead of the general public. The hope is to use these to
lure subscribers into chat rooms to discuss the firsts -- and buy items
related to the promotions. Subscribers who develop chat relationships are
less likely to defect, research shows.

One recent evening, a half-dozen staffers met to discuss the new AOL feature
"First Read," which highlighted the first chapter of a children's book by
Lemony Snicket called "The Carnivorous Carnival." The meeting had just begun
when America Online Executive Vice President Jim Bankoff seized control of
the computer mouse. A designer was showing him a Web page that was set to
launch in a few days, but as Mr. Bankoff zoomed his pointer around the
prototype, he noticed something missing: links to chat and message boards.

Mr. Bankoff ordered up a raft of links to be embedded on the page, even
though it had been designed to look like a page of a printed book rather
than a Web page. "Let's really overdose on the community elements," he told
the group. In the past, chats were often an afterthought. When the Harry
Potter movie came out last fall, AOL staffers didn't think to build any
special chat rooms in their "People Connection" area until they realized the
extent of the Harry Potter phenomenon.

To jazz up the America Online service, Jimmy de Castro, a radio veteran
hired earlier this year, has added more news -- and fewer Britney Spears
photos -- to the "Welcome Screen" that users see when they log on. In AOL
8.0, there will be six versions of the screen: one for Internet newcomers,
one for teens, one for soccer moms, etc. There will be news and, eventually,
advertising tailored to each segment.

Mr. de Castro also has brought in some old-media techniques, such as online
"shows" running at certain times. Some of the shows offer interactive live
chats with celebrities, others package news, commentary and other

As Microsoft keeps plugging away at its feature-by-feature assault, it has
taken several steps to make it easier for AOL customers to switch to MSN,
just as the old browser team created shortcuts to help Netscape users
defect. In fact, a former member of the Netscape-fighting squad, marketer
Yusuf Mehdi, is helping oversee MSN 8. "This is not just another version of
our access product," he says. "This is going to become Microsoft's consumer
offering" for the future. America Online and its huge parent, of course, are
far more formidable foes than the tiny, inexperienced Netscape was for

One tool lets MSN automatically cancel an AOL account online if the defector
consents. The tool also lets people retain their e-mail messages and
address-book contacts when they leave AOL. America Online says fewer than
10,000 of its customers have switched to MSN using that tool, dubbed
TrueSwitch. And since Microsoft says it spent $10 million on TrueSwitch,
America Online figures MSN has spent $1,000 per customer on the program.
Microsoft says many more AOL customers have switched to MSN on their own,
without using TrueSwitch, although it won't provide numbers.

Microsoft is betting that its expertise in building software such as its
Word and Outlook programs will be decisive in its battle with America
Online. For more than a year, Microsoft has been pushing its software
engineers to essentially out-develop America Online. An example is in
parental controls, tools that let parents limit what their children can see
and do on the Web. While America Online has long had them, Microsoft is
offering them for the first time now.

Microsoft sends staffers and ethnographers to people's homes to study
Internet habits. It claims that recent visits found AOL's parental controls
not working for some people. Researchers found that some parents turned the
restrictions off because they were too narrowly focused, Microsoft says, and
in other households, kids circumvented them. In one family, "all of the
family members knew the dad's password," says a researcher, John S. Pruitt.
When a child couldn't access a Web site such as ESPN.com, he simply logged
in with his father's account.

Microsoft developed its own parental controls, trying to outdo AOL. One tool
sends parents weekly logs of their children's Internet activity, such as
what sites they tried to visit. Another feature provides a way for children
to visit blocked sites if they have a good reason. For instance, if a child
is doing a school report on breast cancer and wants to see medical Web pages
containing some nudity, MSN lets the child send an e-mail to a parent at
work for quick approval of the site visit. America Online has added a
similar tool but hasn't yet rolled out a report-card feature.

AOL says 16 million people have signed up to use its parental controls. "We
think it's fantastic that MSN has finally adopted parental controls, because
if there is an arms race in parental controls, the upshot is that kids win,"
says AOL spokesman John Buckley.

Microsoft also obsessed over unwanted "spam" e-mail. MSN 8 has a restyled
e-mail tool with an algorithm that analyzes the content of messages and
their subject lines and if it determines they're junk mail, deletes them.
Microsoft claims it can find and delete about 70% of spam. America Online
says it has also added spam-fighting features, such as a "report spam"
button and a way for subscribers to easily sort out the spam from their
e-mail box.

Reminiscent of the browser wars, where Microsoft got into major legal
trouble for the way it "bundled" its browser with its Windows operating
system, Microsoft also has resorted to a little bundling in tackling AOL.
Microsoft has combined scaled-down versions of its other software products
into its MSN Internet-access service and is essentially offering them at no
charge. The products include photo-editing and bill-payment software, as
well as the Encarta online encyclopedia.


7. AOL All Over

From: "CNET News.com Daily Dispatch"
<Online#3.23914.70-AkTUgRzYyGeR.1 {AT} newsletter.online.com>
Sent: Saturday, August 24, 2002 6:20 PM

Borrowing a page from broadcast TV, online giant America Online
is hoping some celebrity saviors can make its content more
compelling, with the goal of attracting and retaining more paying

In one recent example, the unit of AOL Time Warner offered the
first peek at actress Hewitt's debut music video, "BareNaked."
For other features, AOL is sifting through the vast music
resources of Time Warner for exclusive content.

Subscriber growth at AOL--which is also battling investigations
into its finances and a wickedly slow advertising market--has
slowed dramatically. Just 492,000 new customers signed up last
quarter, compared with the 1.3 million who were added during the
same period last year.

Subscriber satisfaction also has been ebbing. On Monday, the
University of Michigan released its latest American Customer
Satisfaction Index, and AOL scored 59 out of a possible 100, the
lowest of all companies measured in the Web portal category.
Competitor Yahoo received 76, and MSN scored 72.


One of gripes AOL users have had is the rampant use of pop-up
ads. In response, AOL earlier this year cut back on sales of pop-
ups, but it is now embarking on a new style of attention-grabbing

On Sept. 1, the company will feature so-called rich media ads
throughout member pages--a move that was previously inhibited by
technical limitations, despite the rising popularity of rich

Such ads will contain advanced sound and motion through streaming
media, Macromedia's Flash animation or comparable technology.
They appear in all shapes and sizes, including expandable
banners, pop-up ads, and promotions that float over a page, also
known as "screen stealers."

With the new ads, AOL is hoping to reverse some dismal numbers:
In the second quarter, advertising and commerce revenue fell 42
percent, a deeper decline from the previous quarter's 31 percent

In other AOL Time Warner news, the company said this week it will
spin off its cable unit as a separate company later this year and
will offer broadband service over AT&T Comcast's cable systems.

The deal also gives AT&T a way out of its partnership in Time
Warner Entertainment. The new company, to be called Time Warner
Cable, will be formed from Time Warner Entertainment's existing
cable properties and from additional cable properties to be
contributed by AOL Time Warner.

Oh, and we almost forgot: The investigations into the company's
dubious accounting during the dot-com heyday are continuing. Most
recently, some experts said investigators are likely to cast a
wider net in search of inappropriate insider stock sales and
misleading financial statements.


8. AOL, AT&T Alter Cable TV Alliance

August 22 2002



 NEW YORK -- AOL Time Warner Inc. and AT&T Corp. agreed to dissolve their
 complex Time Warner Entertainment partnership in a $9-billion deal that
 also will create a publicly traded cable TV company.

 AOL Time Warner will pay $3.6 billion in cash and stock to AT&T and get
 100% ownership of HBO and Warner Bros. film studios, plus a controlling
 stake in the new cable company, to be called Time Warner Cable Inc.

 Time Warner Cable, the nation's second-biggest cable operator with 10.8
 million subscribers, plans to go public with an initial stock offering,
 perhaps as early as next year.

 The deal, expected to close in early 2003, simplifies AOL Time Warner's
 bewildering financial structure, positions it to buy more cable TV
 properties while prices are down and gives its troubled America Online
 unit a long-sought means of offering high-speed Internet connections to
 millions more customers on AT&T's cable TV network.

 AT&T will get $2.1 billion in cash, $1.5 billion worth of AOL Time Warner
 stock and a 21% stake in Time Warner Cable, all of which will be
 inherited by Comcast Corp. when its purchase of AT&T's cable business
 closes this year.

 The deal provides Comcast with quick cash to help pay down the heavy debt
 it will incur in the purchase of AT&T's cable operation, a key concern
 for investors.

 AT&T Comcast is expected to sell its stake in Time Warner Cable after the
 public offering. With more than 20 million customers, AT&T Comcast by far
 will be the nation's largest cable-TV operator and probably would attract
 antitrust scrutiny if it held onto the Time Warner Cable shares.

 Because of Comcast's interest, its president, Brian L. Roberts, was
 involved in the negotiations, along with AOL Time Warner Chief Executive
 Richard D. Parsons and AT&T Chairman C. Michael Armstrong.

 Parsons said in a conference call Wednesday that the agreement makes AOL
 Time Warner a "far more transparent, easy-to-understand company," while
 protecting its balance sheet from excessive debt.

 Credit-rating firm Standard & Poor's on Wednesday placed AOL Time
 Warner's bonds under review for a possible downgrade, but Standard &
 Poor's analyst Heather M. Goodchild said the AT&T agreement actually was
 more favorable to AOL Time Warner than she expected.

 There was speculation in recent weeks that AT&T and Comcast would hold
 out for much more cash, which likely would have pushed AOL Time Warner's
 credit rating into the "junk-bond" range. As it is, the $2.1-billion cash
 component will have to be borrowed, but Parsons said it would be repaid
 immediately when the new cable company goes public.

 Investors were cheered by the long-awaited agreement.

 AOL Time Warner rose 97 cents Wednesday to $14.33 on the New York Stock
 Exchange, its sixth straight daily gain. The stock, however, is down 55%
 year to date. AT&T shares gained $1 to $12.18 on the NYSE.

 Time Warner Cable will debut as a relatively low-debt player in a heavily
 leveraged cable industry, which should give it lots of clout as a
 potential buyer, said analyst Jessica Reif Cohen of Merrill Lynch.

 Cable TV stocks, downtrodden all year, jumped Wednesday. Comcast leaped
 $3.32 to $25.08 on the Nasdaq Stock Market; Cox Communications Inc.
 gained $2.26 to $25.65 on the NYSE, and Cablevision Systems Corp. rose
 $1.83 to $9.65 on the NYSE.

 For AOL Time Warner, the most important part of the deal may be a
 three-year carriage agreement granting America Online access to AT&T's
 cable system, which has the nation's biggest network of high-speed
 Internet customers.

 Until now, high-speed Internet service has been available to AOL
 customers only through AOL Time Warner's own cable TV properties.

 Within four months of the deal's closing, AOL will get access to up to 5
 million customers of AT&T Comcast--as the post-merger company will be
 known--in the Boston, Seattle, Indianapolis and Nashville areas. In the
 second year, AOL will be offered to another 5 million AT&T Comcast homes.

 In the third year, at the option of both parties, AOL would get access to
 another 9 million homes.

 Parsons, citing competitive concerns, declined to provide the terms of
 the carriage deal, but the Wall Street Journal said AOL would pay AT&T
 Comcast a stiff monthly fee of $35 to $40 per customer. AOL would charge
 its customers $54.95 a month for the service, Parsons said.

 A high access fee would, of course, limit the profitability of broadband
 service, but analysts said it was even more crucial for AOL to make
 progress on rolling out the high-speed service. Subscriber growth for
 AOL's current dial-up Internet service has slowed sharply in the last

 The deal with AT&T Comcast should lead to other AOL Internet service
 deals with other cable companies, Parsons said, adding that "the industry
 has always followed a strong leader."

 "It followed John Malone when he was the fat kid in the boat, and now
 it's Brian Roberts."

 Malone, a cable pioneer, is chairman of Liberty Media Corp.

 Time Warner created Time Warner Entertainment in 1992 in partnership with
 two Japanese companies, and AT&T acquired its 27% stake two years ago
 through its acquisition of the cable TV firm Mediaone Group.

 Both AOL Time Warner and AT&T had long hoped to end the awkward
 arrangement, but negotiations never reached fruition under former AOL
 Time Warner Chief Executive Gerald M. Levin.

 "It probably needed a change of personalities to get things moving," said
 Morris Mark, president of Mark Asset Management in New York, which held
 about 1.5 million AOL Time Warner shares and 1 million Comcast shares as
 of June 30.

 Mark praised Parsons for following through on one goal he set when he
 took over the helm at AOL Time Warner in May. "In a tough environment, he
 is delivering on what he said he'd do," Mark said.


9. New Software (and Bosses) at AOL

August 5, 2002 By SAUL HANSELL
The New York Times

DULLES, Va., Aug. 1 - At the blue glass headquarters of America Online here,
there is a feeling that a four-year-old coup has finally been overturned.

Management turmoil, government investigations and a plunge in the stock
price of AOL Time Warner have caused more than a little confusion and
consternation. But there is a flurry of activity as designers and
programmers ready the annual release of new America Online software in
October, one its designers say represents a very important step backward.

In recent years, each annual update of the America Online service offered
more space devoted to advertisers, more promotions for high-tech gadgets,
and more links to other divisions of AOL Time Warner in hopes of impressing
Wall Street with the potential for synergy.

Last spring, a new group of executives took over running the America Online
service. The head, James de Castro, a former radio executive, is new to the
company and was named by AOL Time Warner's recently departed chief operating
officer, Robert W. Pittman. But many of the rest are America Online
veterans, itching to return the service to its old glory, one they saw as
focused on the user. And so the center of the new release, called version
8.0, will have a renewed focus on chat rooms and the other forms of
interaction and self-expression that AOL calls its community.

"If you are in this for the stock price, you are probably out of this by
now," said James P. Bankoff, an executive vice president in charge of
programming on the AOL service. "The people who are here now are passionate
about what they do, and 8.0 has been a great goal to focus on amid

A simmering wave of dissatisfaction among AOL employees began to boil last

"There was a movement in the halls that we had to take our company back,"
said Ted Leonsis, who was president of AOL in the mid-1990's and is now its
vice chairman. "The senior people were spending too much time in New York
talking about cross-promotion to Wall Street. We knew that members don't pay
for synergy. They want to get online and find a community."

The worst fears of Mr. Leonsis and his colleagues became evident late last
year as AOL's monthly surveys found member satisfaction starting to dip. Mr.
Leonsis formed a task force to look at why members were canceling their
service. It zeroed in on pop-up advertisements, a longtime feature and to
many a longtime annoyance. As revenue began to fall last year, AOL had
increased the frequency of pop-ups, and members began to complain louder
than usual.

A study showed that when the number of pop-up ads was cut in half for a
group of members, their satisfaction improved notably. That led not only to
a cutback in the number of pop-ups across the service, but was, according to
Mr. Leonsis, the catalyst for a revolution within AOL.

"It became a flashing beacon for employees," he recalled. "If someone said,
`I don't care about members, I care about the numbers,' we could show them
the numbers."

By April, Barry Schuler, who had run America Online since its merger with
Time Warner, was out, and Mr. Pittman, who had earlier been president of
America Online, was sent back to try to fix the online unit. He in turn
hired Mr. de Castro.

Things are likely to change again. Mr. Pittman resigned under pressure last
month in a management shake-up at AOL Time Warner. Don Logan, formerly the
head of Time Inc., now supervises America Online, and a new chief executive
for the unit will be chosen as soon as this week.

Mr. Logan, in a meeting last week with 275 top employees, was reassuring,
telling them he understood that America Online was not simply another
magazine to sell. With former Time Warner employees now ascendant, former
AOL executives now fear that "there will be a lot of payback" for their
high-handed attitude after the merger, as a person who had left AOL put it.

"The Time Warner people took a lot of heat from the AOL people," he said.
"There was a lot of chest-pounding about how `we'll show you how to run a
real company.' "

Indeed, there is debate among people at America Online about how well Mr.
Pittman knew how to run a company. To many, he was the one who created
profitable order from the exuberant chaos that characterized America Online
under Mr. Leonsis and its founder, Stephen M. Case. But to some, he was also
the one who put so much emphasis on meeting quarterly profit goals and
impressing investors that there was a lag in developing new features for the
users of the online service.

There is more criticism of the reign of Mr. Schuler, who ran the America
Online division after Mr. Pittman moved to New York to become co-chief
operating officer of the merged AOL Time Warner. Mr. Schuler, a graphic
designer and gadget enthusiast, pushed to develop AOL services for
interactive television, text pagers and other devices that for the most part
had not caught on widely.

Mr. Schuler was also seen as aloof, critical of employees and unwilling or
unable to check the tendency of America Online's advertising department to
sell off nearly every corner of every screen.

Mr. Schuler did not respond to calls and e-mail messages seeking comment.

And the ostentatiousness that characterized many of the top executives was
demoralizing for others, according to several current and former employees.
"You would sit in a meeting," a former AOL executive said, "and the top guys
would make plans to take their jets and rendezvous in Turks and Caicos in
front of a bunch of other people who had all their options underwater."

Mr. de Castro, well off by any standard after a stint as chief executive of
the AMFM radio chain, has been much more upbeat and focused on building the
enthusiasm of AOL employees. He leads an early morning class in spinning, a
form of pedaling aerobics on a fleet of stationary bicycles he had installed
at the foot of a stairwell near his office.

He restored rock music to the halls and elevators, a longtime feature of
AOL's offices that was stopped after the Time Warner merger.

And he tends to reply to long e-mail messages from his employees with
one-word responses like "Awesome!" - not a frequent feature of Mr. Pittman's

Mr. de Castro honed some of his skills during the peak years of radio
deregulation, when stations that were bitter rivals for decades suddenly
came under common ownership.

"He works hard at remembering you," said Michael Sherrod, vice president for
community. "He made people here feel like we can do things that are fresh
and innovative."

Though cheerful, Mr. de Castro can also be tough. He replaced eight of the
nine people who reported to him, mostly with other AOL employees.

"There is some dead skin and dry skin you have to peel away to get to the
beautiful skin," he said. With his team in place, Mr. Castro's initial
strategy is to "get the buzz back in the brand," as he said last week.

He has brought some paradigms from the broadcasting world. There is a daily
10 a.m. meeting to discuss programming for the day on the welcome screen and
other well-traveled areas of the service, a calendar of regular weekly
features (football on Sunday, the stock market on Monday, and so on), and a
budget for major programming initiatives for the fall.

"Just like HBO made a real difference on Sunday night by putting on really
fabulous programming, we can increase members' satisfaction by becoming an
entertainment medium," Mr. de Castro said.

What makes for compelling entertainment online is still the subject of
debate. Mr. Leonsis sent a scathing e-mail message to Mr. de Castro last May
criticizing his treatment of the last talk show of Rosie O'Donnell.

"Everything that is wrong with AOL was on AOL's screen that day," Mr.
Leonsis said. "There was a link to a People magazine story which linked to
Rosie's Web site. That's it."

"What AOL is about," he said, "is having millions of people send goodbye
e-mails to Rosie and having message boards about the major themes of Rosie's
shows - adoptions, gay rights and so on."

Mr. de Castro has largely endorsed the views of Mr. Leonsis and others, and
such interactive features are increasingly prominent across the service.
Most major pages now have spot polls on issues to draw users in.

Soon, some pages will be changed automatically to reflect what members are
doing that day. The food section, for example, will display a list of the
recipes that members have read that day.

"With 34 million members, we can represent what America is thinking or
feeling," Mr. Bankoff said.

This focus on community will be reinforced in the new 8.0 software, due out
in October. It has 100 new features ranging from improved filters to prevent
junk e-mail to more choices for the color and sound of the service.

But much of the focus is on features like "match chat," pop-up windows that
invite people to join chat rooms of those who share their interests. (AOL
members have long listed their hobbies and other interests in the member

"We have 1.4 million chat rooms each day on AOL, but the No. 1 complaint we
get is that `I can't find people to talk about what I want to talk about
when I want to talk about it,' " said David Gang, who is overseeing the
development of the 8.0 software.

While the new software can restore to prominence some America Online
features that had been ignored in recent years, some others will be harder.
Mr. Leonsis recalled a bittersweet exchange while on a recent vacation in
Hawaii. A young man near the pool introduced himself, he said, volunteering
that he was on his honeymoon and had met his wife on AOL.

Mr. Leonsis thanked the man, but it was a bittersweet complement. Last year,
AOL sold its free online personals area, Love {AT} AOL, to Ticketmaster's
Match.com unit, a fee-based personals service.

"I would never have sold Love {AT} AOL," Mr. Leonsis said last week. "Those kinds
of services are at the heart and soul of this company."



August 1, 2002

 AOL Time Warner said yesterday that the Justice Department had begun an
 investigation into accounting practices at its AOL division, after the
 initiation last week of an inquiry by the Securities and Exchange

 AOL Time Warner reiterated yesterday that its outside auditors, Ernst &
 Young, had repeatedly certified its books. But the new investigation
 steps up the pressure and scrutiny on the AOL division, which is
 currently seeking a chief executive who can help stop a steep decline in
 its advertising revenue.

 Several executives close to the search said yesterday that the leading
 candidate for the job was Jonathan F. Miller, who resigned in June as
 chief executive of the Internet unit of USA Interactive, a shopping and
 online travel company. No offer, however, has been made, and a final
 decision is not expected until next week.

 For now, investors remained focused on reports of the Justice Department
 investigation, and they sent the stock price down more than 7 percent
 yesterday, to $11.50. Wall Street lawyers said the latest investigation
 could trouble executives and embarrass the company regardless of the
 outcome. An S.E.C. investigation typically culminates in nothing worse
 than a settlement agreement and the payment of a fine by the company. But
 the Justice Department's investigation raises the threat of criminal
 charges, a grand jury and potential jail sentences.

 "In this environment, once the case goes criminal, the level of anxiety
 increases by an order of magnitude," said John Coffee, a law professor at
 Columbia. "The Justice Department has its cross hairs fixed on corporate

 The scrutiny from the Justice Department increases the likelihood that
 AOL executives will retain their own lawyers, who will probably advise
 their clients to invoke their Fifth Amendment right not to testify. Legal
 experts say that may be sound legal advice regardless of an executive's
 culpability. But it is poor public relations for AOL Time Warner.

 "Generally speaking, I would urge a client not to testify until I knew
 the full picture," said Martin R. Pollner, a lawyer at Loeb & Loeb. "But
 the company's counsel might find that a hard pill to swallow because of
 the impression it creates on the mind of the public."

 In a statement yesterday, AOL Time Warner said, "We are cooperating 100
 percent with the S.E.C., and we will cooperate with the Department of
 Justice as well."

 The statement added, "As we have consistently said, our accounting is
 appropriate and in accordance with generally accepted accounting
 principles, and our outside auditors, Ernst & Young, have repeatedly
 confirmed that."

 USA Today reported the Justice Department inquiry yesterday. Both
 investigations were prompted by articles in The Washington Post last
 month that outlined how in the two years preceding March 2002, AOL
 classified a variety of one-time fees -- like payments to settle
 advertising contracts -- as continuing advertising revenue.

 AOL Time Warner says that all of the transactions at issue amounted to
 less than 2 percent of AOL's revenue. But the timing of the transactions
 is significant because they took place when the company was under
 pressure to show that its revenue was holding up even though many of its
 dot-com advertising clients were collapsing. Around the same time, AOL
 used its soaring stock price to acquire Time Warner, a company with four
 times its revenue. Since that time, AOL's advertising revenue has in fact
 plummeted, and, to shareholders' chagrin, its poor performance has become
 the biggest drag on the combined company's stock.

 Accounting experts said the transactions described by The Post resembled
 some routine practices at Internet firms, but there was no way to know
 what the investigations might turn up.

 An AOL Time Warner executive said yesterday that there had apparently
 been some turf disputes within the Justice Department over the inquiry.
 The executive said AOL received a subpoena from the United States
 attorney in the Southern District of New York on Friday. But the
 executive said that subpoena was withdrawn and the United States attorney
 in Eastern Virgina, the jurisdiction where the AOL division is situated,
 had taken over the case.

 Professor Coffee of Columbia said the location was a surprise, since the
 Southern District of New York monopolized most of the few securities laws
 cases prosecuted in the past, including the recent investigations
 involving Enron and Adelphia Communications. He suggested that it might
 be a sign that amid the growing securities case load, the department was
 seeking to spread out.

 The first consequences of the investigation were evident yesterday as
 television crews crowded into the parking lot around the AOL building in
 Dulles, Va., while Don Logan, the newly appointed chairman of AOL Time
 Warner's media group overseeing AOL, was inside addressing the staff.

 People involved in the search for a chief executive at AOL said that Mr.
 Miller, the leading candidate, had met at the beginning of last month
 with Richard D. Parsons, AOL Time Warner's chief executive, and other
 company executives including Mr. Logan. The interview took place before
 the resignation of the AOL division's interim chief executive, AOL Time
 Warner's chief operating officer, Robert W. Pittman.

 AOL had approached some other more prominent media executives, including
 Marjorie M. Scardino, chief executive of Pearson; John F. Antioco, chief
 of Blockbuster; Paul S. Pressler, the chairman of Disney's theme park
 unit; and Stephen B. Burke, president of Comcast Cable. But most of those
 found the AOL job unappealing, said executives close to the search.

 Affable, but tough, Mr. Miller's expected selection is a sign that Mr.
 Parsons and Mr. Logan are looking for a low-key operating executive
 rather than someone with a flashier résumé who may spend more time in the

 Last year, Barry Diller, chief executive of USA Interactive, sold USA's
 film and television assets to Vivendi Universal to focus on its Internet
 operations as well as its Home Shopping Network. Media executives say
 that Mr. Miller found his job had become redundant with that of Mr.
 Diller and decided to strike out on his own.

 Mr. Miller arranged backing from General Catalyst Partners, a venture
 capital firm in Boston, to buy up companies involved in interactive
 commerce related to sports, entertainment and other areas. He has yet to
 make his first purchase.

 Mr. Miller ran USA's online activities since 1999, a period in which it
 entered what turned into the hottest areas in online commerce -- travel,
 with its majority-owned Hotels.com and Expedia, and online dating, with

 One area that USA Interactive has recently shied away from is
 advertising -- a crucial piece of America Online's profitability -- in
 favor of the transaction business.

 But Mr. Miller has presided over other ad businesses. He joined USA as
 the head of its broadcasting division and before that ran international
 operations for Nickelodeon.


11. AOL And Time Warner: Better Off Divorced
Dan Ackman, 07.19.02, 8:56 AM ET


Some marriages--like Angelina Jolie and Billy Bob Thornton--seemed destined
to last forever and it is shocking when they do not. Others appear troubled
from the start: The union of AOL and Time Warner falls into the second
category and congratulations are due to the partners for acknowledging what
all their friends have been whispering about for a while.

Thursday, the AOL Time Warner (nyse: AOL - news - people ) chief operating
officer resigned his position in a move that has been widely hailed as the
ascension of the old guard at Time Warner over their arriviste partners from
AOL, the internet service provider--and as one last kick in the teeth to the
so-called Internet economy now that it's down. But Robert Pittman's exit and
his replacement by two Time Warner veterans as seconds to Chief Executive
Richard Parsons signal a more fundamental rethinking: the decline of the
conglomerate idea.

This conglomerate idea is that one set of managers is so fabulous that they
can combine disparate companies, manage them better  individually and
allow--here comes the magic part--synergies to make all the parts more
valuable by their association. The idea tends to wax and wane. Lately it has
been waning, not just with AOL Time Warner, but with equally dramatic dives
by Vivendi Universal (nyse: V - news - people ) and Tyco (nyse: TYC - news -
people ).

Tyco and Vivendi lost their heads, Dennis Kozlowski and Jean-Marie Messier.
AOL managed to signal its devolution by ousting its number- two executive,
Pittman (though CEO Parsons is fairly new, his predecessor Gerald Levin
retired as part of an orderly transition).

For investors, the management reshuffling comes a bit late as the company's
share price has continued to fall below levels previously understood as
floors. The shares are now down more than 75% since the deal closed. The
financial community no longer believes in AOL's growth prospects, doubts its
complex accounting, worries about its debt load and wonders about its lack
of a clear strategy.

As for the synergies, for the most part they never happened. If anything,
they happened in reverse--as executives racing madly to prove the value of
an idea that was never very good kept fighting with each other. (See: AOL
Time Warner's Tragic Marriage.)

Pittman, who helped create MTV and ran AOL before it bought Time Warner,
personified the Internet side of the business. The AOL division is not in
sorry shape: It's still doing far better than most other Internet companies
and may even be profitable on its own--though its stunning growth rates of
the 1990s were not sustainable and it has been forced to rely on giveaways
to keep growing at all. It has also failed to sign up broadband Internet
customers in sufficient numbers partly for fear of cannibalizing its
dominant dial-up franchise and partly due to dissension within the AOL Time
Warner family.

Meanwhile, the declining advertising market has bedeviled the Time Warner
side of the business. Other media companies, such as Viacom (nyse: VIA -
news - people ) and The Walt Disney Co. (nyse: DIS - news - people ), are
also suffering from a severe advertising recession and their shares are also
down--though not by nearly as much as AOL. Forces larger than even AOL or
Time Warner are at work.

Tyco shares have declined even faster than AOL's over the past year. Like
AOL, it has some unique problems. But they also suffer from the same issue:
a belief that one diversified company can do it better than two focused

Compare AOL to Microsoft (nasdaq: MSFT - news - people ), the company once
seen as its rival for dominance of the Internet. The colossus of Redmond has
had its own media mergers, such as the creation of MSNBC both on television
and the World Wide Web, and it has diversified into areas such as computer
games and personal digital assistants. But it kept mostly focused on its
high- margin, high-growth software business.

AOL still owns a company that publishes leading magazines such as People,
Time and Sports Illustrated, top cable networks like HBO, and Warner
Brothers, a leading film and television producer. It also owns the
still-dominant ISP. The problem was getting these companies to work
together, analysts say. But the bigger problem was and is that they were
cobbled together in the first place when they all might be better off alone.
As of now, though, there is little chance AOL Time Warner will spin off

Even Thursday, Parsons was still mouthing the integration mantra: "We have
the best media, entertainment and communications businesses in the world,
but our challenge--and our goal in making these changes--is to take the
lessons we've learned over the past two years and use them to make the parts
work together to create greater value for our shareholders."

The question is: What lessons were learned?


This is a marvelous rundown on the news of the day (not just AOL Time

- Steve Brant

The Washington Post


12. You've Got Losses

By Howard Kurtz
Washington Post Staff Writer
Thursday, April 25, 2002; 8:55 AM

First, a flashback:

On January 10, 2000, Steve Case stunned the world by announcing that his
giant Internet company was taking over Gerald Levin's giant media company,
and the press practically swooned at the magnitude of it all.

"In an audacious deal bringing together traditional entertainment and the
new world of the Internet, America Online and Time Warner Inc. on Monday
announced they will merge in the largest business transaction in history,"
said the Los Angeles Times.

"The merger of America Online and Time Warner represents not only the
triumph of the Internet as the irresistible force in business, but a vision
of the Web as a mass-marketed, middle-of-the-road medium for Main Street
America," said the New York Times.

"At first glance," said The Washington Post, "AOL Time Warner could be an
information superfamily taking up residence in the stimulus-laden households
of the media age. The combined entity would have its big fingers in nearly
every method of delivering news, information, entertainment and advertising
to the home--be it through television, cable wires, phone lines, magazines,
books or music CDs."

USA Today reached for superlatives: "The deal rattles the brain because it's
one of those rare events that seems to change the world overnight. . . . The
13 colonies defeat the British. The AFL's brash New York Jets beat the old
NFL Baltimore Colts in the 1969 Super Bowl. The Japanese flex their newfound
financial muscle in 1989 and buy New York's Rockefeller Center. . . . The
new entity, called AOL Time Warner once the deal is completed, seems to be
in that league."

Yesterday, the new entity reported the largest quarterly loss in the history
of American capitalism ­ larger, as the Los Angeles Times noted, "than the
annual gross domestic product of Ecuador, Croatia, Uruguay, Kenya or
Bulgaria." More than fifty billion big ones.

You may not care all that much if you don't own AOL Time Warner stock. But
what's happened during the past two years says a lot about business

Whenever one of these mega-mergers get announced ­ Daimler and Chrysler, or
Hewlett-Packard and Compaq ­ there are reams and reams of copy about how
exciting it is, how the deal was done, the great future for the stock,
profiles of the CEOs as visionaries, and on and on. A few critics are
quoted, but the only cautionary notes are usually whether there will be
friction in the merging of the corporate "cultures."

It's in the nature of the news business to get swept away by a dramatic
announcement. Corporate leaders like to rattle on about synergy, and
reporters like to quote corporate leaders, who themselves have become
television-savvy pitchmen for their companies.

Less exciting for journalists is writing about the tough slog faced by these
monster conglomerates once all the shouting has died down. Until one day ­
boom! ­ the stock sinks so low, or the red-ink tide rises so high, that
everyone realizes the much-ballyhooed deal was a big old flop.

Which is more or less what happened yesterday to the company whose brand
names include CNN, Time, People, Sports Illustrated, HBO, Warner Brothers
and the You've Got Mail service.

"AOL Time Warner Inc. yesterday reported a $54.2 billion first-quarter loss,
the biggest in U.S. history," says the Washington Times.

"A massive charge related to AOL's purchase last year of Time Warner and
declining advertising revenue at America Online accounted for the company's
historic loss.

"The world's largest media company said in March that it would take a $54
billion charge to account for a decline in market value since AOL completed
its purchase of Time Warner in January 2001. The writedown reduces the value
of goodwill, or the difference between the purchase price of an asset and
its book value, created when AOL bought Time Warner for $124 billion.

"'There's a lot of good news, but one area of real disappointment,' Chief
Executive-elect Richard Parsons said in a conference call yesterday."

The patient has 106 fever, but we just got him a really nifty bathrobe.

"Yesterday's announcements made it clear that the difficulties facing the
company's flagship America Online unit are more daunting than even some
pessimists had expected," says the New York Times. "For many investors,
those difficulties have obscured the relatively strong performance of the
company's traditional media divisions. The troubles at America Online have
been the prime force behind the steep drop in the company's shares, which
have fallen nearly 40 percent this year. . . .

"As its subscriber growth has slowed and, more important, as the online
advertising market has collapsed, the America Online division, which was
meant to be the company's growth engine, has stalled instead. Meanwhile,
many of the old Time Warner divisions, once dismissed by dot-com acolytes as
stodgy relics, have steadily forged ahead."

Guess ink on paper isn't washed up yet.

A somewhat contrarian lead, though, in the Financial Times:

"AOL Time Warner's revenue and cash flow beat analyst's modest projections
in the first quarter, as the strong box office performance of Lord of the
Rings helped to blunt the impact of a 13 per cent decrease in advertising

Oh, and by the way they lost $54 billion.

Speaking of business, remember how Merrill Lynch pooh-poohed those internal
e-mails in which its brokers touted "crap" and "junk" to investors as being
taken out of context? The Wall Street Journal now says the company has hired
Rudy Giuliani:

"The popular former mayor of New York City, who first made his mark as a
Wall Street-bashing prosecutor during the 1980s, has recently switched
sides, joining Merrill's side as a hired outside 'adviser' as the nation's
largest brokerage firm negotiates with New York Attorney General Eliot
Spitzer. . . .

"Mr. Giuliani, in an interview, confirms that he called Mr. Spitzer two
weeks ago, just hours before the attorney general announced the results of
his investigation into Merrill, including the release of e-mails ­ some of
them derogatory in nature ­ showing that Merrill analysts often harbored
doubts about stocks that received high public ratings from the firm. 'The
reality is that Merrill is an enormously important player in New York in the
right sense,' Mr. Giuliani said in the interview. 'There is a problem here;
no one is running away from that.'"

The probe, meanwhile, is widening. "As part of an investigation into
conflicts of interest among Wall Street analysts, the New York State
attorney general has issued a subpoena to Salomon Smith Barney requesting
that the firm produce all documents relating to research produced by Jack
Grubman, Salomon's star telecommunications analyst," says the New York

The prez made his way to South Dakota, and there's no mystery why, says The
Washington Post:

"America's top Republican, President Bush, and top Democrat, Senate Majority
Leader Thomas A. Daschle, came way out here to the wind-whipped prairie to
smile and obliquely squabble today. At issue: suspected slights and petty
protocol violations; also arcane disagreements over policy matters ­ but
most of all, politics.

"Fate has located one of the biggest political stories of the year amid the
modest burgs and vast emptiness of South Dakota. Control of the U.S. Senate
may hinge on one very close election here pitting the incumbent Democrat Tim
Johnson against Bush's handpicked choice, John Thune, the state's lone

"Bush may be riding high in the polls, but he is bedeviled by the Senate
Democrats and their one-vote margin of control. Daschle has the power to
block Bush's agenda ­ the energy bill is a good example ­ and freeze
appointments of judges. Bush desperately wants to send Daschle back to the
minority leader's office.

"And so Bush made his second visit to South Dakota, which is at least one
more than most presidents, and he is not yet halfway into his term."

The Vatican conclave is getting worldwide attention, not surprisingly.
Here's the USA Today report:

"The Roman Catholic Church's top U.S. leaders said yesterday that they've
outlined a policy to rapidly oust 'notorious' priests guilty of 'serial,
predatory sexual abuse of minors' and send alleged new offenders to civil
authorities and lay-led review boards. But they stopped short of calling for
a 'zero-tolerance' policy for offenders and alluded to 'spiritual atonement'
for cardinals and bishops accused of covering up the actions of predatory

"The statements, in a three-page communique and a six-paragraph letter to
priests, came at a news conference after two days of crisis meetings with
Pope John Paul II and Vatican officials. The U.S. clerics promised to send
the Vatican ­ after the U.S. Conference of Catholic Bishops meets in June ­
a set of 'national standards' for dealing with other cases of sexual abuse
among priests."

No zero tolerance? Abusing kids is okay if you don't do it too often?

The Middle East drama is far from over, as this Los Angeles Times dispatch
makes clear:

"Fresh from what it sees as an overwhelming military victory in the West
Bank, the Israeli government is openly debating whether the time has come to
expel Yasser Arafat from this land.

"Doing so would mark another step in Prime Minister Ariel Sharon's plan to
relegate the Palestinian Authority to history and promote a more cooperative
leadership in its place, following a three-week military campaign that left
much of Palestinian society and infrastructure a shambles. It is a strategy
he has pursued in the past, with problematic consequences.

"Sharon has already come close to expelling his longtime nemesis. Only a 2
a.m. telephone call last month from Secretary of State Colin L. Powell--just
hours after a Palestinian suicide bomber wiped out entire families at a
Passover Seder--stopped Sharon from snatching Arafat out of the West Bank
city of Ramallah and casting him into exile, according to sources. . . .

"When Powell came calling again this month, this time in person, and asked
Sharon for a promise to keep his hands off Arafat, the Israeli leader

Salon's Arianna Huffington sees the O.J. syndrome returning:

"The addicts have fallen off the wagon. Again. Alert the media.

"Of course, they won't listen to you ­ because they are the ones who are
addicted. After swearing off the trivial, the titillating and the trashy in
the wake of Sept. 11, the media are once again overdosing on their
overwrought, over-the-top, overkill coverage of the arrest of D-grade
celebrity Robert Blake.

"The telltale signs that the media machine is heading for a big-time Blake
bender are all there: the 'stop the presses!' breathlessness, the contrived
sense of importance, the rampant speculation, the 'special report'
break-ins, the trotting out of all the usual experts. We even had Geraldo
weighing in on Blake. From the Middle East, where some actual news was
purportedly taking place ­ although you wouldn't have known it from the

"This is why I have decided to step in and stage an early intervention
before things get completely out of hand. It's bad enough watching what the
craving for scandal-driven ratings does to otherwise intelligent
journalists. But what I really can't stomach is the thought of the
inevitable next round: the orgy of thoughtful and noble-minded hand-wringing
and self-flagellation that is sure to come after the Blake bacchanal runs
its course and the media wake up with a head-splitting hangover, wondering
'What the hell are we doing with this lampshade on our head?'"

National Review's Byron York deconstructs some poll numbers involving the
Middle East:

"At the White House briefing Tuesday, press secretary Ari Fleischer laughed
when a reporter asked, 'Has the president expressed any reaction to polls
which show his ratings slipping?'

"'You're kidding, aren't you?' Fleischer responded. But the reporter wasn't
kidding, so Fleischer cited a new Washington Post poll pegging the
president's job-approval rating at 78 percent ­ a little down from his
ratings a few months ago, but still almost stratospherically high. 'The
American people, as shown by all the data, powerfully, continually support
the president at record-breaking levels for a record-breaking amount of
time,' Fleischer said.

"Fleischer also pointed out that the poll shows an impressive majority of
those surveyed ­ 71 percent ­ approved of the way the president is
conducting international affairs. But Fleischer did not mention that a
significantly smaller number, 57 percent, supported the president's handling
the conflict between Israel and the Palestinians. Why is there such a large
difference between the two numbers? A closer look at the poll results
suggests it may be because many Americans believe the United States is not
taking the Israeli side emphatically enough.

"In response to the question, 'In the Middle East, are your sympathies more
with Israel or more with the Palestinian Authority?' Forty-nine percent said
Israel, while just 14 percent said the Palestinians. . . .

"The poll also shows that most Americans do not go along with the idea that
the United States has not been sufficiently 'engaged' in the Middle East.
Sixty percent of those polled said the U.S. is doing the 'right amount' in
the conflict, while 12 percent said the U.S. is doing too much ­ that's a 72
percent majority who feel the U.S. is doing enough or more than enough. On
the other side, just 25 percent said the U.S. is doing too little."

Beltway types are still buzzing about the Karen Hughes resignation. Here's
GOP insider Rich Galen on Mullings.com:

"This is April of the second year of the Bush administration. If you are
working in an administration's first term, and you are thinking about
leaving, you have to leave prior to the mid-term elections. If you are still
in your position after November, you have pretty much signed up to stay
through the re-election campaign.

"So, you are not deciding on whether to stay around for another three or
four months. You are committing to another two-and-a-half years. . . .

"Karen's husband, Jerry, is a lawyer. Jerry is a gentle, kind,
behind-the-scenes type of guy. Unfortunately for him, when your wife is the
counselor to the president there are not many clients you can service who
might not leave you open to a conflict of interest.

"Their soon-to-be-a-teenager son, Robert, spent the election year being
home-schooled on the campaign plane. This was wonderful for mother-son
togetherness, but not much for kid-to-kid activities. Robert, it seems
reasonable to suspect, would like to go home and hang with his pals. . . .

"Not so long ago The Mullings Director of Standards & Practices and I ran
into the Hughes family and the Allbaugh family at a local restaurant. Karen
indicated that they were still trying to adjust to living in Washington. I
suggested that if they ever got to a comfort point, it would be a signal it
was time to leave.

"In this age of hyper-sensitivity to scandals ­ real, impending, or
imaginary ­ the first major departure from the White House seems to be
nothing more than the desire of an ordinary family, which has participated
in an extraordinary experience, to return to an ordinary life."

When James Carville learned that Hughes was quitting, he had an emphatic
reaction about his wife, White House aide Mary Matalin. "If she gets that
job, she'll have to get a new husband," Carville told Don Imus.

Phil Gramm is also retiring, but not without a parting shot from the
American Prospect: "The collapse of Enron generated a flurry of speculation
about Texas Senator Phil Gramm's political loyalties, owing to his wife's
position on Enron's board and Enron's extensive contributions to Gramm's
campaigns. Whatever Gramm's motivations are, shame doesn't seem to be among

"As Senate Republicans accused Democrats of obstructing the energy bill last
week, Gramm quietly blocked an amendment introduced by California Democrat
Dianne Feinstein that would have strengthened regulations on energy
derivatives trading. Translation: it would have closed the loophole that
allowed Enron to hide wholesale prices from buyers and control markets.

"The measure, which consumer groups called the first 'Enron test,' flunked.
It was denied cloture, thanks to Gramm, by a vote of 50-to-48. His move,
moreover, attracted almost no attention in the press."

There's been talk that Republicans are shying away from CNN's "Crossfire"
and the new liberal co-hosts, Carville and Paul Begala. Which brought this
on-air rant from Begala:

"I have a message for the nameless, gutless whimperers out there. Quit
whining. Unlike some other shows, we here at 'Crossfire' actually present
both sides of the issue. Every single night, we welcome the leading lights
of the Republican right on to battle against their ideological foes.
Carville and I make no apologies for being tough, nor do Tucker [Carlson]
and Bob [Novak]. That's what makes this show different. Look, if you want
namby-pamby one-sided arguments go to Fox. But if you're tough enough and
you're smart enough to go toe-to-toe with people who actually know how to
debate, welcome to CNN. Welcome to the new 'Crossfire.'"


13. Will AOL Go The Way Of The Model T?
Mark Lewis, 04.19.02, 12:40 PM ET


NEW YORK - Is Robert Pittman following in Henry Ford's footsteps? If so,
may not be good news for AOL Time Warner shareholders.

Ford was a revolutionary who changed the world, only to grow complacent and
eventually lose his industry leadership position. His wildly successful
T car put the horse and buggy out of business, but then Ford stuck with the
Model T too long while rivals stole customers by adding bells and whistles.

Pittman, co-chief operating officer for AOL (nyse: AOL - news - people ),
be on the verge of making a similar mistake. Pittman has taken direct
of the firm's America Online unit, which has been plagued by slow growth as
Internet dial-up customers defect to rivals offering high-speed broadband
connections. America Online has made slow progress in migrating its huge
of dial-up customers to its own broadband offerings.

 AOL's Cable Troubles

Now AOL reportedly is retrenching. Friday's Wall Street Journal reports that
the media conglomerate "is rethinking its cornerstone strategy of promoting
such broadband access nationwide." The paper quotes Pittman to the effect
that America Online should focus on getting its current customers to retain
their AOL dial-up service, even after they have signed up for broadband
service from a rival firm.

Apparently, Pittman has been pleasantly surprised by the number of AOL
customers who have retained their dial-up service as a kind of backup to
their broadband service. "A lot of companies go broke trying to speed up the
consumer adoption curve," Pittman told the Journal. Whereas AOL will happily
milk its high-margin base of dial-up customers for as long as these folks
willing to keep sending in their monthly $23.90.

The problem is that as broadband gains mass acceptance, even technophobes
will eventually gain the confidence to venture out beyond the reassuring
confines of AOL's walled garden. And broadband is gaining momentum. On
Friday, BellSouth (nyse: BLS - news - people ) reported that it added
108,000 digital subscriber line (DSL) customers during the first quarter,
bringing its total to 729,000. Earlier this week, SBC Communications (nyse:
SBC - news - people ) said it added 183,000 subscribers during the quarter
push its total to 1.5 million. The cable firms--and AOL's own Time Warner
cable unit--continue to push ahead with broadband, and EchoStar
Communications (nasdaq: DISH - news - people ) has pledged to offer
broadband access nationwide if federal regulators will approve its proposed
acquisition of DirecTV.

AOL finds itself in a tough spot, little more than a year after closing on
its acquisition of Time Warner. That deal was supposed to create a
content-and-distribution colossus, but the Internet distribution part of the
equation has not yet worked out as promised, so the stock price has
shriveled. Already there is talk on Wall Street that AOL should spin off its
online unit and revert to a content-and-cable play.

Neither Pittman nor his boss, AOL Chairman Steve Case, seem eager to embrace
that idea. "The promise of the merger remains intact," Case told the
"We just hit a speed bump." AOL's soon-to-be chief executive, Richard
Parsons, also defended the merger. So it's full speed ahead--except that
Pittman seems to be keeping one foot on the brake by talking about a renewed
focus on maintaining that dial-up base.

Perhaps he is correct. And that Henry Ford analogy may not be such a dire
portent, since even after losing its leadership position, Ford Motor (nyse:
- news - people ) eventually moved beyond the Model T and continued to be a
profitable business (at least until recently).

But when AOL acquired Time Warner, it had grander things in mind than to
merely continue as a profitable firm. This merger was supposed to remake the
media environment. It was all about the future, whereas dial-up service is
well on the way to being a relic from the past--like the Model T. When even
the stodgy old Baby Bells are talking up broadband, does Bob Pittman really
want to be known as Mr. Dial-Up? He is right that AOL should make as much
money as possible from dial-up before it goes away. But that hardly sounds
like the centerpiece of a visionary growth strategy.

More From Forbes
SBC Gets Aggressive On Broadband 04.18.02
The Baby Bell's overall results are tepid, but it builds momentum with its
broadband strategy.

AOL's Cable Troubles 03.26.02
It's facing big challenges in a sector it needs more than ever, as its ISP
engine loses steam.

FCC Declines To Hobble Cable Broadband 03.15.02
EarthLink squawks at the FCC decision, but investors know better: They bid
ISPs higher.

A First: Broadband Beats Dial-Up 03.06.02
People spent more time online via broadband than dial-up, but where are the
plans to exploit this trend?


14. The Engine Stalls At AOL

April 22, 2002 Vol. 159 No. 16

Steve Case's online giant was supposed to take Time Warner to new heights,
not lows


 Six years ago, Bob Pittman traded away his job as CEO of the world's
 largest real estate company to rescue a struggling Internet company that
 many critics had already written off. He did that and more, using his
 marketing wizardry to turn America Online into a new media powerhouse,
 big enough to eventually swallow an old media standard bearer called Time
 Warner. He became a self-designated prophet of 21st century success: AOL
 was going to rocket Time Warner into a brave new world, delivering music,
 movies and you name it, anywhere, anytime--and of course make a killing
 in the process.

 But last week Pittman had to be called on once again to save AOL, which
 is beginning to look like the media giant's albatross. After eagerly
 devouring Pittman's hype just a year ago, investors and critics now feel
 woozy. Incoming AOL Time Warner CEO Richard Parsons, 54, clearly felt
 that nobody could clean up the mess better than Pittman, which is why he
 asked his top deputy to go back to Dulles, Va., on a new rescue mission.
 "AOL is our biggest problem, and so we're putting our best fighting
 general on it," says Parsons, who was designated CEO when Gerald Levin
 abruptly announced his resignation last December.

 Pittman takes over from Barry Schuler, the former tech entrepreneur who
 has run AOL since the merger in January 2001 and will now head a new
 interactive services division. Although Pittman, 48, is known as an agile
 manager with an uncanny ability to build big consumer brands, this is the
 Mississippi native's biggest test. He must restore AOL's luster and
 regain the trust of colleagues, business partners and, most important of
 all, Wall Street.

 The fact is, two years after the merger was announced, AOL Time Warner's
 top brass is being forced to prove the decision was not a mistake.
 Despite its powerful brand and unrivaled global member base of 34
 million, the AOL division has seen its once stratospheric subscriber
 growth slow, its ad revenue fall and its international operations bleed
 money. The much ballyhooed broadband move--in which networked homes will
 enjoy high-speed connections to movies and music whenever they want--is
 off to a rocky start. Any delay is crucial to consumers eagerly
 anticipating the broadband revolution, because if AOL, with all its
 affiliated cable systems and entertainment properties, can't deliver
 those services, who can? Microsoft? Comcast? Rupert Murdoch?

 The AOL service's woes have infected all of AOL Time Warner, whose stock
 is the third most widely held in the U.S. By the end of last week, those
 shares had dropped to $20.10--wiping out nearly two-thirds of the market
 value of the combined companies since their merger was announced in
 January 2000. Several Wall Street analysts estimate the company's cable,
 entertainment and publishing divisions (which include CNN, Warner Bros.,
 Warner Music and Time Inc., the parent company of this magazine) are
 worth about $19 a share. That leaves AOL near zero. When it reports its
 first-quarter financial results next week, AOL Time Warner will take a
 write-down of $54 billion--the biggest such charge in U.S. history--to
 reflect the decline in value of the combined company. This meltdown has
 revived questions raised by some Time Warner division heads in the months
 following the merger: Why was a solid company sold for overinflated AOL

 In part, the AOL division is a victim of the lofty expectations generated
 by its successes in recent years--and the hyperbole of some of its
 executives. After the online service's ad and e-commerce revenue doubled
 in 1999 and nearly doubled again in 2000, executives--led by
 Pittman--declared that AOL could power AOL Time Warner to a 33% annual
 growth in cash flow, even during a 2001 that was clearly shaping up as a
 recession year.

 But while managers in New York City were trumpeting these goals, the
 folks at the AOL division's headquarters in Dulles were overwhelmed by
 them. Even before the merger was finalized, many of AOL's top managers
 and technologists were retiring--either formally or in practice--on the
 immense wealth they amassed before the dotcom bubble burst. Pittman,
 meanwhile, moved to New York to help run the parent company. And founder
 Steve Case, now chairman of AOL Time Warner, stepped back from day-to-day
 responsibilities, in part to spend more time in California with his
 brother Dan, who is battling brain cancer.

 That left Schuler--who had never managed anything larger than the
 100-person software start-up that he sold to AOL in 1995--in charge of a
 fast-swelling staff of 15,000 and $9 billion in annual revenue. Instead
 of setting strategic priorities, Schuler and his lieutenants bounced
 between brainstorming sessions for soon-to-debut products like universal
 messaging and agonizing meetings over how to fulfill short-term earnings
 goals. One executive bemoans that at the old AOL: "Our great strength was
 keeping it simple, the goals clear and everyone pulled together. We
 really ended up losing our focus."

 In the first move to restore some discipline, AOL Time Warner last fall
 sent chief financial officer Michael Kelly from the New York headquarters
 to become the AOL division's chief operating officer. Kelly found what a
 senior executive refers to as a "big sandbox," in which in the name of
 synergy, it seemed as if anyone with an idea was suddenly proposing
 grandiose new projects with Time Warner divisions. "People are doing
 crazy stuff and wasting money," says the executive. "Someone has to set
 some priorities." Case, 43, says ruefully that rather than speeding AOL's
 move into the broadband age, "the merger actually slowed us down."

 Case is confident that AOL will haul itself out of the ditch; he points
 to a history of unfulfilled predictions of its demise. During the winter
 of 1996, just before Pittman arrived, the company was dubbed America on
 Hold because its servers couldn't handle the dial-up volume. But AOL
 invested heavily in fail-safe server technology and launched a massive
 marketing effort. "I've seen this movie a lot," says Case, who recently
 bought an additional 1 million shares of stock at $24 a share, after
 selling twice that amount early last year at a significantly higher
 price. "I kind of like being the underdog again. That's when we've always
 done our best work."

 The situation is serious enough, however, that Case says he will rely
 more heavily on his founding fraternity to set the company right. AOL's
 cash cow is its 26 million U.S. subscribers, most of whom pay $23.90 a
 month for AOL's dial-up service. Almost half of that subscription revenue
 represents pure profit. But the U.S. dial-up market is already close to
 60% saturation and isn't expected to hit 70% before 2005. AOL subscriber
 growth this year is estimated to drop to about 10%, just a third of its
 torrid pace in 1999.

 The AOL division's long-term-growth gambit is to attract as many of its
 dial-up customers as possible into the promised land of broadband, where
 they would pay more--eventually as much as $200 a month, in Pittman's
 rosy scenario--for a variety of on-demand services, from wireless instant
 messaging to the ability to listen to Norah Jones or watch A Beautiful
 Mind anytime they like.

 But delivering those services--and doing so at a profit--is proving a
 vastly more complex business proposition than anyone imagined. As the
 ongoing battle over music and video downloads suggests (think Napster),
 success in a broadband world requires solving complex questions about
 copyrights and digital encryption. Few executives, even at AOL Time
 Warner's movie and music divisions, are ready to open their treasure
 troves to the threat of piracy in an online, on-demand world. The
 broadband business also requires AOL to pay a cable or DSL provider for
 access to the pipes that reach customers' homes--at least in the 80% of
 the U.S. where Time Warner Cable doesn't control the cable systems--and
 to figure out a way to share additional revenues with a disparate array
 of partners. Such deals have become especially imperative since December,
 when AOL Time Warner lost out to Comcast in the bidding for AT&T's 14
 million cable customers.

 All this adds up to a grim reality: until AOL can offer easy access to
 premium content such as movies and music on demand, not enough customers
 will pay even the $55 a month it charges today for its broadband service.
 Those who do--the early adopters--are actually cutting into AOL profits.
 Every time one of its dial-up customers shifts to broadband, the AOL
 service goes from a nearly 40% profit margin to one potentially as low as
 10%--mainly because it has to share broadband revenue with cable

 Can Pittman put AOL back on track? His appointment was lauded among
 employees who view him as an impassioned leader with a down-home style
 that reflects his Southern roots and a long stint in the music business.
 (After an early spell in radio, Pittman went on to found MTV and VH1 and
 did a stint at Time Warner before joining real estate firm Century 21.)
 He flies his own jet and has houses in New York, Colorado and Jamaica.
 But unlike many other AOL millionaires who spend more time with their
 toys than at the office, Pittman is committed to the company (although
 his wife Veronique and their two young children were not thrilled that he
 will be working two jobs, one of them in Virginia).

 Both Parsons and Pittman have insisted that AOL's troubles are not as
 dramatic as the headlines suggest. Growth may have slowed, but it hasn't
 vanished. Pittman has told AOL division staff members to refocus on the
 service's core mission, "figuring out what's important to people and how
 to make it more convenient for them to do that online."

 But his immediate priority is to attract more advertising. If it weren't
 for the $130 million that AOL's sister divisions plowed into promoting
 their brands on the service during the fourth quarter, ad revenue would
 have plunged 26% instead of just 7%. In fact, AOL Time Warner is one of
 its own biggest advertisers. Many of the New Economy companies that used
 to advertise on the AOL service are either bankrupt or close to it. And
 although consumers are spending more and more time and money on the
 Internet, Fortune 500 companies and their agencies remain doubtful of the
 impact of online ads.

 AOL executives say that by using its online network to build buzz for
 such hugely successful Warner Bros. films as Harry Potter and Lord of the
 Rings, the AOL service has proved its worth. Likewise, AOL's revamped
 music channel--one of its hottest content areas, drawing 9 million
 visitors a month--is fast becoming a key promotional vehicle in the
 record business..

 But to draw more advertising, the AOL division is going to have to change
 its notorious our-way-or-the-highway culture. The AOL service's business
 partners, suppliers and advertisers trade stories of sitting around
 tables listening to AOL executives yammer on about who is wealthier or
 has a nicer private jet. To his credit, Schuler had started an effort to
 inject a little humility. One might expect that a battered stock price
 had already done that. "They're still copping attitude and alienating
 people," says an ad executive. Managers at a telecom giant found AOL so
 uncompromising on a recent contract that they are shopping their business

 For all its troubles, the AOL service, which accounts for nearly a
 quarter of the media giant's cash flow, is a global leader whose 34
 million subscribers dwarf the 8 million of its nearest competition,
 Microsoft's MSN. None of AOL's competitors offers a service that so
 successfully combines simple e-mail, instant messaging and chat. And no
 one matches AOL's unique system of parental controls, which makes it the
 family service of choice. But to keep its user base growing, AOL has been
 giving away more subscriptions--one reason its revenue per user has
 stayed flat, despite last year's $2 price increase. Kelly maintains that
 the trial offers are worthwhile because nearly three-quarters stay on as
 full-paying members.

 Though AOL says its members have never been happier with the service,
 independent surveys show that dissatisfaction is on the rise. In one by
 the Yankee Group, a Boston, Mass., research firm, AOL fared worse than
 the industry as a whole at "providing value for the money." Last fall, in
 a Consumer Reports look at Internet service providers, AOL came in last
 in connection reliability, far behind leaders EarthLink and AT&T
 WorldNet. To many, AOL seems more and more like a carnival barker,
 flashing pop-up ads in their faces. Pittman last week indicated to
 colleagues that he considers the pop-up ads out of control and will move
 quickly to fix the problem.

 AOL believes it can still count on users' loyalty. Plans are in the works
 to further segment AOL, so that "professional" subscribers would get more
 features for their money, while the budget-conscious would pay less. And
 AOL will soon introduce a variety of multi-user family packages. But so
 far, at least, subscriber "stickiness" may have less to do with
 satisfaction than with complacency. As Standard & Poor's analyst Scott
 Kessler puts it, "Nobody wants to change their e-mail address." The
 competition is working hard to get those AOL subscribers. Microsoft,
 which banished AOL from its Windows XP desktop last summer, is investing
 heavily in new features for its MSN service and generally getting good

 To help turn things around, the AOL service has forged a few promising
 partnerships with hardware and software powerhouses, including Sony and
 Apple. Online retailer Amazon has contracted to provide AOL with its
 powerful shopping search technology, beginning this fall. But AOL hasn't
 yet made the most crucial kind of deal--with another cable provider.
 After investing billions to upgrade infrastructure, rival cable providers
 aren't ready to hand over their lucrative customer relationships. AOL
 will soon enjoy access to all of Time Warner Cable's 13 million homes,
 but that's less than 20% of the total market. Its high-speed service, now
 offered as an option on the Baby Bells DSL service and 20 of Time Warner
 Cable's markets, has garnered only around 500,000 paying customers, about
 5% of the 10 million U.S. residential broadband users. Part of the
 problem is that AOL charges around $55 a month, compared with $30 to $50
 for rival cable and telephone companies. Even on Time Warner's cable
 systems, the cheaper high-speed isp that the cable guys built before the
 merger, called Road Runner, has nearly 2 million customers and is
 reportedly still outselling AOL.

 The AOL division's quest for rapid growth overseas, meanwhile, has been
 slow and costly. AOL Europe lost $600 million last year, even as AOL was
 forced by contractual obligation to buy out the 50% stake in that
 business owned by German media giant Bertelsmann. The price--$7
 billion--had been set at the height of the Internet bubble and represents
 about twice what the Bertelsmann stake is worth today.

 That sort of liability is just part of a debt burden that, combined with
 the current ad recession, hampers AOL Time Warner's ability to pay for
 new cable assets or another TV network. In fact, analysts are concerned
 that its balance sheet may put the company at a disadvantage when
 competitors like Microsoft are hoarding cash to fight tomorrow's new
 media battles.

 Throughout AOL Time Warner, morale is slipping along with the stock
 price. People gossip about Pittman's stock sales--he sold 1.5 million
 shares last year for $70 million and now holds only about 13,000--and
 wonder how he will handle two full-time jobs. Company sources say there
 may be more executive moves as early as May, when Parsons formally
 succeeds Levin; while some speculate that if Pittman is successful he
 could be back at corporate full-time in a matter of months, others say
 that if he can't show progress at AOL by year-end, he may leave the
 company altogether.

 For his part, Steve Case is confident in his former deputy and their
 joint vision. "The AOL business is still the crown jewel in the AOL Time
 Warner portfolio," Case says. "It will surprise the world yet again by
 raising the bar and inspiring imagination


15. AOL's '90s Nostalgia Suit (media unspun)

From: "Jimmy Guterman" <media-unspun {AT} topica.email-publisher.com>
Sent: Saturday, January 26, 2002 11:49 AM

Remember the browser wars? Netscape does. Yes, Netscape Communications
still exists, although since 1999 it's been part of AOL. You haven't used
their browser in years -- want to know why? AOL knows: One outcome of
Microsoft's antitrust trial -- along with star status for David Boies -- was
that Microsoft was found guilty of anticompetitive behavior during the
browser wars. That means they cheated (sort of).

AOL Time Warner says Redmond must pay for its sins. On Tuesday it filed suit
against Microsoft, to finish the job that the federal court wouldn't: it
wants reparations, unspecified but possibly tripled later on.

Of course, the odds of Netscape reclaiming its once-100% market share are
worse than Mariah Carey's chances of getting her EMI contract back. Ed
McDowell, writing for the Motley Fool, called the suit "legal fantasy." What
are they really after?

Steve Lohr's Thursday analysis in the New York Times called it a strange and
bitter battle between two corporate foes who hardly seem to realize they
don't compete with each other. Microsoft sells software and the Xbox; AOL
Warner is a media company with a huge online service. So why are they
stepping on each other's toes? Lohr says it's all about cable access and the
future: Microsoft just helped Cox snatch up AT&T's Broadband unit, denying
the prize to AOL. Neither wants the other to control distribution.

At week's end, lawyers for both were furiously (literally) filing briefs
against each other. If the groundhog sees his shadow next week, expect the
snit to last all winter. Maybe even longer. -- David Sims

Microsoft Heavily Courted

In AOL's Suit Against Microsoft, the Key Word Is Access
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Netscape/AOL: Legal Fantasy

Lawsuit Against Microsoft Is Netscape's Biggest Asset
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Browser Wars Are Back: Netscape Sues Microsoft

Microsoft returns fire at AOL in antitrust suit

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