AOL said its executives did not mistreat prospective clients. The company said it was common for its deal makers to seek out relationships with new business partners, and then leverage those relationships to generate additional revenue.
There was a perception within AOL that some business affairs executives acted as though there were no rules. AOL sources described a deal in which a junior financial analyst at the company had been directed by a BA official to alter an internal report steering more revenue to Homestore Inc., an online home and real estate service, sources said.
David Colburn was chief of the AOL unit that put together deals that are under investigation by the SEC and Justice Dept.
(Courtesy Chai Lifeline)
Homestore shared revenue with AOL from advertising sold on Homestore's house and garden areas within AOL's online network, the sources said.
Every month, AOL financial analysts would receive a report from operations, showing the level of ad revenue and an estimate of Homestore's share. Without explaining why, business affairs told the AOL financial analyst to change the report, inflating Homestore's ad revenue share by an additional $2 million, the sources said.
When AOL officials discovered the problem, the maneuver was short-circuited, and the company said it fixed the error. "[W]hile a report which erroneously attributed a revenue share from certain advertisers to Homestore was initially generated, the mistake was identified and the report was later corrected," AOL's attorney said in a letter to The Post.
AOL said that outcome demonstrated the effectiveness of its internal controls. Homestore officials declined to comment.
By August 2000, the business affairs bravado was beginning to deflate.
The tech-laden Nasdaq Stock Market was hemorrhaging, dot-coms were dropping like flies and grim senior deal makers at AOL convened emergency meetings around a long conference table in the boardroom, sandwiched between the offices of Stephen M. Case, then AOL's chairman and chief executive, and Pittman, then AOL's president.
Before them was a growing list of struggling start-ups pleading to restructure their advertising deals.
Colburn ran the meetings. Myer Berlow, his counterpart heading the interactive marketing division, which worked with business affairs on ad deals, would sit in or monitor the proceedings by speakerphone. Participants said many discussions were more like yelling matches. Colburn and Berlow would sometimes scream at their deal makers about the need to get AOL's business partners to pay up.
"Why can't you get this deal closed?" Colburn would shout, recalled someone in attendance. "Why can't you do this?"
The deal makers would throw up their arms in futility.
"Colburn was always reminding everybody what pressure we were in because of the merger," said an AOL official. "He'd say, 'Are you guys crazy? Are you forgetting what we have to accomplish?' "
The Telefonica Deal
The pressure inside AOL tightened like a vise: The stock was eroding, and the firm was engaged in tedious negotiations with federal regulators reviewing the merger. Enough failing dot-com advertisers could compound the problems.
For months, AOL managed to keep up its ad revenue from dot-coms by restructuring their deals into shorter-term arrangements. But by mid-December 2000, it became harder to find revenue. In at least one instance, business affairs pushed too far.
The unit brokered a deal to sell $15 million in online ads to Telefonica SA, the big Spanish telecommunications company. AOL needed to run the ads in the final days of December to book the revenue in that quarter.
But with so little time left, AOL had to place the ads in high-traffic areas of AOL, such as its welcome screen, the first Web page people see when they use the service. More consumers saw ads on the welcome screen and AOL could get faster credit for running the promotions.