Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner

Behind AOL and Time Warner Merger

"Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner," is a reporter's account of the rise and fall of AOL Time Warner. Drawing on hundreds of interviews and confidential company documents, investigative business reporter Alec Klein takes readers behind the scenes of the merger, the culture clash and the corporate collapse.

Klein, author of "Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner.," was online Thursday, June 17 at 2 p.m. ET to field questions and comments about his bestselling book.

Klein is an award-winning reporter at The Washington Post. For his coverage of AOL, Klein won the Gerald Loeb Award, business journalism's highest honor, in the large newspaper category in 2003. In 2003, he also won awards from the Society of American Business Editors and Writers in project reporting and the Virginia Press Association in news writing. Klein has written for The Washington Post, The Wall Street Journal, the Baltimore Sun and the Virginian-Pilot.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Alec Klein: Alec Klein here. Thanks for attending. Let me give you all a quick update on where things stand: AOL is still under investigation by the SEC and Justice Department over the company's accounting. Meanwhile, the online division is beginning to show signs of improvement, according to company executives. Still, there are rumblings every so often that someone wants to buy the ailing Internet division. But he company has said all along, no way. And so we begin ...

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Columbia, S.C.: Just a comment.

What goes around comes around.

You can't treat the buying public with such disdain as AOL allowed its customer contacts to do and expect to make it in the service industry. I won't have anything to do with any company supporting or is part of AOL.

Alec Klein: It was one of the lessons of the rise and fall of AOL. At its peak, the Internet firm could dictate terms with its business partners; in some cases, if you ask many of those business partners, AOL went too. Hence, the cowboy culture that many said prevailed at the company. In the end, though, that culture didn't serve the company well.

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McLean, Va.: After the explosion of the last decade in technology companies, what is the net, real effect of AOL on the US and the future of the company?

P.S.
Is there an audio version of your book?

Alec Klein: There's no question, AOL had a profound impact on the tech economy--indeed, many said AOL helped drive its growth in the late 1990s when AOL was at the vanguard and dot-coms were clamoring to do business with it. But today, many question whether AOL will be remember more as the buggy whip of the Internet Age, that is, it was popular once, but its utility is in question. As for the future of the company, AOL remains a substantial part of its business, and yet Time Warner is still looking to generate more growth.

On your other question--there isn't an audio version of Stealing Time, but the paperback is out now; I believe it's also possible to download a digital version.

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Canton, Ohio: I am a former TWC stock holder. And I watched the stock plummet from $65 in 2000 to $12 in 2001,2002. My question is - do large companies like AOL - who know their books are in trouble - look for a marriage with a company with a good cash flow, in this case TW, that may find it propitious, with the hidden agenda of keeping itself afloat and not really benefitting partner company? Is this (becoming) a trend?

Alec Klein: Many have shared your experience. And many are asking the same question. This much is clear: AOL, according to internal company documents and sources, was aware of the impending decline in the dot-com sector before it consummated its merger, and it made its deal with Time Warner at a smart time--smart, at least, for AOL. Without Time Warner's array of media assets, from Warner Bros. to Time Inc., AOL could have found itself in an even worse situation.

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Milwaukee Wis.: When AOL & Time Warner announced their intentions to merge. Wasn't there any indication that this merger of entertainment and internet would not work? Or was this done purely out of greed!

Alec Klein: History is an interesting thing. When the merger was announced, virtually everyone hailed it as the deal of the century. Steve Case, the head of AOL, was dubbed the boy wonder. Time Warner was applauded for its bold move into the digital age. The media was uniformly impressed. Other media companies scrambled to make deals to compete against AOL and Time Warner. So, I think it's fair to say that many thought the deal made sense--both within the companies and those on the outside. Some maintain that the driving force was greed. But I think that's only part of the story. From my interviews, it was clear that many of the key executives were driven not just by money but by a sense of ego, of their place in history.

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New York, N.Y.: Some say everyone has a price. What will it take to allow the Internet line to be sold?

Alec Klein: That's the multi-billion-dollar questions. Periodically, sources close to AOL tell me that Steve Case, the former AOL chairman, would still like to buy the ailing online division, run it himself and show the rest of the world that it's a good thing after all. And yet, Dick Parsons, the CEO of Time Warner, has repeatedly said in public that he has no plans to sell the division. Why, he said, would he sell something at its low point? And now that the division is beginning to pick up, there may be even less incentive to sell.

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Silver Spring, Md.: Many companies look to merging with others to get out of financial debt and trouble. Most every time mergers seem to be detrimental to both companies forcing them to bankruptcy. Can you name any existing successful mergers out there within the last 10 years?

Alec Klein: Interestingly enough, Time Warner itself was a product of a merger, well before AOL came beckoning. Time and Warner, in fact, were once warring factions, before they began to coalesce and eventually found a common enemy in AOL. When Time and Warner merged, many questioned whether it would ever work. But if history is any guide, it has. It is, after all, the largest media company in the world.

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Stafford, Va.: AOL was amortizing the advertising expenses of getting new customers over a 5 year perior at a time when they didn't have a single customer who had been with them for 5 years. Wasn't it a sham to recognize a years worth of revenue for a customer who just signed up and amortize the cost of sending a billion floppies and CD's out each weak over a 5 year period?

In any case, Time Warner's accountants must have know. Why did this merger proceed?

Alec Klein: How the merger's potential pitfalls eluded the best of Wall Street remains something of a mystery. Except there's this: When the two companies finally agreed on a deal, the dealmakers, lawyers and other experts had a weekend to review the terms of the deal, the financials and other considerations before it was announced to the world. A weekend isn't much time when it comes to the biggest merger in U.S. history.

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Manassas, Va.: What do you think of the possibility of an AOL spinoff after the SEC reportings and whether the rumors of Steve Case resuming his former roll as leader of that spinoff?

Alec Klein: Whatever happens, it seems a certainty that we haven't heard the last of Steve Case. He remains a relatively young man, and he has also shown himself to be tough and resourceful.

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Arlington, Va.: Are you going to write another book? If so, what will you write about?

Alec Klein: Any ideas?

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Stafford , Va.: When the AOL Time Warner merged, it was a joke for many people. After all, all AOL ever was was a pipeline to the internet; AOL had no content worth anything. Of course, that was the trick of the time, claim that advertising dollars were just around the corner even though no one was making money on internet advertising.

Alec Klein: Funny thing, euphoria. Because back in the day--in the late 1990s--the Internet was it. Suddenly Wall Street didn't care about profit, dot-coms were flush with venture capital money, and everyone thought it was the Gold Rush. Although online advertising was not a proven media, customers lined up, ready to pay AOL to promote their goods and services. Even today, AOL-ers marvel at the times.

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Anonymous: Would it be unrealistic to think that the stock would ever go up?

Alec Klein: The stock price is a preoccupation for many, especially since many witnessed it at its heady top and many more felt it at its bottom--which I believe was about $8 in 2002. It's still under $20. For many who had their live savings or 401 (k)s tied up in the stock, it's been a painful ride. But company executives continue to say that business is getting better; only time will tell.

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Vienna, Va.: How is AOL surviving? Is the company completely dependent on the Turner corporation and profits from its several media outlets? And why can't they put quality content on AOL?

Alec Klein: Time Warner has infused AOL with many old hands from the old media empire in the hopes of executing better. Meanwhile, Time Warner has been using its other assets to help promote AOL. But the issue remains: Can AOL transition from dial-up to broadband? It appears to be making some progress, but the landscape has changed dramatically from the time AOL was the dominant market leader. Now, people know what the Internet is, they know how to get online, and they are demanding high-speed services, which they can get from a variety of other places--cable and telephone companies among them.

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Washington, D.C.: Is AOL a dot-com now?

Alec Klein: To many, AOL is indeed a dot-com and always has been. Others say it's simply an on-ramp to the Internet. Either way, we know it's not even a division of the company; it's a unit of a division.

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Fairfax, Va.: As a former AOL employee, I am curious about morale at Dulles. I know for a fact that there were several smaller unpublicized layoffs since the last major one in late 2002. Any grumblings of impending layoffs? During my time there, it seemed like there was a major layoff almost yearly.

Alec Klein: Over the years, AOL has triggered small, unannounced layoffs, a fact that sometimes has AOL-ers wondering when the ax is falling next. As a reporter covering the company, it was sometimes difficult to pinpoint where, how many and exactly when it was happening. Morale was especially low in the aftermath of the AOL accounting scandal in 2002. Sources tell me it's gotten better, although there are still real concerns about the business.

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Gainesville, Va.: The problem with the merger is that Time Warner got the free cashflow, which they wanted, but also the bad press, which they didn't. AOL got the life raft it needed to bear the bubble burst, but got the content from TW that it needed a bit too late. Things move too slow, as happens a lot for large companies. The movies and audio that would have made AOL more valuable showed up too late, or not at all.

Alec Klein: Even now, executives on both side grumble about what went wrong--and a lot did--especially in the area of cross-company cooperation. AOL and Time Warner were supposed to be greater than the sum of their parts. Company executives called it synergy. But what they didn't account for was the amount of ill-will between the AOL and Time Warner forces. They couldn't get along, and in the end, synergy became a dirty word.

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Reston, Va.: With all the other broadband and ISP providers and all the leading search engines, I don't understand how AOL could survive? Who really goes to their web channels or site if they don't even use their service-- which sucks?!;

The only thing great that AOL invented was instant message.

Alec Klein: It's true that many have criticized AOL for being the Internet on training wheels. And while it's not in vogue among many Web surfers, it still has some powerful tools. For example, as you point out, instant messaging. AOL deserves credit for acquiring that technology at an early stage and recognizing its potential. Instant messaging is still a developing technology, one that may eventually become an even bigger media platform.

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Eastern Shore, Maryland: As a current TWX stockholder, I am debating to hold on or to dump now. Analysts still say it's a strong buy, it's hard to tell how the SEC investigation will affect the stock. I know you're not a financial analyst, but what do you think?

Alec Klein: I'm not in the business of picking stocks. I can refer, though, to recent history. And it shows that Time Warner is working to improve the business. But the stock price has not responded dramatically. Company executives say that things are getting better. But investors and others continue to press for more clarity and certainty, including a resolution of the twin federal investigations looming over the company.

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Stafford, Va.: You mean that Time Warner's staff only had a weekend to look at AOL's numbers and see if the numbers were legit? Unbelievable!

If someone told me that I only had a weekend to check out some numbers, I would understand that the boss wanted me to say OK and that's that.

Alec Klein: One other issue prevented Time Warner from understanding the full extent of AOL's business: AOL was inflating its advertising revenue, and no one outside the company knew it at the time. It was only after the Time Warner deal was clinched and we at The Washington Post investigated AOL that we learned how AOL had pumped up its ad revenue. AOL vehemently denied it had boosted its ad revenue, until after The Post stories ran. Then it admitted it had improperly booked at least $190 million. By then, the merger was a fait accompli.

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Reston, Va.: What gets me upset is the lack of corporate ethics. Whether the company goes through a scandal, execs are not held up to better standards nor get punished appropriately for cooking the books! Enron, Microstrategy, MCI, AOL Time Warner are all the same!

Alec Klein: You and many others. The SEC and others within the government are grappling with this very issue--how to manage corporate governance. It's a difficult issue because it really goes to the question: How do you harness greed, hubris and ambition in corporate life?

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Arlington, Va.: So how would you characterize the current outlook for AOL Time Warner?

Alec Klein: Well, first, I would characterize it by saying it's not AOL Time Warner anymore. As you probably know, corporate execs chopped of the "AOL" part of the name. It is now simply Time Warner. The outlook, according to analysts and company executives, is improving, but there are still several hurdles ahead.

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Reston, Va.: Do you plan to write a follow up on the internet-media conglomerate?

Alec Klein: Any ideas?

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Anonymous: What do you think it would take for AOL and Time Warner to be shining again? A new product, new intellectual property, new company or what?

Alec Klein: Company executives have tried almost everything at AOL. New products, new services, new promotions. Much, however, depends on the success of its broadband offering. As for the Time Warner side of the house, many of its divisions have been doing well. So then, the hard part becomes, how do you make AOL and Time Warner work well together? It took Time and Warner several years to figure it out. Jerry Levin, the former Time Warner CEO, told me it may very well take many years for AOL and Time Warner to figure it out.

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