It's Time to Take It Apart

Each of these options would likely be a mistake. Any half-hearted move toward "liberating" AOL is no more likely to succeed than the half-hearted effort toward "integrating" AOL over the past six years. Given that Time Warner failed to capitalize on AOL's potential during a period when it owned 100 percent of AOL, it seems doubtful that a scenario in which it has a lesser, but still controlling, stake will work better.

Worse still, a "split the baby" approach would be unwieldy and unwise, just as it turned out to be when Time Warner brought a minority investor into Time Warner Entertainment more than a decade ago -- a deal that the company spent years unraveling. And joint ventures are notoriously difficult to manage, especially in the fast-moving world of technology -- which is probably why, notwithstanding their many other successes, neither Microsoft nor AOL has had great results with joint ventures to date. AOL has spent the last six years wrestling with integration issues -- it needs to be independent now so it can start to regain its leadership position.

If AOL were independent, it would have its own stock, which it could use to compete with acquisitive companies like Yahoo Inc. that use their shares to buy innovative young companies -- the same approach that AOL employed in the 1990s when it acquired upstarts like ICQ and Mapquest. Even more importantly, it could adopt an aggressive strategy to build on its core strengths, without being slowed by bureaucracy or stymied by sister divisions. And it could reinvest its more than $1 billion a year of free cash flow, now diverted to other Time Warner operations, to assure itself of a brighter future.

Could a stand-alone AOL stage a comeback? Five years ago, most people thought Apple was a tarnished brand destined for declining market share and irrelevance. But some (including its co-founder Steve Jobs) saw the potential there, and a spirit of innovation has returned to the company to produce breakthrough products. Apple is now more valuable -- and more relevant -- than ever. Liberated to pursue its own future, AOL could have an Apple-like renaissance.

Three initiatives, each grounded in AOL's storied past, could be the basis of the company's resurgence.

First, there is no firm better positioned to become the preeminent Internet-based phone company of the 21st century. With nearly 100 million instant messaging users, sending billions of messages each day, AOL is already one of the nation's leading communications companies. While I have respect for the talented entrepreneurs at Internet phone companies like Skype and Vonage, an independent AOL should be able to have many times the number of Internet phone customers as these upstarts (neither of which even existed when we announced the merger of AOL and Time Warner). While AOL is now, at long last, finally getting an Internet phone service off the ground, a spun-off AOL could make this its highest priority, without any anxiety about conflicts with Time Warner Cable (which offers competing services).

Second, given that AOL has always fostered a sense of community and encouraged interaction between like-minded people, it is well positioned to lead in the booming field known as social networking. Indeed, AOL was facilitating social networking before anybody called it that; now this is one of the fastest growing segments of the Internet, as shown by the surging interest in (and valuations of) companies such as MySpace and Facebook. There's no reason why AOL should be falling behind these new entrants -- except that, within a multibillion-dollar conglomerate, emerging opportunities are often ignored until it's too late.

And third, the current drive to make AOL.com a general interest portal is great, but the value of general interest Web sites may have already peaked. The bigger opportunities are likely in the area of vertical portals, Web sites that draw people into specialized channels about things like sports or health, and that host multimedia content as well as video search tools, which blur the lines between the Internet and television. AOL's huge audience gives it a tremendous advantage here, not just to sell ads, but also to build valuable, durable interactive media brands and franchises.

It is true that in each of these three areas, and many others, there are initiatives already underway at AOL. My point, however, is that AOL must go beyond merely "doing" these things; it must reach for leadership in each area. And to do that, it must be freed from its corporate shackles and return to its entrepreneurial roots, identifying ideas early and promoting their widespread acceptance.

It is time for a change at Time Warner. For the sake of shareholders, employees and customers, the best option now is to liberate the disparate businesses and let them compete on their own.

Author's e-mail:

stevecase@aol.com

Steve Case, the co-founder of AOL, recently resigned as a member of the Time Warner board of directors, but remains one its largest individual shareholders. He now is chairman and CEO of Revolution LLC, a private investment company based in the District.