Outlook: Time to Undo the Merger?

Steve Case
AOL Co-Founder/Chairman and CEO of Revolution LLC
Monday, December 12, 2005 11:00 AM

Six years ago, Steve Case helped bring about what was widely hailed as the "merger of the century," combining his company, AOL, with media giant Time Warner. Now, he thinks it's time to undo it. In an article in Sunday's Outlook section, Case says the merger hasn't worked and that it's time to break Time Warner into four separate, independent parts -- Time Warner cable, Time Warner Entertainment, Time magazines and publications, and AOL. Each one, along with the shareholders, would be better off, he says. Time Warner had to "integrate or liberate" its parts, Case explains. Integration didn't happen; it's time to liberate the divisions to compete more effectively with other rivals.

Steve Case was online Monday, Dec. 12, at 11 a.m. ET to discuss his Sunday Outlook piece, It's Time to Take It Apart .

The transcript follows.

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Steve Case: Thanks for joining this chat. I look forward to answering any questions you have about my piece, and talking more about AOL's future. It's a company that matters a lot to me, and one that has great promise - if it is freed from the Time Warner conglomerate, and allowed to pursue its own destiny. Now, let's take some of your questions.

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Daytona Beach, Fla.: Dear Steve,

I have been stockholders in AOL since 1995, through the good years and the bad.

If we, the old AOL stockholders, decided to DEMERGE, would you be interested in taking on the job of running AOL again?

Thanks.

Steve Case: Thanks to you, and several others, for asking this question. My passion for, and concern about, AOL remains strong. But having spent 20 years of my life working at AOL and Time Warner, it's time for me to move on to other challenges. So, returning to AOL is not something I'd be interested in, no matter what happens there.

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Washington, D.C.: Hello,

I've never understood why strategically you felt Time Warner was a good choice for a merger. When riding high during the mid to late '90s I always thought AOL should have gone after potential broadband service providers (i.e. Comcast - during those times). The true value of an ISP is the service is provides and not the content it offers.

Steve Case: At the time we felt that broadband was the most important strategic challenge for AOL, and a merger with Time Warner would help accelerate AOL's transition to broadband. That included having branded multimedia content like CNN, but being able to leverage Time Warner Cable's cable systems to launch AOL was obviously key as well. I am sorry that promise was never realized.

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Charlottesville, Va.: In your article you give brief comment to the "booming field known as social networking." How do you envision a liberated AOL competing against Murdoch (i.e. MySpace etc.)in the field of social networking? How might AOL's vision be similar or different that Murdoch's?

Steve Case: There are a lot of great thinks happening with Web 2.0 and in the whole social networking space. In many ways AOL pioneered this space, launching instant messaging 20 years ago, and focusing from the start of community. Community for us was always the killer app. So returning to those roots makes sense to me.

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Herndon, Va.: Hello Steve. You write of general interest Web sites waning in popularity, yet somehow Yahoo! has managed to keep a stranglehold on the top spot in terms of monthly unique visitors. What's your take on Yahoo's position on the consumer Internet landscape?

Steve Case: Yahoo has done a great job in the last few years. Hats off to them. They have had a clear vision and executed well. They have also used their stock to buy innovative companies. While it is hard for me to see that AOL has been eclipsed in many ways by Yahoo, given AOL always used to be the dominant company, the fact is AOL has struggled post-merger and Yahoo has benefited from that.

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Leesburg, Va.: Since you left AOL, we've lost sight of what the consumer really wants. I recently left the company after 10 years there because of this. You have an ability to tap into what people really want. How will this translate into your new endeavor, Revolution?

Steve Case: Thanks for your kind comments. My focus at Revolution is on giving consumers more choice, control and convenience in areas that really matter to them, like health care. It is complex and challenging but also exciting. This feels to me like a good place to focus the next 20 years of my life.

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New York, N.Y.: Why is Dick Parsons so reluctant to the idea of a break-up? The management team has never once quantified the benefits of vertical integration. Do you think the outside parties have a credible chance to "force" a break-up?

Thanks.

Steve Case: Dick Parsons is a great guy and somebody who I consider a friend. He inherited a difficult situation and has been working hard to make the best of it. Obviously, we don't agree on the best path forward for Time Warner, but that doesn't mean I don't respect him and like him personally. I was reluctant to go public with my concerns but felt I should, in part because a deal regarding AOL seems imminent, and I felt I should express my views.

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Washington, D.C.: What would you gain from Time Warner splitting off AOL now? How many shares do you still own in Time Warner?

Steve Case: I own about $250 million worth of Time Warner stock. I believe that if the company were split into four companies -- with each current share of Time Warner swapped for one share each of Time Inc., Time Warner Cable, Time Warner Entertainment, and AOL -- the shares would be worth more. How much more is speculation. Would I benefit? Absolutely. But so too would all other shareholders.

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Atlanta, Ga.: Mr. Case, could you be more specific as to the reasons why the merger hasn't worked and if your companies were to split, what new direction would AOL take?

Steve Case: There are many reasons. The timing turned out to be difficult, given the correction in Internet stocks. And in the best of cases large mergers are hard. But ultimately I think it suffered from lack of leadership, including from me. I was hoping that when I stepped down as CEO to facilitate the merger, I could play a constructive role as Chairman, but that didn't play out the way I expected, frankly. It is hard to push for strategic moves when none of the businesses report to you. Saying something is different than doing it -- and that's where leadership and execution comes in.

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Crofton, Md.: AOL used to be doing very well, but not any more. No high speed infrastructure is a big problem for AOL. If AOL cannot solve this issue quickly, the situation will get worse.

Steve Case: Obviously we saw high speed coming, which is why we thought the merger with Time Warner was strategically wise. In my view AOL should have replaced Roadrunner as TW's cable broadband brand 5 years ago. That didn't happen, but partnerships with other high speed providers like DSL were made more difficult because people assumed AOL was in the cable camp. So instead of accelerating AOL's broadband push, it slowed it. Obviously, this was a big disappointment for me and others who believed in AOL and believed in broadband.

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Washington, D.C.: Was the Time Warner merger an excuse to buy an old-line cash producing business to give AOL's vastly overvalued shares a reasonable floor value?

Steve Case: Not really. Obviously at the time of the merger AOL has a high valuation and as CEO of AOL it made sense to consider opportunities to diversify. But the merger was really strategically driven, based on the belief that broadband was the future and TW could accelerate AOL's broadband push, and convergence was the future and the combined assets of the companies positioned it well to drive personal television, digital music, etc. In theory this was true - in practice, unfortunately, it was not. Hence my call for splitting the company up.

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New York, N.Y.: Where does Ted Turner stand on this issue and might he have a role in Icahn's planning?

Steve Case: I don't think it is appropriate for me to speak for Ted or any other member of the Time Warner board.

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Washington, D.C.: There are internal company memos from Microsoft about the future of Internet services, like free word processing, spreadsheet, and e-mail programs, and how Microsoft can profit from these opportunities. However, their assumption is that there will be advertising dollars to fund these services. Despite their expectations about advertising dollars available, some large companies like Time Warner and Viacom, not to mention The Washington Post and New York Times, are having difficulty making their Internet efforts profitable. Do you fear that there's a rosy scenario about Microsoft's advertising revenue projection?

Steve Case: I don't want to speak to Microsoft's projections specifically, but I do believe that advertising dollars will continue to flow from old media to new media -- because more people are spending more time online and less time doing other things.

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Ashburn, Va.: As a current employee of AOL for about five years, I've seen the morale in our company go from good to worse. Do you think splitting the two companies could potentially help boost morale or make it worse?

Steve Case: Obviously I believe it could help. I know there are a lot of dedicated passionate people at AOL. Many of them feel stymied, such as on initiatives like VOIP. AOL should dominate voice telephony given its leadership in this space -- not just with AOL but also AIM and ICQ. My hope is a liberated AOL would be a more aggressive and nimble AOL and that would benefit shareholders, members and also employees.

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Washington, D.C.: If you're not interested in leading AOL any more, would you be interested in leading one of the three other organizations that would result from a break up of Time Warner? If so, which one(s) and why?

Steve Case: I have closed the AOL chapter of my life. It was a great 20 years. It had ups and down but more ups than downs. And I am proud of what our team built, and the contribution it made to making the Internet accessible to the masses. My focus now is on Revolution, building new businesses that can also change the world, in areas such as health care, which needs change badly. So I am not interested in running any aspect of AOL or Time Warner.

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Washington, D.C.: Why hasn't AOL been able to build it's own search engine portal; thereby missing out on the huge pay-for-performance advertising category dominated by Google and Yahoo?

Steve Case: I don't know. Obviously this was a missed opportunity. We bought Webcrawler more than a decade ago which was one of the first search engines. It is a shame it didn't become Google!

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New York, N.Y.: As a former employee (1997-2003) I've felt that AOL lost its focus on the consumer after the merger. Do you agree?

Steve Case: I think the team at AOL still focuses on consumers. I just think they are slowed down, and sometimes limited, by being part of a much larger company with a much broader agenda. If AOL is spun out to shareholders, I think it will be worth more, but also do more, more quickly, for consumers.

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Bowie, Md.: Considering how fast the Internet world keeps changing, is it reasonable to think a decision like merging or un-merging two giant companies can be made timely enough to actually work out the way you planned? Or will this action just seem just too obsolete by the time its actually finalized?

Steve Case: I believe an independent AOL would move more quickly and create more value for shareholders. I have been arguing this for some time. The sooner it happens the better. While it would take some time to complete a spinoff, that is a better option in my view then keeping AOL as a captive division, and also better than trying to do a joint venture that will be complex to structure and even more complex to run and even more complex still to unwind if it doesn't work. So a spinoff is the best of the available options. And the sooner the better.

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New York, N.Y.: Do you think you are overstating the merger-related fallout as a primary cause for the problems at AOL? The merger is now almost six years running (from announcement) and the "Web 2.0" revival has already been a few years in the making. While I agree with you that AOL not having its own currency is an impediment, that seems to be a poor excuse for not being able to create value organically. To what extent do you think AOL's executive management simply has dropped the ball on capitalizing on growth opportunities? Do you think AOL could benefit from fresh leadership?

Steve Case: I think the AOL management has done a good job under very difficult circumstances. There have been missed opportunities, but much of that is due to the corporate structure and decision making process. I know the AOL team has recommended may things that have been turned down -- and also some core initiatives like VOIP were slowed due to concerns raised by sister divisions who were offering competing services. AOL could benefit from a fresh start with a clean break.

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Ashburn, Va.: As a follow-up to the AOL broadband dilemma, it is hard to understand why Time Warner cable is not branded or powered by AOL. It looks like the work form of divisional politics. Can you speak to the situation?

Steve Case: Obviously I agree with this. Most people in the industry think it is odd - and a mistake - that Time Warner Cable continued to offer its own Roadrunner service instead of moving to AOL which is a better known brand with a wider rage of services. If I had been CEO I would have made that happen on day one. It is such an obvious move. It is sad to me it never happened.

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New York, N.Y.: Dick Parsons seems to take the view that these businesses may still work well together as the digital age dawns. Wouldn't Time Warner be wise to wait another six months to see how much traction the re-launched AOL and other services in different divisions (DVR, triple-play) fare before making any drastic changes?

Steve Case: Obviously I was a big believer in convergence and a big believer in cross-divisional collaboration to drive innovation and growth. That was the underlying theory of the merger six years ago. But it has not happened, and I have reluctantly concluded it will not happen. Waiting another six months after waiting six years won't change anything -- but it will slow the efforts of each business to make the strategic moves to best position themselves for the future. Plan A didn't work - let's admit that and move to Plan B.

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Leesburg, Va.: There have been a # of layoffs at AOL over the years, as you well know. This is a difficult thing to go through, both for the management teams, and those in the trenches. With your proposal of breaking away from Time Warner, what sort of stability do you feel this could offer AOL's employees? If any...

Steve Case: The best stability for employees of any company is a clear path to growth and success. AOL cannot create value by cutting costs, it also needs to drive topline revenues. That requires more freedom to innovate, and a currency to (like Yahoo has done) acquire innovative young companies. A liberated AOL would I think be a better place to work, with employees more jazzed about what they are doing, and more optimistic about the future.

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Vienna, Va.: AOL seemed to be lagging well behind its competitors (Google, Microsoft) well before the merger took place, and many say that was the reason for the merger. Why would AOL do well on its own again?

-Former AOLer 2001-2004

Steve Case: Well I don't agree. At the time of the merger AOL was the dominant company in the Internet. The companies that lead now like Google and Yahoo were followers. And AOL had successfully fended off Microsoft's attacks for many years. So AOL was winning at the time of the merger, and the decision to merge with Time Warner was driven by a belief that would ensure AOL could win in the future, as the market moved to broadband. No company had better broadband assets than Time Warner -- not just the cable systems to carry AOL, but also the branded multimedia content from CNN, HBO, etc to differentiate the service. So it was intended to position AOL to dominate in broadband the way it had dominated in dial-up. It is very disappointing to me that didn't happen, and in the ensuing 6 years, AOL has become something of an also ran.

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Oak Hill, Va.: Mr. Case, you presented a very good rational for splitting Time Warner. What are the main arguments against the split and how would you counter them? Is resistance to split political or just based on the competing strategy?

Steve Case: I don't believe it would be appropriate to go into detail about board deliberations. But in general the argument would be if we stay the course things will turn around. I would love that to be the case, but concluded, after years of waiting for those good things, it was time to adopt a new strategy. I am convinced that shareholders will be better off owning shares in four different companies, each with more flexibility and the ability to act more quickly to seize opportunities, vs owning one share in a conglomerate.

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Pittsburgh, Pa.: How do you think peripheral computing devices such as Tivo and the iPod will contribute to the nature of consumer computing in the near and far term?

Steve Case: Devices will continue to be huge. My whole belief in convergence -- the idea that technologies and markets will blur -- presupposes the emergence of more consumer devices. My hope was that the merged Time Warner would have been the leader in driving personal television - letting people pick TV shows like they pick web sites - and also in digital music. That hasn't happened, unfortunately.

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Washington, D.C.: What should AOL do with AIM and ICQ? To date, they have had very little monetary value but high perceived strategic value.

Steve Case: They should be platforms for voice. Indeed, that is why we bought ICQ so many years ago, believing that it could be another brand to create a telephony business. I think there has been too much focus on advertising on instant messaging - while that is important, the bigger opportunity is in voice services. It is crazy that companies like Skype and Vonage are leading in this space now -- it was AOL who created instant messaging 20 years ago, buddy lists, etc

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Bethesda, Md.: Have any of these big-company mergers ever worked out? It seems that the end result is that many people lose their jobs and the synergies that were the stated cause of the mergers never materialize. Any thoughts on that?

Steve Case: I recognized at the time that big mergers are hard. I just thought the idea of AOL Time Warner was such a big idea, with such vast opportunity, people would rally around it. For whatever reason that didn't happen.

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Arlington, Va.: Steve - I understand that Cheney is part of your new gig, Revolution. Are you sure that was a wise decision?

Steve Case: Well last I checked Mr. Cheney was still Vice President! I think you mean Colin Powell. He is an investor and board member of Revolution Health. He is a great guy and I am delighted to be working with him again. (He was on the AOL board until he resigned to become Secretary of State.) We have a great team assembled at Revolution and I am proud to be part of it.

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Columbia, Md.: In hindsight, wouldn't a joint venture between AOL and TW have been more successful in reaching the strategic/shareholder value goals than the merger?

Steve Case: We tried to establish a business relationship between AOL and Time Warner Cable in the late 90s. It was hard to do. I thought the merger would make it easier. I was wrong.

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Haymarket, Va.: Sorry to sound uninformed in the ways of Wall Street, mega-mergers, etc., but how much of AOL's downhill slide, in your opinion, was due to those who still believe in "the old way of doing business," and would never allow AOL to outshine an old-timer like Time Warner?

Steve Case: I don't believe that was really the case. I think most people at Time Warner, certainly the leadership including Dick Parsons, want AOL to grow and be successful. They just have a different view of how to best do that.

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Steve Case: I am told that our time is up. I want to thank all of you for joining me this morning. I hope my answers shed a little more light on what happened over the pas few years, and even more importantly what might be the best path forward for Time Warner -- and AOL specifically -- over the next few years. Although my focus now is Revolution, AOL will always be a part of me, and I want to do what I can to get it on the right track. And as one of the largest individual shareholders, I also want to do what I can to create value. My focus is on long term value, and I believe splitting the company into four separate entities is the best way to do that. Thanks for listening!

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