| AOL News: Steve Case Resigns
With Frank Ahrens
Washington Post Staff Writer
Monday, Jan. 13, 2003, 2 p.m. ET AOL Chairman Steve Case resigned under pressure yesterday as founder and chairman of AOL Time Warner Inc. The resignation will be effective in May. "Turner and others have privately accused Case of acquiring Time Warner with America Online stock that was inflated in value, even though he knew that its business was faltering. It didn't help any that Case, personally, had sold several hundred million dollars' worth of America Online stock in the years before the merger." Post financial staff writer Frank Ahrens, was online on Monday, Jan. 13, to take your questions about Case's resignation and the future of America Online. The transcript follows. 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.
Frank Ahrens: Greetings, all and welcome to the discussion of Steve Case's exit as chairman of AOL Time Warner, the world's largest media company. Case had been the lightning rod for the merger's failures since it was completed in January 2001, though not all of that is fair. Gerald Levin, who was Case's opposite number at Time Warner Inc., wanted to wed a dot-com as much as Case wanted to merge with a "hard asset" content company. But Levin resigned more than a year ago, leaving Case as the role recipient of shareholder blame for the company's crashing stock price. Let's take your questions now.
Forestville, Md.: Do you find it strange that we haven't heard anything from Richard Parsons, AOL Time Warner's CEO? In fact, I don't remember hearing from him for months, even in the trade mags. Where'd he go? Frank Ahrens: Good question -- I have a call in to Parsons right now and if I get him, you can read all about it in tomorrow's Post. He is clearly in the spotlight now and some wonder if he will consolidate his power and take over as chairman as well as chief executive.
Reston, Va.: Call me slow, but I don't get what was so great about the merger -- just how was AOL supposed to help Time/Warner? Put pop-ups into AOL? Cheap ad rates for AOL on TNT and TBS? Besides, AOL sucks. Their new 8.0 has mail features that other e-mail programs have been doing for years. Frank Ahrens: You're not slow. In fact, if someone had consulted you a few years ago, this merger may never have happened. It is a function of the business world and the fickle nature of Wall Street to get behind a big deal instead of asking skeptical questions. This deal was supposed to point the way toward the 21st century for entertainment and communications. Steve Case talks about "convergence," a future where all a person's machines -- computer, TV, radio, PDA, cell phone, etc. -- will talk to each other and data will flow freely. He believed that combining technology -- AOL -- with content -- Time Warner Inc. -- was the way to do this. He may be right...in another 10 years or so. In theory, you could watch Warner Bros. movies and listen to Warner Bros. music on your computer via AOL, or on your TV via Time Warner Cable, etc. For the investor, this meant what was called "synergy," or the idea that "one plus one equals three," meaning that the combined revenues from such a company, thanks to cost-cutting between overlapping units and cross-promotion, could outdo what either company would earn on its own. I think many people think 8.0 is a disappointment, especially considered its build-up.
Williamstown, Mass.: Holy Cow. When are marketplaces going to start acting a little more "adult" and stop blaming the wrong people for equity declines. Steve Case is no more at "fault" r a bad merger than the weatherman is for bad weather. No one, not Redstone, not Eisner, not Murdoch, not Diller, not any analyst, NO ONE thought it was a bad idea at the time, and people tend to forget that most "media mergers" tend to lose overall because of the egos involved (witness Time Inc.'s merger with Warner lo these many years ago). Frank Ahrens: A good point. CNBC did a special recently called "The Big Heist: How AOL Took Time Warner," and host David Faber asked Richard Beattie, who was AOL's lead lawyer in the merger, if at the time he ever heard ANYONE say, "I don't get this merger." Beattie responded: "I don't think I heard anyone say that." True on Time Inc.'s merger with Warner Bros.: the combined stock price never exceeded what either company's stock did on its own. I expected to see more of a bounce in AOL Time Warner's stock this a.m.; currently, it's up about 2 percent.
Gaithersburg, Md.: Hi Frank, I don't have a comment about Steve Case/AOL, but it's great to see you online once again. Miss your old chats! Frank Ahrens: Hey, thanks much. It's been awhile; I still miss the radio chats. But my good friend and colleague Paul Farhi tends that farm now...
Herndon, Va.: Frank, it wasn't that long ago that I couldn't pick up the Wall Street Journal or the New York Times or even The Post without reading big, long articles about how AOL Time Warner was a synergistic win that would point the way to the future of media. How much did the press either generate the AOL Time Warner hype? Or did the press just jump on the bandwagon? Frank Ahrens: We did both. Things were going great guns until about a year ago when AOL Time Warner took a huge write-down and Vivendi Universal posted the biggest loss in Gallic history and I thought: Hmmm...story? I took a hard look at the the idea of synergy and how it practically plays out as opposed to how it looks on a white board presentation. Much harder to make work in real life.
Silver Spring, Md.: Dumb question: If AOL's stock was at 50 or even 30 bucks a share, would Case be stepping down as chairman? Frank Ahrens: Not a dumb question. I think the answer would be "no." I think the merger would be called a success. Some people think that AOL Time Warner's stock is being unfairly punished by institutional investors and Wall Street. But these folks have motivation: Funds that they manage that are heavily depended on AOL Time Warner stock have tumbled in value thanks to the falling stock price.
Bethesda, Md.: What's it mean for AOL shareholders if the company were to reverse the merger? Frank Ahrens: For all practical purposes, I think the merger is essentially reversed. There are no more AOL executives at the top level of company management. Even the head of AOL, Jonathan Krim, is an outsider. One analyst figures that AOL itself accounts for only about 15 percent of AOL Time Warner's stock price. It's a unit within a division, and a troubled unit, at that. I think what it means for shareholders is that the so-called "Case discount" is ended and they might hope to see the stock price go up.
Falls Church, Va.: If Steve Case is responsible for the pop-ups we get now on AOL, he deserves to step down. How annoying. E-mail is almost not worth using anymore when pop-ups prevent you from even entering the Internet via AOL! Frank Ahrens: AOL listened to customers and has significantly cut back on pop-up advertising; I think by something like one-third. Yes, I think everyone agrees that they're annoying and I'm not sure that the pop-up replacements you see elsewhere on the Internet -- the so-called "interstitial" ads that appear in-between pages -- are any less annoying. If I have to wait for an ad to disappear on a page I want to see, I'm going to be annoyed.
Falls Church, Va.: So what's next for Case? He's got a ton of money. He's young. His duties at AOL, after May, won't exactly be very taxing. Based on what you know about Case, what's next for this guy? Frank Ahrens: The "Based on what you know about Case" is the hard part of this question. There's a reason why some people at AOL Time Warner's NYC headquarters call Case "The Wall." He seems to prefer e-mail to face-to-face communication and is sometimes seen as taciturn. The few times I've spoken to him -- once in a formal sit-down interview in NYC -- once jawboning outside the "Harry Potter" preview, he has been largely affable and forthright, I thought. But he knows his reputation. I opened the interview with a question and he said, "That's a question for the chief executive." Then silence as he looked at me. I came back with something and he laughed, saying, "Now he's thinking, 'Great. This is going to be a terrific interview.' " In the short term, I think Case will be active in a long-term strategic way on the board. I think he religiously believes in his version of the future and, for now, a corner office at AOL TW is a place to execute it. He is at heart, however, an entrepreneur who's only 44 and has lots of money. The possibilities really are limitless. I think he's had a very, very tough personal year with the death of his brother Dan, who was his best friend and business mentor.
Dulles, Va.: Hey Frank, I think you meant Jonathan Miller is the head of AOL, not this Krim character. Frank Ahrens: Hahaha! You're right! I gave my friend and colleague Jonathan Krim quite a promotion! Though I'm pretty sure he'd turn down the helm of AOL... Yes, I meant Jonathan Miller.
Arlington, Va.: Hiya Frank! Nice to have you online again! So why is AOL considered such a poor performer despite their huge gains lately? Are they falling short of goals? Short of expectations? Geez, what did they HOPE would happen by now, AOL taking over the world? Frank Ahrens: I think a key problem with AOL is that no one really knows how to think of it as a mature business, which it is. It's at around 35 million subscribers and even the most blue-sky optimists at Dulles HQ wouldn't expect they'd crack 40 million. So you've got 30-some million people (many get it for free thanks to sign-ups with Gateway purchases, etc.) who care enough about AOL to send them a check for $24 a month. That's $1.2 billion a year in free cash -- that's a lot. The question is, how do you manage this business that has always been judged on how fast it expands, not how well it runs. They are trying several ideas, such as breaking down the subscription price into tiers -- one that would be cheaper for basic service, one that would be more expensive for more content, stuff like that. Something that could go in AOL's favor: Yes, they are trying hard to move their customers onto highspeed Internet access, but there's a heck of a lot of people CAN afford a $600 computer but CAN'T afford $50 a month for highspeed Internet. Therefore, that's a big base of people who still want dial-up, which AOL does.
Washington, D.C.: What does Jim Kimsey have to say about all this? Frank Ahrens: I haven't talked to him; we may try to get to him today. He was quoted in the CNBC piece as saying it seemed like a good idea to hire Steve Case because his brother Dan was pumping investment money into Kimsey's business, which would become AOL and if they hired Steve, Dan might give them more money.
Alexandria, Va.: So how bloody are Ted Turner's hands this morning? Frank Ahrens: Great question and one I hope to get at. He and Gordon Crawford, an executive at AOL TW's biggest institutional shareholder, have reportedly militated for Case's ouster for a long time. Remember, though, Turner was the one who said on the day the merger was announced that he was as happy on that day as on the first day he made love, 40-some years go. Thanks, Ted, for that visual. I remember when I interviewed Case in NYC, Turner actually popped his head in the office, either as coincidence or a telegraphed show of support. Who knows. I think Turner is really upset about what's happened to his beloved CNN which once seemed to own the world (see: Gulf War) and now finds itself lamely aping Fox News tactics, which don't wear very well at CNN, to try to catch back up in the ratings.
Arlington, Va.: How can AOL continue to "ADJUST" earning and nobody be found negligent? These people are not $20/50k accounts, these people are being paid MILLIONS to have good bookkeeping. Frank Ahrens: AOL TW is still under investigation by both the SEC and the Justice Department for improper booking of some revenue. AOL TW says it has found all the irregularities and is cooperating with both agencies. In terms of adjusting earnings, that's a function of overly optimistic revenue projections colliding with unfavorable economic conditions; more foolhardiness than impropriety.
Chevy Chase, Md.: You know, Leonsis was on a Washington Post chat this week and didn't say anything about this. Do you think he knew or maybe this move even surprised him? washingtonpost.com: Leonsis was online on Friday, Jan. 10. Frank Ahrens: That's a good question. My bet is, like everyone else, Leonsis expected Case to leave at some point, maybe before the May shareholder meeting, but may have been surprised by the time Case chose. I know that Case and Leonsis talk every couple of weeks.
Reston, Va.: I think there are two reasons for the failure of the merger: 1. The big media (especially those like Washington Post, New York Times, CNBC) who just could not even buy the idea that an upstart online company acquired a traditional media. Right from the beginning, the media projected a very bad picture about the merger. Nobody wrote that it would take at least five years to judge the effectiveness of a merger of this proposition. 2. We were told only one side of the story: the brashness of AOL folks. What about the unwillingness of TW folks, who are equally responsible for this. Care to comment? Frank Ahrens: Interesting points. On question one, I bet there was some skepticism about how much "there" was there in a dot-com that went from struggling to trading at $90 per share in a few years. Justified, I guess, it turns out. I also think that 2001 really, really hurt this merger. It was the worst advertising year since World War II even before 9/11, which further crippled the economy. Something this big needed favorable conditions to continue. Yes, I think the Time Warner people, particularly the Time Inc. people certainly resented that they were being told how to run their (sometimes hundred-year-old businesses) and reacted in-kind.
Rockville, Md.: What are the chances that Netscape will be spun off and allowed to work directly with Mozilla to build the next "killer app"? I run both Mozilla 1.1 (ver. 9928391823847231891) and Netscape 7.1, and prefer them to IE by a mile. There is potential here! Frank Ahrens: I am just an unfrozen caveman business writer. Your modern technology "terminology" frightens and confuses me!
Destin, Fla.: Do you think that AOL Time Warner will move now to shed the AOL name, or even bolder, move to spin-off AOL into a separate company? Frank Ahrens: That's the question Wall Street has been asking for months now. (Don't you love using "Wall Street" like it's an entity, like the Queen or the Pope or "Hollywood?" It's great journalism shorthand.) Some analysts speculated that even dropping AOL from the company name would pop the stock up a few bucks. So much depends on perception.
Olney, Md.: Hi Frank -- I just wanted to add that Time/Warner has used the "synergy" word for years. I worked for their record division for 24 years and I always heard about this synergy we were going to have.It never came to be. They know how to say the word, spell it, but unfortunately they don't know how to make it work. Like you said earlier in the discussion they wanted you to be able to access, for a fee, movies and music via AOL. They still haven't figured out how to do that. It doesn't help matters that much of their record buying clientele feel that music should be free thanks to the Napsters of the world. I spoke to someone at Atlantic Records a few weeks back and he told me they were still trying to figure out what and how to charge people. Case leaving will probably clear the confusion of just who's in charge but then I would think Turner and Parsons may have a go at each other. All I can say is I'm glad to be away from it. Frank Ahrens: This a great report from the inside. It's tough making fiefdoms work together. One example that seems to have a chance is Sony, which I wrote about recently.
Bethesda, Md.: Today's Wall Street Journal talks a lot about Capital Group's Gordon Crawford and his role in bringing down Case. I had heard a lot about Turner pushing for Case's ouster, but not this guy. What's the story? Frank Ahrens: Gordon Crawford is with Capital Group, which is the biggest institutional shareholder, as opposed to you or your buddy, who owns AOL TW shares, of AOL TW. Institutional investors have seen the value of AOL TW stock drop by more than 75 percent over the past year. They are angry and want to hold someone accountable. Since Gerry Levin resigned more than a year ago and top AOL TW execs Dick Parsons, Don Logan and Jeff Bewkes were all running their Time Warner divisions, Case got the blame, since he was the last guy standing who architected the deal. Crawford, as the Journal reported, is very close to Ted Turner and John Malone, head of Liberty Media, who both sit on AOL TW's board. He has their ear, one would suspect.
Gaithersburg, Md.: Almost every internet user I know once had an AOL account; and threw them over for a lest expensive, more generic ISP. How well has AOL done it branding its content and becoming more than just an ISP for neophytes? Frank Ahrens: I was talking to Jon Krim -- not the AOL president -- today at lunch about my mom, who has AOL since she got it for free when she bought a computer a year ago. Her free year is coming up and I asked Jon if she should keep it or toss it off for another Internet provider, say, MSN. He said if she's really into what AOL does well -- its highly populated and multiple communities, with chats and IMming and so forth -- then she should keep AOL. But if she goes online only to e-mail her son and cruise the Internet, then any old ISP will do.
Rockville, Md., again: OK. There is potential in the I-n-t-e-r-n-e-t B-r-o-w-s-e-r put out by AOL that is not being developed. Will they be looking to sell, or even just set free, this part of the company? Frank Ahrens: Thank you! I think Jon Miller is looking for any and all ways to raise cash for AOL. On the other hand, I do know that several of AOL's cool toys-in-development have been stalled over the past year thanks to the company's slowing pace. Your browser may be one such victim.
Bowie, Md.: So, will Parsons become chairman? Or will the company look outside? If they go outside, I imagine there's only a handful of execs in the world capable of pulling this off. Got any names on your watch list that you'd like to share? Frank Ahrens: I always wonder what out-of-work-media-lord Thomas Middelhoff is up to. Up until last summer, when he was bounced by his board, he headed Germany's Bertelsmann AG, the world's fourth-largest media company. He and Case are friends; they used to be on each other's "buddy list," and may still be.
Leesburg, Va.: Do you feel the Nina Munk article in last month's Vanity Fair magazine was a tipping point for Steve Case's resignation or Gordon Crawford's insistence that Case resign, the more powerful impetus (Media vs. Wall Street) for this weekend's announcement? Frank Ahrens: Well, I'm *never* going to give credit to a rival publication for having any influence, now am I? I think the pressure came from all sides on Case, actually.
Baltimore, Md.: Does Bob Pittman have any current role at AOLTW? If not, is there any buzz that he'd return to the company now that Case is giving up the chairmanship? Frank Ahrens: I think Bob Pittman is persona non grata, especially because AOL TW is so TW-dominated these days. He was not liked, for instance, in Hollywood at Warner Bros.
Harrisburg, Pa.: When Mr. Case sold his AOL stock, was this public information? If so, how does one find out when an executive is selling his company's stock? When this happens, why doesn't the press publicize this more? Frank Ahrens: Yes, it is public in SEC filings and you're right, we should report on it better. Usually, it comes up in stories like today's. In 2001, Case cashed in something like $120 million in AOL TW options.
Columbia, Md.: In hindsight, what could have Case done to make the merger successful? TW, not AOL, made the mistake of purchasing so much "over valued" AOL stock. The entire economy went belly-up, and not just AOL/TW. Was this whole expedition just that bad of an idea? Frank Ahrens: I will say this: AOL TW was a better merger idea than Vivendi Universal. Edgar Bronfman Jr., whose family owned the Segram's dynasty and Universal music and motion picture biz, saw the AOL TW merger happen and panicked, running into the arms of a charismatic Frenchman, Jean-Marie Messier, who had even grander convergence ideas than Case. He headed a creaky French utility and wanted to turn it into a media and communications giant. Instead, he nearly ran it into bankruptcy and spurred investigations here and in France. Oh, yeah: and he was bounced by his board last July. C'est la guerre.
washingtonpost.com: Story: Sony: 'Synergy' Not a Dirty Word (Post, Dec. 25, 2002) Frank Ahrens: I think this is the link to the Sony synergy story, if you want to read it.
Frank Ahrens: That's going to do it for today, folks. Thanks very much for your questions; it was good to be back, if only for once.
washingtonpost.com: That wraps up today's show. Thanks to everyone who joined the discussion.
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