This is how far things have deteriorated: At a recent private Time Warner party, Steve Case showed up, and an immediate whisper buzzed through the room. What was Case doing here? This was a Time Warner get-together, not an AOL function. Never mind that Case happens to be chairman of AOL Time Warner Inc. Among some on the Time Warner side, he was an unwelcome guest.
Such is the state of affairs that nearly two years after the largest merger in U.S. history, AOL Time Warner remains a house divided. The rift has widened as America Online Inc., the Dulles-based operation, has struggled monumentally with slowing subscription growth and plummeting advertising revenue, and federal authorities have launched investigations into the online division's accounting practices.
Just how awry the whole deal has gone from a financial standpoint will be on display this Wednesday, when the media company plans to release third-quarter results expected to once again show lackluster advertising and subscriber growth at the AOL division.
The corporate-cultural ramifications of the merger are still playing themselves out. For much of the their short marriage, the companies have found it difficult to cooperate on issues big and small, whether deciding which e-mail program to use or discussing how to join forces on a new kind of interactive television venture. Chief executive Richard D. Parsons has tried to walk a fine line since taking over earlier this year, decreeing that the company would go back to the basics and that each division would be judged not so much on how well it collaborates with others but on its ability to be the best in its particular market. At the same time, he urged all parts of the company to work together.
"We must integrate our operations to demonstrate that while each part of our company could stand alone, together they are significantly more valuable than they are apart," Parsons said at the company's annual meeting in May.
Parson's words may not be enough to sooth tensions. AOL employees think Time Warner officials sandbagged the merger by dragging their feet on important integration issues. Time Warner people feel betrayed by AOL's weak financial performance and the discovery of its potential accounting problems, which have depressed the company's stock and wiped out much of employees' retirement savings.
The bad feelings go back to the earliest days of the merger, in the spring of 2001. At the time, executives from the companies had begun to meet to discuss how they might join forces. One such meeting began politely enough: A Time Warner executive said he would allow Fortune, a magazine in his stable, to provide articles to Netbusiness, an AOL Web site. There was just one issue to resolve: How much would AOL pay for the material?
An AOL executive seemed puzzled. AOL and Time Warner were now part of the same family. Why, asked the AOL executive, should AOL pay for something produced in-house? Because, responded the Time Warner official, it costs money to report and write articles. The decibel level rose. Faces turned flush. Finally, the Time Warner executive stalked from the room. The meeting was over.
The squabble over Fortune and Netbusiness might have involved less than $1 million -- a pittance for AOL Time Warner, the largest media company in the world. But, said one official who participated in the meeting, it was a sign of things to come: "A culture clash," the official called it.
In May 2001, four months after the merger was approved by the U.S. government, another red flag emerged: AOL Time Warner began switching all employees to AOL's e-mail program, drawing a discernible amount of grumbling from the Time Warner folks, especially those who worked at magazine division Time Inc.
It wasn't an issue of snobbery, the magazine people insisted. It was just that AOL's e-mail system was designed for computer users at home -- not for corporate dwellers like themselves who often attached big files to their e-mails.
AOL e-mail, they insisted, wasn't robust enough. They preferred a system built by AOL archrival Microsoft Corp.
AOL executives weren't convinced. It wasn't just the e-mail imbroglio. AOL thought Time Warner was slow to embrace the bigger stuff -- "synergy" -- and to some degree, it was true, say some who worked at Time Warner.
While Robert W. Pittman, then the company's chief operating officer, was proselytizing the masses on the benefits of synergy during the initial stages of the merger, some of his Time Warner operating executives viewed it as a fairy-tale idea. Sure, it would be nice if one part of the company would cooperate with another to generate new revenue, so the thinking went. But how about taking care of business first?
The reality was, some executives said they weren't convinced that synergy always worked -- that, for example, an advertiser would want a multimedia package, buying promotions both on the Internet through AOL and off-line through Time Warner's magazines and traditional media properties.
Synergy "sounds good in theory, but for managers inside of those businesses, it was never desirable," said a former Time Warner executive who spoke on condition of anonymity. "So many of the businesses wanted to control their own revenue streams."
There were other tensions. Some sources recount a trip that Myer Berlow, then president of global marketing at the corporate level, took to meet Warner Bros. executives in Burbank, Calif., last year. Berlow asked the movie executives why they were spending a smaller percentage of their promotional budget to advertise on AOL Time Warner properties than competitor Paramount was.
Berlow, who declined to comment, was leading a company-wide effort to boost advertising sales. But Warner Bros. executives felt bullied.
The AOL people "used language which was literal and symbolic that made it very clear to every senior person at the division that they were in charge," said a Time Warner executive who requested anonymity. AOL honchos, the executive said, talked about "the 'myopic and antiquated old-media' guys. This was not just an aside. This was endemic to their presentation and to their tone."
Even when they tried in earnest, AOL and Time Warner couldn't always find a way to work together. Such was the case when executives from AOLTV, the online unit's interactive television unit, tried to develop deals with Time Warner's television and movie studios. Both sides were excited by the prospects.
Imagine, as they did, running current-event quizzes online that would appear on television while people watched CNN, a Time Warner property. The two sides, however, were at first stymied
It wasn't a matter of egos but of nuts and bolts, said one former AOLTV official who asked not to be named. Both sides were hamstrung by minimal staffing. Neither side understood the other's medium. And, perhaps most important, everybody was doing other things, like running his core business.
"We were 275 miles away from each other," the former official said. "One was sitting in Dulles, one was in New York, and you both have other jobs to do. It was simple human things that could make it hard."
AOLTV, once considered a key element of the combined company's future, a melding of AOL's vast Internet assets with Time Warner's huge stable of content, is now a shell of an operation. It's not even being marketed actively.
In another reversal, the company dropped the e-mail directive earlier this year. No longer would employees be required to use AOL's e-mail system. It wasn't just a symbolic gesture. AOL's e-mail system was hampered by software glitches. The people at Time Inc. cheered.
Meanwhile, the dispute over Fortune was never fully resolved. The Time Warner magazine ended up pulling much of its content from the Web site, and AOL dramatically scaled back its operations, leaving Netbusiness stirring quietly.
In recent months, debate has been growing about whether to reconsider the merger itself. There has been talk about spinning off the online division -- or, at the very least, hacking "AOL" from the company's name.
"Frankly, I think the stock would get a bump up if they got rid of the name," said Dave Sickert, who worked as a director for Time Warner at HBO and then its online initiative before jumping to AOL, where he ran its online shopping group. "AOL's viewed as an Internet company. It's tarnished, unfortunately."
AOL has already been buried -- if not in name, then in concept -- by some from Time Warner who have come to view the Internet unit as little more than wiring for the delivery of Time Warner's rich library of entertainment.
Other divides may prove more difficult to bridge, including the sheer differences in demographics.
"Most of the AOL people were very young versus the Time Warner culture that tended to skew older," Sickert said.
At Time Warner, he said, people worked for the long haul. They called it the "golden rubber band." When people thought about leaving Time Warner, he said, they would be snapped back because they realized it was a stable company with a decent retirement plan. AOL operated under a different work ethos. The glue, Sickert said, was the stock option. It was a short-term mentality. "If you could last to each vesting period, you got a little more golden each year because the stock was doing better," he said.
AOL was new money, the Internet set, a tight, centralized operation. Time Warner was old money, the established class, a loose collection of fiefdoms that minded their own business. The combination didn't mix well.
Time Warner "looked down on us," said an AOL executive who requested anonymity. "They felt that we were focused on money, and we thought being focused on money is what business is about -- making more money for the company, making more money for stockholders."
The executive recounted a conversation in which a Time Warner executive turned to him and said derisively, "All you're trying to do by doing these deals is push up the stock." To which the AOL executive snapped back, "Yeah -- as opposed to what?"
Time Warner executives now have a chance to show whether they can manage the merger any better. The company, which has already fired one high-level AOL executive and identified at least $49 million in questionable accounting, is conducting its own internal probe, run by the same law firm that advised Time Warner on the merger.
Former chief executive Gerald M. Levin -- himself a Time Warner hand -- remains optimistic that the combination will eventually sort itself out. "People are just too impatient with the emergence of new business cultures," he said last month during an appearance in London at the World Congress of the International Confederation of Societies of Authors and Composers. "It doesn't happen overnight."