by Kara Swisher
For America Online, look for a bigger ball game. . . . Experts say AOL must think even bigger to transform itself into a true global media company rather than remaining what is essentially a glorifed online service with mostly American customers. Some analysts suggest AOL might look for a merger with a big traditional media company, which would offer a variety of distribution and content arms.
In the original version, I had even specifically mentioned Time Warner by name, along with Viacom, as possible AOL targets Stewart and I had thought seemed most likely. But those names were expurgated in editing in order to make me look less stupid, since it was clear that such a deal would never happen. They’d have better luck if they tried to buy France, my editor had even joked to me. Simply put, the idea of AOL actually being able to pull off such a coup seemed too ridiculous to print.
Now, as dawn approached, it might still be silly, but it had turned out to be true. And, soon enough, the business world would be waking up and journeying down an unknown path of uncertain direction.
Just then, the tinny sound of a single door creaking open sounded on my computer. An IM from a high-ranking AOL exec popped up with a ping, signaling the now unnecessary additional confirmation. Even in the truncated text, it was full of exactly the kind of glee and gloating that would later wreak havoc on the merger. “Yes. We bought Time Warner. Unbelievable. We won.”
It was unbelievable, for sure. But of what exactly had been won, I was a lot less certain. Had AOL found, at long last, the proverbial pony? Or—as it had always been the case throughout its capricious corporate history—that much more familiar pile of manure?
Begin at the beginning and go on till you come to the end: Then stop.
Lewis Carroll, Through the Looking-Glass
Chapter One
THE TRUTH, THE WHOLE TRUTH, AND NOTHING BUT THE TRUTH
(or something like it)
I Made a Little List
Now, in the frigid and head-clearing morning of the new economy after the New Economy, everyone seems to agree: Time Warner was had by AOL.
That is, at the turn of the new millennium, the world’s biggest and arguably most influential media company merged itself with the highflying online giant and central icon of the Internet boom for a 44 percent stake in the combined company. The problem was AOL’s business was soon to crater as that boom turned to bust, and its once lofty stock would become almost worthless. In this simplistic scenario, the trade of the century soon became known as the worst deal in history.
This is most certainly the tale that has taken up residence in the stony prison of conventional wisdom: A wheezing and increasingly desperate traditional media company, scared of inevitable death (or, worse still, irrelevance) in the hot swirl of a digital revolution, marries itself off to the young, sexy, and possibly sleazy starlet of the new-media society.
Disaster ensues.
And this merger has most definitely qualified as a disaster of belly flop proportions, by any measure you might care to use, which AOL Time Warner’s own magazine, Fortune, dubbed “one of the greatest train wrecks in corporate history.” The stock’s 75 percent drop within two years of the deal’s completion, the vicious purge of the top executives responsible for the merger, the investigations into dicey accounting practices, the poisonous atmosphere—all this has resulted in a constant barrage of ugly news headlines and poor morale at the company.
As I sit here in 2003 surveying the carnage, it is hard not to feel a bit queasy about the whole sorry mess. I had been following AOL’s history—and the course of the whole commercial Web revolution—from early on, so it felt a bit like I was watching someone fall down a flight of stairs in slow motion, and every bump and thump made me wince. It made me reassess old ideas and wonder what had gone wrong. And it left me deeply confused as to what had happened and, more important, what was coming next.
That was certainly how one of the company’s largest and most vocal shareholders, Ted Turner, seemed to be feeling, too. Turner, the legendary media entrepreneur who’d gained as much fame for his headline-grabbing antics as for founding CNN, had begun ranting regularly about AOL Time Warner CEO Gerald Levin not long after the January 2000 merger announcement. In meetings, according to many sources, he’d call Levin a “liar and a thief”—when, of course, he wasn’t discussing his separation and pending divorce from Hollywood star Jane Fonda, which the couple had revealed just a few days before the merger announcement.
Things got only worse after Turner had lost $7 billion in stock value by the end of 2002. “I’m poor, but I’m proud,” he’d say loudly and often. And he took to showing up at the offices of various Time Warner executives, where he’d turn his pants pockets inside out and cry out to anyone who would listen: “I was robbed.”
Turner was perplexed. Perplexed at what had happened in the deal, and perplexed at how he’d managed to lose more money in two years than almost anyone in the world had ever possessed. In December 2002, on the fifth anniversary of his $1 billion pledge to the United Nations, he announced to reporters, “I went from no money to a pile of money, just as big as the World Trade Center.” Unable to stop himself despite the crassness of the comparison, he went on: “Then—just like the World Trade Center—Poof! It was gone.”
Possibly the most vexing part for Turner—though he never seemed to admit it in all his angry outbursts—was the knowledge that he’d done this to himself. Not only had he voted for the deal as a major stockholder; he’d also publicly declared, without any prompting, that he “did it with as much or more excitement and enthusiasm as I did on that night when I first made love some forty-two years ago.” As much, okay. But more? No wonder he was suffering such postcoital pique.
Turner’s transformation—from sex-crazed teen to ranting, grumpy old man—got me thinking about the whole deal. So I made a little list, titled: Questions to Ask Ted Turner, If He Ever Agrees to Talk to Me.
1.
Were you really robbed?
2.
If not, why are you saying you were?
3.
What did Gerald Levin lie and cheat about?
4.
Why did you and Jane Fonda break up?
(That last one was just for me personally.)
This led to another list, titled: Questions to Ask Gerald Levin.
1.
Do you think you robbed Ted Turner?
2.
If so, where is his $7 billion?
3.
Are you a liar and a cheat?
4.
Why do you think he broke up with Jane Fonda?
I went, to tell the truth, a bit list-crazy, making them for everyone involved—Steve Case, other executives, the investment bankers, the Wall Street analysts, major institutional investors, and on down the line to the smallest schmoo at the companies.
It seemed like an easy job then. I’d just take my many lists and get some answers. Then I’d be able to explain what had happened—which would then go a long way toward explaining what had happened in the whole Internet boom and bust. Yes, this should be easy.
Or so I thought. But the mood in the business world as I began doing interviews in the fall of 2002 was very ugly, and the AOL Time Warner deal was being held up as the biggest and stupidest moment in the whole era. What I would soon learn was that this was a story in which everyone was to blame, but no one was at fault. And only a few would go on the record about what happened, although everyone would tell you in detail why someone else screwed up. Worst of all, so heavy is the stench of the fetid merger itself, it’s been nearly impossible to determine if the main idea of the merger—the virtuous combination of old and new media to face the inevitable digital future together—was ever a worthy one.
This was, in short, a bad deal in search of a big scapegoat.
Nobody Still Knows
As I started writing this book, the multiplicity of competing agendas and few truly honest players quickly made it hard to sort things out. Soon enough, I felt a bit l
ike a spun top—which was, as it turned out, an oddly familiar feeling. It was the same one I’d had when I first started writing about the Internet many years ago.
“The truth is: Nobody knows” was the opening line of my first book, aol.com: How Steve Case Beat Bill Gates, Nailed the Netheads, and Made Millions in the War for the Web, which chronicled the rise of an unlikely group of entrepreneurs on the edge of disaster to the heights of status, power, and money. The line was meant to show how few people understood the power of this entirely new and highly disruptive online medium. And, more to the point, how fewer still thought America Online, which had been left for dead many times on its rocky journey, could ever amount to much at all.
That book was a story of the losers winning it all. With crazy characters and huge hype, big-time moguls and risky deals, and piles upon piles of money, the AOL story was a primer on the dot-com revolution that electrified the country at the end of the 20th century. As the biggest player of them all, AOL sat at the very top of this world when I completed the book in 1997.
And then, AOL somehow rose even higher, capping its lofty position at the dawn of the new millennium with the announcement that it would buy the world’s most important media company, Time Warner, rather than the other way around. The losers now stood ready to transform the combined company into a place that would control much of what Americans read, listened to, and watched, as well as how they communicated.
Today, it’s easy to forget how bullish the world was on the merger news in January of 2000, because the context of that once hopeful and perpetually frenzied time had vanished almost completely by 2003. The Web-will-change-the-world-and-make-us-filthy-rich cheer had morphed rather abruptly into an It-was-all-a-Ponzi-scheme-wasn’t-it? shriek. But let us try to remember anyway: When the merger was announced, it was hailed as the new paradigm and few questioned its wisdom. Its key executives—Steve Case, Jerry Levin, Bob Pittman, and, yes, Ted Turner, too—were seen by many as rock star–like icons of the future. The new sages of the business world, they were admired and envied for their immense wealth, power, and seeming ability to influence the future direction of the world. Mere mortals had become accidental gods, as one Wall Street analyst had told me soon after the deal was announced.
But now the losers are losers once again, having fallen Icarus-like to earth after arrogance and hubris had brought them too close to the sun. The merger of the century is seen as an abject failure. Instead of high fives and dreams of perfect synergy, AOL Time Warner has become a place of vicious boardroom infighting, management coups, shaky morale, and a general feeling that the whole effort to merge the old and new economies has been a farce. There are, of course, lawsuits on top of lawsuits, as the molten anger hardened into a much colder and more urgent need for revenge and retribution.
As things started to teeter and then topple at the company, I, too, found myself weirdly upset. First of all, there was an element of self-interest in my discomfort. The column I wrote about the tech sector for the Wall Street Journal was called “Boom Town.” “Been watching the NASDAQ. Think we should change the name to ‘Bust-town’?” Journal deputy managing editor Dan Hertzberg had written me in an email on November 30, 2000, as the Net royalty started to show major signs of wilting. When your boss starts making little “jokes” like that, you know it’s time to start looking for answers.
But it wasn’t just that. There was also the dirty little secret I have continued to hold in these antidigital times: I am still a believer. Maybe not in the AOL Time Warner merger anymore, but in the essential idea at the heart of it—that someday the distinction of old and new media will no longer exist. Despite the grave dancing everyone’s been doing about AOL Time Warner’s fate, I still believe we’re at the very start of realizing the promise of the many technical innovations that burst on the scene at the end of the last century. Borrowing from Winston Churchill, I call it the end of the beginning of the digital revolution.
By that, I mean that it is from the ashes of this bust that the really important companies of the next era will emerge. And that evolution will, I believe, be shaped by what happened—and what is happening now—at AOL Time Warner. Because the moment the deal was struck has become a kind of Internet Rubicon: It stopped the boom that needed stopping and ushered the nascent industry into maturity with a rough shove.
In the wake of the crash, true faith in the eventual dominance of the Internet is not an easy thing to admit to. In fact, largely because of this one disastrous deal, saying you believe in the Internet as a revolutionary medium is now a bit like admitting to a capital crime. It may even be one, if you also happen to express confidence in convergence—that longed-for mix of technology and media that will someday enable consumers to get any kind of information anytime and anywhere. And I won’t even begin to imagine how pilloried someone who also touts synergy—the fabled ability to make a company worth more than the sum of its parts—would be.
But I still believe. And in order to find out what would happen next, I needed to find the real story behind the failed merger, and how we got here from there. That, and the answer to another question:
Who really robbed Ted Turner?
Whodunit?
But figuring out who is responsible for the flameout of the AOL Time Warner merger is not such an easy thing, because the list of potential perpetrators is long. It’s also convoluted, since the suspects and the victims are often one and the same. And they’re all so in denial (and, more important, so financially burned) that it’s hard to get a rational answer out of anyone.
Was it AOL? Cynical observers think Steve Case and his AOL crew fully expected the coming dot-com bust, and that they bought Time Warner at the peak of the Internet bubble with a little bit of aggressive—and possibly illegal—accounting to help the deal along. In this scenario, AOL simply snookered Levin into selling his jewels for fake currency.
Was it Time Warner? Some see the company as a desperate curmudgeon, unwilling to cooperate because of its rank jealousy of AOL. An old-style company accustomed to enjoying lavish perks and exhibiting little shareholder regard, Time Warner was, some suggest, unable to see the vast problems and opportunities the digital revolution was bringing their way.
Was it Wall Street and its handmaidens in greed, the venture capitalists? After all, it was the fee-seeking investment banks and their cheerleading analysts, along with the venture capitalists, who ginned up the huge valuations for Internet companies like AOL. These players clearly had a hand in pushing for such a massive deal to go forward without any cogent analysis or due diligence. They all got their cut, of course—and will again if the whole sorry mess is unwound.
Was it the investors? They’re the ones who agreed to play by these frothy rules, whipping up stock prices to new heights and celebrating every uptick without question. Both individual shareholders and huge institutional investors played an important role in the game, buying into the deal and its elevated promises without the slightest hesitation. Then, at the first sign of trouble, they turned on it without a backward glance.
And what about the media? The rah-rah press praised the deal to the skies when it was announced—and then did a complete about-face, damning it without a trace of irony. Or how culpable are once-lax regulators, who failed to rein in the excesses of the dot-com era in real time and then swooped in with subpoenas when the climate changed? Or perhaps it was simply the shift in times—from insane euphoria to total depression—that is part and parcel of the American business cycle. Digitalization was in? Well, so sorry, now it’s out.
Or possibly it was just the classic reason for so many merger failures: It was way too much, too soon, and it became an unmanageable entity that overpromised and underdelivered quite spectacularly.
Perhaps it was all these suspects, suddenly converging to create what one of AOL’s top executives, Myer Berlow, dubbed “the perfect storm.” As the economy tanked, all the factors combined to upend an already overburdened ship. The result: The AOL Time Warner
merger has become the Titanic of business deals—except without Leonardo DiCaprio around to pretty it up a bit.
Making sense of this miasma was going to be a challenge. Worse still, the overwhelming deluge of details—from critical moments to pointless gossip and everything in between—made it hard to discern what was truly important in the story and what was not. Was the key to understanding this debacle, its aftermath, and the future of the industry too buried in minutiae to paint a true portrait of what happened? (How many of Ted Turner’s fist-banging outbursts, for example, really mattered, as entertaining as they might be to write about?)
With that in mind, I put together one last list of the questions I really wanted to answer, this one for myself:
1.
So, who really robbed Ted Turner?
2.
Should he (and everyone, really) have seen this coming?
3.
Will the demise of this merger be the final and inevitable chapter of the dot-com debacle?
4.
And how did the person who first made love to Ted Turner “some forty-two years ago” like being compared to a megamerger?
That last one was, of course, just for me personally.
The will to grow was everywhere written large and to grow at no matter what or whose expense.
HENRY JAMES
