Thursday, January 16, 2003

Richard Parsons today assumed the additional role of chairman of the board of AOL Time Warner. I wrote about this for yesterday's Wall Street Journal and for those of you who are not subscribers to the site, this is what I said:

Case Closed

By John Ellis

Shortly after AOL's acquisition of Time Warner was announced in January 2000, Time Warner CEO Gerald Levin explained that he had decided to sell because he couldn't figure out how to harness the power of the Internet. He reasoned that by harnessing Time Warner to AOL, a new/old media juggernaut would be born. Shortly after that, Mr. Levin was named chief executive officer of AOL Time Warner. The inherent contradiction of having someone flummoxed by the Internet run a supposedly Internet-driven enterprise struck many observers as emblematic of what ensued.

Immediately after Steve Case announced that he was stepping down as chairman of AOL Time Warner, the company put out a statement saying that Mr. Case would remain on the board of directors and would continue to serve as co-chairman of the company's strategy committee. That contradiction -- he has to go but he can stay as the company's chief strategist -- will hopefully not be emblematic of what comes next.

Mr. Case's demise marks the end of AOL's influence within the larger enterprise. The Time Warner team now assumes complete control. It seems likely that by the end of this year, they will drop AOL from the company's name and sell or spin off the AOL business. If they could, they'd probably do it today.

But then what? Right now, AOL Time Warner is $25 billion in debt. It has lost $200 billion in market capitalization in two years. It will soon write off another $15 billion for the 4th quarter of last year. It is under investigation for "accounting irregularities" and the possibility of criminal prosecution looms. And its various business units, with a couple of notable exceptions, continue to underperform. The notion that the company can now coalesce around a common purpose is laughable. Time Warner has always been about egomaniacs running fiefdoms and raiding each other's turf. Division heads collaborate only to kill off rivals. They collaborated to kill off former COO Robert Pittman and Chairman Case. Now they'll start on each other.

The notion that the company even has a common purpose is dubious, at best. The ceaseless hyping of Time Warner entertainment in the pages of Time Inc. magazines diminishes their editorial integrity. High-speed Internet access through Time Warner cable systems diminishes the value of Warner Brothers music (since customers can download music for free at blazing speed). Time Warner cable systems enhances the value of HBO, which diminishes the value of Warner Brothers TV. And on and on it goes.

The only way synergy can be realized is if all the companies within the enterprise agree to share data and to invest in the information technology that makes data-sharing an operational fact. Management consultants call this "information technology interoperability." IT interoperability means that when a Time Warner cable system subscriber watches an HBO special presentation, every other business unit is made aware of that preference and is invited to approach that subscriber with relevant material. A Sopranos fan might be asked to buy an album of Sopranos music or a Sopranos cookbook or Sopranos DVDs. A Tiger Woods fan might be offered both a subscription to Golf magazine and Sports Illustrated, as well as a Warner Books guide to the best 100 golf courses. You get the idea.

Let's just say that "interoperability" isn't a keyword with Time Warner types. They're more interested in tangible things like corporate jets and idling Town Cars waiting to whisk them off to the Four Seasons for lunch. Spending time and money with techies is your typical Time Warner chieftain's idea of corporate hell.

Synergy is for suckers, and they know that. The only viable strategy that AOL Time Warner CEO Richard Parsons can follow is divestiture and the recombination of various parts. Selling off AOL will help pay down some of Time Warner's debt. Selling off all or part of CNN will help pare it down some more. Selling the music and book business will cut costs and raise extra cash. He will then be left with three basic businesses; magazine publishing, entertainment media and cable TV. All are strong and -- in an improved advertising market -- prosperous. Sell one and the other two are stronger still. Finding the right combination of companies to keep together will be the key to unlocking shareholder value and the creativity that exists at the edge of the individual business enterprises.

The truth about AOL Time Warner is that the parts are worth more than the whole. This truth is not lost on Mr. Parsons. What Messrs. Levin and Case brought together, he must now tear asunder and reconfigure.

Mr. Ellis writes the "Strategy" column for Fast Company magazine and is a partner at Ellis Kreamer Partners.