The Third Wave: An Entrepreneur's Vision of the Future (13 page)

In the end, it was fairly clear that the best merger partner would be Time Warner. In many ways, the company had everything we needed. Time Warner had been formed a decade earlier through the merger of two media giants, Time Inc. and Warner Communications. Time Inc. was co-founded in the 1920s by a young entrepreneur named Henry Luce, who, in the process of selling
Time
,
Life
,
Sports Illustrated
, and
Fortune
to a growing, educated middle class, became the most influential publisher of the mid-twentieth century. Warner Communications had been built by Steve Ross, a charismatic company builder who went from owning parking garages to assembling one of the world’s largest media companies, which included the Warner Brothers movie studio, the industry-leading Warner Music company, and a range of other content businesses, including Lorimar-Telepictures. Later, Time and Warner (by
then renamed Time Warner) also acquired Turner Broadcasting, led by the energetic, if idiosyncratic, Ted Turner. By the time we started contemplating a merger with them, Time Warner had serious heft—nearly $30 billion of revenue and $8 billion of profits. It had a trove of content brands—Time Inc., HBO, CNN, TBS, Warner Brothers, Warner Music, and many others. And it owned Time Warner Cable, one of the largest cable companies, so we would have a clear path to broadband, something we believed essential.

Broadband was coming, and, with it, a major threat to our dial-up–driven business. (In a world of smartphones, it’s amazing to think back to a time, less than fifteen years ago, when you couldn’t use the Internet and your phone at the same time!) Instead of phone lines, broadband used cable lines that we didn’t have open access to—and couldn’t get access to ourselves. Cable companies didn’t have to share their broadband lines the way phone companies had to with their dial-up lines. The regulations made it possible for them to shut out their competition altogether.

The “open access” fight, as it became known in the late 1990s, was a preview of the net neutrality fight that would come much later. Both dealt with the question of whether the owner of the “pipes”—the wire into your home—can control what you see over the Internet. During the open access battle, the cable companies took the view that they could just say no, refusing access to companies like AOL. During the net neutrality fight, they were subtler; they no longer sought to lock out
competition, but they did seek to disadvantage it. They took the view that they could simply make some sites perform less well, unless those sites paid an extra fee to the cable company. And, in fact, when Tom Wheeler, chairman of the Federal Communications Commission (FCC), approved the commission’s net neutrality rules in 2015, he cited his fights with me in those early days as having been instructive to his decision.

We urged the government to intervene, giving us the same access to broadband as we had to phone lines. I spoke wherever and to whomever I could, whether to members of the FCC, members of Congress, or presidential candidates. In fact, when then-governor George W. Bush was campaigning in Virginia, I met with him to make my case for open access. He listened to what I had to say, and he had his aides follow up. But about a month later, he came out against our proposal, arguing that the market could sort the issue out without government intervention. In retrospect, he was probably right. But that he was not willing to take a stand was unhelpful, and it was one of the key factors that made a merger with Time Warner seem not just sensible but necessary. If we couldn’t partner with a cable company, the thinking went, maybe we needed to buy one. And Time Warner had both a large broadband footprint and a number of valuable other brands and businesses. We concluded that we needed Time Warner. And we thought Time Warner needed us.

The content companies—HBO, Turner Broadcasting System (TBS), Warner Brothers—had a lot to gain from the
digital delivery of their product. The print journalism companies, which were already in the throes of an irrevocable, Internet-induced transformation, risked rapid decline if they didn’t incorporate an aggressive digital strategy into their business model. The video entertainment businesses would have a way to distribute their content digitally—and, over time, directly—to consumers, bypassing distribution intermediaries. And Time Warner Cable would have the chance to become the biggest company in the industry, giving them numerous synergies to wring out of a merger with AOL. They would control the pipeline of access that brought consumers to the Internet, the platform consumers used to explore it, and the content they consumed on it.

Together, AOL and Time Warner would have what seemed like the perfect platform. But there was one big question: Could we get them to agree? Most insiders assumed that there was no way they would ever consider it. Our bankers suggested we not even bother trying.

I decided to give it a shot.

I was hoping to enter into a negotiation with Time Warner CEO Jerry Levin on a lot more than price. In combining two different companies, we’d have to come to terms on a range of issues, from operational structure to strategic priorities. And at the top of that list was a threshold question we would have
to get past in order to move on to more important matters: Who would run the merged company?

I was reluctant to give up control over AOL, which I had watched grow—and helped build—into a company beyond anything I could have imagined. It was like my child. I was confident it had a bright future—brighter still, I thought, if we could execute the merger.

At the same time, I understood enough about Jerry to know that he would never go for it if he wasn’t to be in charge. It would be hard enough for executives at Time Warner to accept that AOL, still relatively young, had a significantly higher valuation than they did; it would be impossible to convince them to give me the power to run the combined company.

I decided, before picking up the phone to call Jerry, that I would offer to step aside as CEO so that he could run the merged entity. And that was the first thing I told him when he answered the phone, in the same sentence in which I asked him to consider the merger. There was a long pause. “Let’s have dinner,” he finally responded.

Later, in an interview in April 2001, David Frost asked Jerry and me about our “courtship.” I guess you could say that this dinner was our first big date, and it went well. Jerry saw the potential of technology and was doing his best impression of Paul Revere inside his company: “The Internet is coming! The Internet is coming!” But all of his attempts to get people in line and marshal a change—to attack rather than defend—had fallen flat. In the mid-1990s Jerry spent more than $100 million
on internal digital efforts like Pathfinder, a web portal that was supposed to be a one-stop shop for Time Warner content. But it never went anywhere, largely because of internal squabbles over turf. This merger was his chance to get Time Warner equipped for the Internet age.

But over the next several months, in conversations about organization and exchange ratios (essentially the price of the acquisition), the negotiations often looked more like a couple on the verge of a breakup rather than one ready to get married. Both sides walked away multiple times.

There was a point in November 1999 when I was on a panel at Time Inc.’s headquarters with Ted Turner and Richard Branson, the founder of Virgin Group. After we all finished speaking, Ted and I walked out onto the patio. As the vice chair of Time Warner’s board (and its largest individual shareholder), Ted knew about the proposed merger—and that we were at an impasse. He urged me to keep at it. “Steve, we should make this work,” he said, putting his arm around my shoulder. “You need us and we need you. Let’s figure out a way to get a deal done. Don’t give up.”

I followed his advice. We kept on negotiating among a small group of executives, in order to keep the number of decision makers within reasonable limits and to prevent the discussions from leaking. Had it leaked, both of our stock prices would have been affected, and merging could have easily become unfeasible. Negotiating this way ultimately led to a good deal at the right price. But it also meant that some of the most
senior executives at Time Warner, including several who were running entire businesses within Time Warner, only found out about the deal the night before we announced it. Many were frustrated—indeed, blindsided and embarrassed—and the animosity lingered, poisoning a lot of what we had planned to achieve together.

Should we have approached the negotiation differently? I don’t think so. There’s no doubt that, had we come to terms in a way that involved consensus from all senior executives, there would have been more support and less anger. But I have trouble believing that we could have come to consensus with such a large group, or that a group that size could have kept the negotiations private. As I and many other CEOs have found in the past, opposition inside the room often finds expression outside the room, sometimes in the form of a leak to a reporter. I believed then, and still believe, that we had to protect the integrity of the deal. And I was convinced we would have the time and space to rebuild any bridges we’d burned.

Besides, other than bruised egos, the Time Warner executives had little to complain about. I tried to take the high road, describing the merger in the press and elsewhere as a “merger of equals.” But the truth was, it was anything but. At the time of the merger, we were the younger company, sure, but with a market cap of $163 billion, we were worth more than General Motors and Ford combined. The deal was structured as an acquisition of Time Warner by AOL. AOL shareholders went from owning 100 percent of a company that generated $5 billion of revenue and $1
billion of profit to owning 55 percent of a more diversified company that was expected to generate nearly $40 billion of revenue and $10 billion of profit. We paid a 70 percent premium, and we let Time Warner executives accelerate their vesting period, so they could sell their stock and get a windfall. And, in fact, some did. Those who didn’t stayed by choice. They believed in what we were doing.

On Saturday, January 8, 2000, we came to terms on the deal. I flew to New York the next day to prepare for a major press conference. We were announcing the merger Monday morning. It was surreal.

The AOL executive managing our communications effort was Kenny Lerer (who would later go on to co-found the
Huffington Post
). He knew the Time Warner culture because he had worked with them in the past, and I remember him saying to me, “Tomorrow, when this is announced, your life is going to change, and not in a good way.”

“Why is that?” I asked.

“Because you’re going to go from being the CEO of a really hot company to being a chairman without any of the businesses reporting to you. AOL’s not even reporting to you. You’ll have a nice title, but no operating responsibilities, and people will start ignoring you. You’ve gotten used to being in the front seat driving, but now you’ll be in the back seat watching.”

I didn’t
have a moment of hesitation about the deal we were announcing. I was confident it was the right thing to do for AOL and its shareholders, and I was well aware of the difference in job responsibilities between a chairman, who runs board meetings, and a CEO, who runs the actual company. Nonetheless, Kenny’s certainty surprised me. Particularly his closing remark: “At the press conference tomorrow, just don’t look like you got the raw end of the stick when you go out there, or people will assume you got shoved aside.”

In the end, I think I may have overcompensated. I was determined to give people the impression that I was the victor, not the one losing out. On front pages of newspapers across the country were pictures of me pumping my fist into the sky like I’d won a gold medal, a giant smile on my face.

My performance worked. Almost too well, actually. Within a few days of the announcement, it looked like AOL was taking over the world. I remember landing at Dulles Airport, seeing my face on the cover of what seemed like just about every magazine on the newsstand. That week felt like AOL’s coming-of-age—as if the Internet had finally arrived. And yet, in retrospect, ratcheting up my performance gave the false impression that I was running the combined company. And that exacerbated the perception later that it was mostly my fault that the combined company was faltering. I had ceded my operating responsibility but none of the accountability for the company’s performance. And it wouldn’t be long before problems emerged.

The day we launched, we filled the press release with bold promises for our shared future. “AOL Time Warner Will Be Premier Global Company Delivering Branded Information, Entertainment, and Communications Across Rapidly Converging Media Platforms and Changing Technology,” we declared.
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That was the vision. That was what we believed we were building, and what our collective shareholders—98 percent of whom voted for the merger—embraced. But that is not where we ended up. And the internal and external problems that would undo the company were already taking shape.

The first was internal. As part of the merger, we had committed to $1 billion worth of cost cuts across the company. My sense at the time was that it was a reasonable target. The combined companies had costs of about $30 billion, so we were talking about trimming 3 percent. But the decision forced layoffs and reprioritization among the businesses in the first months after the merger.

“I now have to cut people and projects because of this merger,” frustrated executives would say. “And I wouldn’t have had to otherwise.”

That bred an immediate and spiraling resentment among senior executives and severely undercut our ability to build trust. There was rising tension about the merger, even before the stock market took its tumble.

Exactly two months to the day after announcing the merger, the NASDAQ hit its all-time high.
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Then the dot-com bubble collapsed. Our valuation plummeted. In the year to come, we would lose nearly 80 percent of our value. But the crash didn’t just hurt our valuation; it decimated the 401(k) plans of Time Warner employees who were already embarrassed that an upstart had taken them over. Now they were angry. It created a climate that, for some, confirmed—and even exacerbated—fears about and biases against the merger. You could feel the tide turning in the headlines, but it was nothing compared to the shift in posture among Time Warner executives, many of whom were already suspicious about the Internet’s potential. The plummeting market was bringing out the skeptic in everyone. And you don’t want to get in the way of a bear market when she’s protecting her cubs.