Do you, Time Warner, take AOL to be your - Company Business and Marketing

Jennifer Greenstein, Andrew Morse, Susan Ornstein, Aaron Pressman, Laura Rich, Gary Rivlin and Elizabeth Wasserman contributed to the story.

AOL's a heavyweight. Time Warner's no slouch, either. Their marriage -- the biggest corporate merger ever -- will create an unprecedented media giant. But can the companies live happily ever after?

RIGHT NOW IT'S AN EMPTY HOLE. AOL Time Warner's future headquarters is a dust-spewing pit that spans a city block on Columbus Circle in Manhattan. Soon, glass and steel parallelograms will begin to rise and face Central Park. A 2.8-million-square-foot building will house the company's top staff, a state-of-the-art broadcast center for CNN, shops, restaurants, condominiums, a hotel and a performance space for Jazz at Lincoln Center.

The $1.7 billion structure will provide a visible symbol of the Internet Economy's biggest gamble yet -- the marriage of entertainment and the Web. This is no quiet combination of two widget companies; its executives won't labor anonymously in suburban Virginia, where AOL currently rules. Everybody will be watching: Wall Street, Hollywood, the media, the Internet industry. And they'll expect to see more than a swanky skyscraper come out of it.

The mammoth company, a combination of the world's most powerful Internet service provider with the king of content, could have unprecedented control over the flow of information and entertainment. It delivers magazines to more than 200 million readers a week and will be able to pinpoint many of them on the Internet with AOL's MovieFone, Madonna's music and news from CNN. Bugs Bunny and Buffy the Vampire Slayer will join AOL instant messaging and Netscape.

The bruising regulatory battles with the European Union are over and, though Wall Street has been jittery about AOL's stock price (it hit a 52-week low last week) and a few twists and turns are still in store in Washington, the companies expect to complete the merger in a matter of weeks.

Meanwhile, the companies have locked down news about future projects, concerned that what they say might affect the regulatory process. Integration committees are at work, their discussions so closely guarded that even many top executives remain in the dark. The meetings may not matter anyway: Some Time Warner executives who have been through mergers in the past, such as with Turner Broadcasting, say those meetings are often blue-sky sessions with little relation to reality.

The result: Nobody, including most of the people who work for AOL and Time Warner, knows what the new company would look like. But expectations are high. Linda McCutcheon, former president of Time Inc. New Media and now president of Koz.com, says it's "a brilliant deal and an elegant solution for Jerry Levin and Steve Case to solve every problem they have. It's a transforming event in the digital landscape." What McCutcheon and others see is this: AOL gets content and the broadband delivery of Time Warner's fat cable lines. Time Warner gets a Net presence to serve up movies, music and information, as well as a connection with the premier Internet brand.

But critics say there is real danger in one company trying to be all forms of content and delivery. "That's a shaky premise on economic grounds," said Eli Noam, professor of finance and economics at Columbia University. "The old Time Warner was hard enough to manage. Now you add AOL to the mix and I'm not sure that's the way to go."

To prevent a management nightmare, "don't seek consensus," counsels McCutcheon. "It will be genetically impossible." That advice addresses what some predict could be the undoing of the merger. AOL and Time Warner officials groan each time the phrase "culture clash" comes up, saying it's a bromide concocted by the media.

But to many, the chemistry seems lethal. On one side are the hard-driving, khaki-wearing masters of the networking universe who have been kingmakers only since the mid-1990s. On the other are the more conservative media masters who've been around for 77 years and, deep down, may feel like they're behind the times.

At Time Warner, each division -- even each publication -- operates like a city-state with an unquestioned ruler who doesn't always cooperate with colleagues in other divisions. Since the days of Steve Ross, the former Warner Communications boss who died in 1992, division chiefs were rewarded based on their own bottom line, not just that of the company. As a result, Time Warner executives don't always take orders well.

And AOL is used to giving orders. Early in the negotiations, David Colburn, a cowboy-boot-wearing lawyer who is AOL's president of business affairs and chief dealmaker [see "AOL's Rough Riders," page 130], was in a meeting in which a Time Warner official didn't think he was getting enough respect. "You talk like you're buying us," noted the Time Warner player.

"We are, you putz," replied Colburn. The phrase was considered a point of honor by Colburn's colleagues, who had T-shirts made up repeating the answer. (Colburn confirms uttering the putz line, though he adds it was meant as an innocent aside and won't affect his relations with his counterparts at Time Warner.)

One joke that has been floating around the AOL executive suites is telling: "What do you call the process of AOL absorbing Time Warner? Answer: Ethnic cleansing."

OF COURSE, TIME WARNER executives aren't exactly shrinking violets. Some even contend that Time Warner's Levin thought joining with AOL was the only way to make the unruly Time Warner fiefdoms work together. "In media companies, people kill for sport," says Tom Wolzien, an analyst at Sanford C. Bernstein.

The merger is an especially serious blow to the departments at Time Warner that were struggling to find a way to digitally deliver information. They believed they could figure it out for themselves. Levin himself, after all, was a tech zealot before it was cool. But many people at AOL think their Time Warner brethren are clueless about technology. Pathfinder, Time Warner's attempt at a portal for Time Inc. magazines, was an abysmal failure. And its interactive TV tryout in Orlando, Fla., crashed and burned. The attitude at AOL is that Time Warner executives depend on their secretaries to retrieve their e-mail messages.

About a week after the merger announcement, the infamous Colburn and his colleagues were meeting with, among others, Richard Bressler, Time Warner digital manager. AOL was talking about placing pop-up advertisements on AOL to promote Time Warner's magazine properties, according to sources within the companies.

"What are these pop-ups? How big are they? Can you send me some information on them?" Bressler asked. In a voice dripping with sarcasm, Colburn said: "Rich, why don't you invest $21.95 in an AOL subscription and consider it due diligence?" (Bressler says it didn't happen this way.)

THE MAN WHO SOME SEE AS the white knight bringing these two warring tribes together is Robert W. Pittman. He has worked at both Time Warner and AOL and is known as a closer -- someone who may be able to bridge the philosophical gap between the two companies. Early on, Pittman and Richard D. Parsons were named co-chief operating officers, with Case as chairman and Levin as CEO. Pittman's side of the ledger includes all the properties with subscriptions or advertisers, such as America Online, the magazines and TV. Parsons will head the content divisions that produce and sell their products in the retail channel -- movies, music and books. His bailiwick seems sleepier and more low tech than Pittman's, more difficult to bring into line. And some insiders predict that Parsons will soon seek another perch. One of Pittman's first jobs will be to resolve the different attitudes about content. Time Warner is an established media company that wants to protect its content as intellectual property. AOL uses its technolog y to leverage other people's content to make money.

"AOL doesn't understand the value of quality content," says one former Time Warner official. "AOL's view of value is 'What's the bottom line?'" That's because, he maintains, AOL's audience is for sale to the highest bidder. If you go to AOL for personal finance news, for example, you'll find CBS MarketWatch.com gets twice as many promotions as any other finance site. CBS MarketWatch pays AOL $21 million in cash and in-kind advertising to feature its news. But where does that leave Time Warner's content providers?

"They're going to work hard to get CNN and CNNfn into the mix," says Larry Kramer, chief executive of CBS MarketWatch. "But for the next two years, they'll honor their deal. ... Nobody [at CNN] is going to tell them not to make money.

AOL often does deals that require its partners to plug AOL on their site. For example, E-News provides entertainment news for AOL and promises its own "news" coverage of AOL. Those deals are going to make Time Inc.'s publishing executives nervous. Last June, Case said AOL would continue to form partnerships with a variety of companies. "Just recently we extended the agreement with CBS to provide news," Case said. "We're delighted to have CNN in our family. When the merger closes, we think CNN can do some wonderful things, but we don't want it just to be CNN. We want to give our members some choices."

If the two sides can work out their cultural and philosophical differences, the possibilities for the future are enormous. Take cross-promotion: A couple of weeks ago, AOL, disks were delivered in Sports Illustrated, and Time Inc. magazines are being marketed online by AOL. One Time Warner publishing official suggests that Time Warner adopt AOL's monthly subscription model -- it debits customers' bank accounts -- instead of sending reminders ("this is your last issue") in the mail.

Another example of cross-marketing began Sept. 18 when the two companies orchestrated an online campaign to promote Madonna's album, Music. It began with an early evening sneak preview of the Warner-released album on Spinner.com, an AOL-owned Web radio site. AOL members were invited to join the pop diva for a live chat on AOL. A week later, according to Amazon.com, Music was the bestselling album online. It was a gimmicky public relations move to tout the merger for what would probably have been a big seller anyway, but it appears to have worked.

WHETHER THIS WILL THRILL

Wall Street is a different matter. If it's anything like other big mergers, AOL Time Warner is more likely than not to fail -- at least where shareholders are concerned. A KPMG International study last year showed that 83 percent of all big corporate mergers and acquisitions fail to improve shareholder value. At the same time, 82 percent of the executives involved wrongly saw their mergers as successes. (One reason: Egomania?)

Another front-burner issue will be music. By 2003, brokerage firm Robertson Stephens predicts the U.S. music industry will grow to $18.7 billion, with online downloads accounting for 15 percent of it, or about $2.7 billion.

The Napster genie is out of the bottle, and everyone in the music industry is scrambling to figure out how to address the pirating issues and deliver music via the Internet. With Time Warner's vast library of music and AOL's ability to process and deliver it, the company could deliver all the digital music customers want, charging a single subscription rate. If it can't immediately achieve Napster's success, critics will take note. And Time Warner's music success overseas, where it makes half of its sales, could help AOL, which has not made the international inroads it would like to make. The 4-year-old AOL Japan, for example, has been anemic; it has 450,000 subscribers, compared with Fujitsu AtNifty's 2.3 million.

In its book division, Laurence Kirshbaum, head of Time Warner Trade Publishing, has ambitious plans for iPublish, an Internet-only publishing imprint. AOL already has provided the muchneeded technological help for iPublish and, once the e-book venture launches, AOL will provide crucial marketing assistance by promoting iPublish e-book titles on AOL's book channel.

In the bidding war by book publishers for rights to General Electric chief Jack Welch's memoir, four publishers pushed the advance price up to $7.1 million -- believed to be the highest price ever paid for a nonfiction work. With only two bidders left in the game -- Time Warner and HarperCollins -- the author asked to review each company's publishing plan. Time Warner's presentation included a marketing strategy that would feature promotions on Time Warner's CNN and Fortune, as well as with AOL. Time Warner won the book. The book division has already plunged into its first joint venture with AOL: a how-to guide to using AOL that will be published in November. The book, Wired in a Week, will be sold with an AOL disk tucked in the back and an offer to reimburse the book cost to readers who sign up for AOL's Internet service.

It will likely take years to assess whether the AOL-Time Warner merger creates something groundbreaking, to know which divisions have won the battles for control and which players have staked out their turf. Perhaps the clashes will be over by 2004, when the two giants are slated to move into their new headquarters. Then again, the discord could last as long as it took city and civic officials to agree on a plan for the Columbus Circle site -15 years.

And in Internet time, 15 years is more than a lifetime.

The Other Side of the Aisle

From Disney to EarthLink to BellSouth, an all-star list of enemies has come together to fight the merger of AOL and Time Warner.

THEY SAT, ROW AFTER ROW, IN DARK SUITS in a stately congressional hearing room, waiting for the feeding frenzy. The lobbyists were from corporations representing a half-dozen different industries, but they had a common purpose. They were working in concert to pick apart the AOL-Time Warner merger.

The hearing officially was titled "The Future of Interactive Television," but it quickly turned to ripping the deal. A Disney VP struck at the company's plans "to dominate" interactive television. Next, the founder of an instant-messaging coalition targeted America Online's laxity in making its service interoperable. For AOL to insist it only wants to protect subscribers is like "saying the Berlin Wall was built for the safety of East Germans," she said. Then the manager of an Internet service provider attacked Time Warner's verbal pledge to open high-speed cable lines to services like his own.

One thing you can say about the impending corporate marriage of AOL and Time Warner: It's attracted an impressive list of enemies. Some say these detractors are acting out of pure self-interest. "People want to make sure their ox isn't going to be gored," says one former regulator. Others say important principles are involved. "This deal will create the genetic code for the next generation of digital media," says consumer advocate Jeff Chester. But one thing is sure: Even if the merger is approved in some form during the next few weeks, the antagonists aren't going away.

Disney and NBC have been pushing for conditions so consumers can interact with Disney-ABC television programming the same way they will with content owned by AOL Time Warner. Internet service providers such as EarthLink are pushing for "open access" to Time Warner broadband networks and are balking at the terms the company has offered, such as forking over 75 percent of revenues to the cable operator. AT&T, Microsoft, Yahoo and others want "interoperability" with AOL's Instant Messenger. BellSouth and SBC don't want cable companies to have a greater regulatory advantage over telephone carriers in bringing broadband to the masses. The Federal Trade Commission may address a handful of these concerns during the antitrust merger review now under way. But expect the Federal Communications Commission to be grappling with open access in the cable industry for years to come.

AOL Time Warner's response to this has been simple. At an FCC hearing in July, Time Warner President Richard Parsons speculated on his competitors' motives. "Money, that's all it is," he said, referring to complaints from Disney about past dealings with Time Warner over cable carriage. But it's also simply convergence. "It foreshadows a time in which a Disney could be competing a lot more with a BellSouth than in the past," says Charles Schwab analyst Erik Olbeter.

Since the rise of the Internet, the level of third-party involvement in the regulatory review process of large mergers has grown significantly. After all, it was AOL's founder and chairman, Steve Case, who in a 1998 speech at the National Press Club recognized that Washington matters. "Over the next five years, I believe the future of this medium will be determined more by policy choices than by technology choices," he said. Public opinion matters, too. Who Wants to Be a Millionaire? was the hottest show on Disney's ABC in May when Time Warner's cable division, in a contract dispute, pulled the plug on ABC television programming to 3.5 million households. Viewers howled. As if emboldened by this PR success, Disney kept up the pressure and made it easier for other companies to follow. "Nobody wants to be the first one out of the box," says a lobbyist for another company that opposes the merger. Leading Disney's charge is its chief lobbyist, Preston Padden, ever-colorful and media savvy.

"There's no doubt Disney has had the most effective lobbying in recent memory. They've been carrying the flag with a very effective army of advocates behind it," says Reed Hundt, former chairman of the FCC.

Disney isn't the only powerful adversary in the arena. Microsoft executives and outside lawyers have stepped up their lobbying of FCC officials for conditions on the merger that would force AOL (owner of ICQ) to open its instant-messaging services to competitors. At the same time, representatives of several regional Bell companies have reportedly been interviewed by the FTC about whether the proposed merger would affect the rollout of digital subscriber line services, which compete with cable modem services. In addition, numerous ISPs have now outlined for federal authorities their, ongoing negotiations with Time Warner over access to that company's cable broadband subscribers. That the battle lines have been drawn in public will make it more difficult for all these companies to go back to doing business as usual together in the likelihood the AOL-Time Warner deal is approved. "It's unlikely to go back to teddy bears and rainbows," says Scott Cleland, an analyst with the Precursor Group. "This will continue to be hard fought. Only the venue will now switch to the FCC."

Elizabeth Wasserman

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