The Mega-media Business Model

It’s now AOL Time Warner’s turn to take center stage as the latest poster child of America’s mega-corporate meltdown.

Last week, on the day the world’s largest mega-media company posted its first quarterly net profit since completing its mega-merger, the Securities and Exchange Commission (SEC) announced it was investigating AOL Time Warner for questionable bookkeeping – joining the likes of Enron, WorldCom, Tyco and Adelphia. The SEC investigation was initiated in response to articles in The Washington Post that suggested AOL might have inflated its revenue over a two-year period ending in March.

The week before, new CEO Richard Parsons accepted the resignation of former MTV and AOL wunderkind Robert Pittman, the company’s chief operating officer. Parsons reorganized the executive suite, elevating two respected Time Warner executives, Don Logan, CEO of the Time magazine publishing unit, and Jeffrey Bewkes, CEO of Home Box Office. At one point, Pittman had been considered heir to the CEO throne, and there is some speculation he could land at another mega-media giant, such as Disney.

Since AOL and Time Warner completed its merger in January 2001, the value of its stock has declined by more than 75%. When news of the SEC investigation broke last week, the price dropped to $9.51, a one-day decline of 15%, but has since climbed back above $11. At the height of the Internet boom, America Online used its soaring stock to acquire Time Warner, an old-media company with four times its revenue. Recently, however, some investors and analysts, among others, have targeted Steve Case, the company’s chairman and architect of the $165 billion merger, for removal.

So what’s ahead for AOL Time Warner?

"Demerging would be a solution," says Gerald Faulhaber, Wharton professor of business and public policy, and an early critic of the AOL Time Warner merger. "They have to look at [themselves] and ask, ’Are we still a compelling business model for ad agencies to reach people?’"

The merger, Faulhaber adds, has been a "big distraction, not for Time Warner, but for AOL because they lost their focus." The only potentially positive aspect in the deal was that AOL would get “access to broadband conduit … and that was unsuccessful." Furthermore, the merger’s dysfunction has been intensified by bitter infighting and a culture clash between AOL and Time Warner divisions and people.

"AOL Time Warner is clearly not going to survive," says Wharton marketing professor Jehoshua Eliashberg. "It is really about different cultures clashing. Pittman had to resign. It was like trying to mix oil and water. The way AOL and Time Warner [each] think about business is different."

While AOL Time Warner once talked of magical synergies between the "new media" and "old media" and between "content" and "delivery," now many in the business press are openly speculating on when the company will split up. That may indeed be the fate of Vivendi Universal after its meltdown under controversial CEO Jean-Marie Messier, who was forced out several weeks ago. (See related story in this issue, titled “Challenges Ahead for Vivendi’s New CEO.”)