The AOL Time Warner Disaster | TTYL, AOL | 4

0:06I'm David Brown and this is Business Wars.

0:31Today, America Online is but a shadow of what it once was, now existing as a subsidiary of Yahoo owned by a private equity company. But in the 1990s, AOL was everywhere. My breath catches in my chest until I hear three little words. I was just asking if you ever got my email. Shoe Gal. What? That's my screen name, Shoe Gal. If you need to reach me, my email is chunkylover53 at AOL. AOL had cameos in the 1998 rom-com You've Got Mail, Sex and the City, and The Simpsons, to name a few. And that's because AOL was the moment, getting hundreds of millions of users connected across the world. Whether you were emailing your family across the country or sending an instant message to your friend across the hall, AOL was your gateway to staying in touch digitally.

1:24But when the dot-com bubble burst, and their merger with legacy media company Time Warner fell apart in the early aughts, AOL hit hard times. The cultural clash was tough to look past. The AOL crew, led by founder Steve Case, was young, unconventional, and a bit like a fraternity. The Time Warner group, led by CEO Jerry Levin, was more old-school, serious, refined. And the two just couldn't see eye to eye. To say the merger crashed out would be an understatement. Nina Monk is the author of Fool's Rush In, Steve Case, Jerry Levin, and the unmaking of AOL Time Warner. As a reporter, Nina had a front row seat to this failed partnership.

2:07She joins us to piece together what really went down and how it all fell apart. Later, we'll hear from some of the top names on our Business Wars buddy list, Wired's Lauren Good and Michael Calore. The pair co-hosts the Wired podcast Uncanny Valley, which goes inside the biggest stories coming out of Silicon Valley. They're logging on to chat with us about AOL Instant Messenger, better known as AIM or AIM. The platform was laid to rest in 2017, but its impact lives every time we send a text, Slack message, or DM. So, let's get ready to dial up and dial in, because all that's coming up.

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4:58Nina Monk, welcome to Business Wars. Thanks for having me. How long have you been covering business and tech? I feel like I've been seeing your byline since the 90s. Oh, you're really making me sound terribly old. Oh, come on. Come on. If that's the case, then I must be terribly old, too, because I've been reading them. Look, I have to say that I was incredibly lucky. I came out of journalism school at Columbia right in the early 90s as business journalism was taking off. I mean, it was a marvelous moment for journalism generally, particularly compared today, but for business journalism, you know, wow, what a moment.

5:42I understand early on in your career, you were like what, at Fortune? I actually started my career at Forbes, which was a terrific place in the early 90s. I was then at Fortune, as you say, and surrounded by some of the most talented journalists of the era. and then I joined Vanity Fair. And now you look back and realize that this was this particularly rich moment and there was this obsession, I suppose, with the rise of moguls and mega-mergers and the way in which corporate chieftains had become celebrities. I was going to say that must have been a kind of plum beat for, well, for anyone to be at Vanity Fair.

6:24Graydon Carter, I guess, what, tells you he wants you to cover AOL? He was really a dream editor, I got to say, because he just was one of those kinds of editors. I mean, I was lucky to have a few marvelous editors back then, but Graydon was just terrific. He would come back from a dinner party and pick up the phone and he'd say, you know, Nina, I heard about this thing, this AOL. Can you just go into a story? And I ended up covering right from the beginning because I had just left Fortune, which was owned by Time Warner. And so I ended up pretty well right from the beginning covering the AOL Time Warner deal for Graydon Carter at Vanity Fair.

7:07And that's how I finally wrote the book. How much experience prior to sort of getting the order to cover this, how much experience, personal experience, had you had with AOL? You know, we forget, again, talk about making myself sound terribly old, but I remember distinctly I was working for Forbes magazine in the Los Angeles Bureau at the time. It was maybe 1993, 92. And I had a very clever bureau chief who was into all things technology. And he said, you know, there's this thing called AOL and we can, if we get the disks and we can, I'm going to convince headquarters to pay for this. And I remember so well the first time, you know, we all got those disks, which the landscape was littered with these AOL CDs that you had to upload to your computer.

8:02I remember. And then you'd plug in the copper cable from your computer into the wall, you know, the old telephone wires, and you had to literally dial up. And six times out of ten, it didn't work. And you'd kind of just sit there like an idiot, waiting and waiting and waiting for something to happen. And I think for anyone born, you know, post 1990 at this point, I think it's really hard to understand what the Internet was before the Internet, effectively. I mean, I remember when I was in university, you know, kind of still in the in the late 80s and even the early 90s, where what we did understand of this thing called the Internet was they were more like gated communities.

8:49until you had Netscape, until you actually had a browser. It was all so limited. And it seemed so unlikely that it could become something enormous. For sure. And you could get into the community if you had the CD that you could get for free, the AOL CD. And then it was like opening up the world and email. I remember that we love to hear, you've got mail. Of course. And I think that is now part of our cultural history. But, you know, by the time you get to the mid-90s, AOL wasn't just by then the most powerful brand in what we used to call cyberspace. It was really one of the most powerful brands in the world.

9:27It had demystified the internet and it had made it so innocuous and so unintimidating, you know. And I remember Steve Case, the head of AOL, saying we want to be the Coca-Cola of the online world. We don't care about technology. We're not a technology company. And that is this moment that is when everything changed and it went mainstream. Let me ask you something, since you literally wrote the book on what happened with AOL and Time Warner. Was AOL in this period when everyone knew what it was, most everyone that you knew was using AOL in one way or another, was AOL making a lot of money? You know, it's interesting.

10:11I have to say, at least when AOL went public, they were just, I think, starting to break even, if I'm remembering correctly. But one of the amazing things about this era, what we used to call the dot-com era, it was really that the whole world had turned upside down, that the old models no longer applied. It was this whole new game. And historically, you absolutely did not go public until your company was very profitable. The Microsofts of the world certainly didn't go public until they were very profitable. And there were all these clearly defined rules of investing and sort of sensible, thoughtful models for how companies were evaluated.

10:54In a kind of old school, almost maybe now Warren Buffett, like very traditional way of looking at the world. Now we understand it wasn't that the big idea was wrong. This thing called the Internet was indeed a revolution. It's that there was no way to predict at that time which firms would actually endure or thrive, which ones were just in the end shells. You know, AOL was wiped out more or less. That stock price, which climbed 6 ,000 % just two or three years after its IPO, just fell out of nowhere, literally fell 95 % from its peak. And it took a full decade to come back. Exactly. And this was when a lot of Americans realized, wait a minute, a lot of this is the sort of Wizard of Oz thing.

11:42Exactly. We've got things going on on this screen that we're all spending more and more time with. We have these names, big names, AOL, for example, but they weren't making the money. They had cash flow, but they weren't profitable. I think it's important to return back to Steve Case because he was one of these tech celebrities that we're talking about here. And he had his own concerns about the future of AOL. And I get the sense that he was driven by that fear, that uncertainty. You know, that was ultimately the genesis for what would become the biggest merger that we had ever seen up to that point, the AOL Time Warner merger.

12:29No, I think you've hit the nail on the proverbial head. You know, I think what Steve Case did that not many people were able to do at that point was he was able to pull back and recognize that he had, in effect, this currency in the AOL stock. But there were very clear signs that the people who worked at AOL, certainly those of the highest levels of management, knew that something was off. You didn't know whether it was all going to collapse tomorrow or in four years, but something was entirely off kilter. We'd had a stock price, AOL stock price that in just two years had gone from$2 a share to$40 a share.

13:15Suddenly, if you had invested$11 ,000 in the IPO, by the time that the Time Warner deal was announced, you would have had$8 million of AOL stock. I mean, you know, and almost overnight, you saw the AOL parking lot in there, what had been a very modest office in, you know, Dulles, Virginia, filled with once Toyotas and Fords were suddenly replaced by Porsches and BMW Roadsters and a custom-made Ferraris. And there were, at one count, I remember reporting that by 1999, there were more than 2 ,000 millionaires working at AOL. And the 1999 issue of the Forbes 400 list of the wealthiest Americans that year had four people who worked at AOL alone, including Steve Case, who was then worth$1.5 billion.

14:09dollars. And you had, again, a company, not just the wealth it had created in that bubble, because there's nothing else to call it at this point, but this was a company that was being valued on Wall Street in terms of its market capitalization. AOL, America Online, by early 1999 was worth more than Disney and Time Warner. It was worth more than Philip Morris, Bell Atlantic, IBM. And all of those companies had revenues that dwarfed AOLs. I mean, Time Warner alone had five times more revenue than AOL. But in the view of Wall Street, nothing could compare to the promise of AOL's growth. And I don't know if you remember the name Henry Blodgett.

14:58He was kind of, at the time, the infamous internet stock analyst. And I remember distinctly quoting him in one of my articles, and he specifically said, you know, we look at AOL in the same vein as Coca-Cola or Gillette. You know, this is the ultimate American company. Well, Coca-Cola still exists, and so does Gillette, but I wish I could say the same for AOL. Time for a short break. My guest is Nina Monk, author of Fool's Rush In, Steve Case, Jerry Levin, and the unmaking of AOL Time Warner. And when we come back, we're going to look at the merger gone wrong, and a cultural clash that led to AOL's quiet retreat from the limelight.

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18:26Welcome back to Business Wars. Nina Monk is the author of Fool's Rush In and has covered AOL since the 1990s at publications like Fortune, Forbes, and Vanity Fair. Nina, we know that AOL and Time Warner came into this infamous merger with two completely opposite identities. AOL had the more move fast and break things mentality and Time Warner had the old school by the book way of doing things. Can you say more about the cultural differences between these two companies? Yeah, that's definitely putting it, definitely putting it very mildly. You know, one of my favorite anecdotes, and this is from after the deal has been announced, the deal is coming together.

19:08They're trying to figure out how to work together. And they had their, AOL and Time Warner had their first joint board meeting. And I remember Jerry Levin telling me about it. And I think it was the first moment where he understood very clearly what so many of his lieutenants had been warning all along, that the cultural differences between these two companies was so immense that it couldn't possibly be bridged. Traditionally, Time Warner's board meetings had been these very formal, serious affairs run by Levin as chairman and CEO. There was a seating plan, a printed agenda that people followed, you know, ritually, item by item.

19:54Each director's place at the table was marked with a black leather portfolio embossed with his or her initials. There was an elegant three-course lunch in the Time Warner building at Rockefeller Center with uniformed waiters who would balance sterling trays. There was scotch and sherry served in crystal glasses. And you get the idea. I mean, this is real elegant, old school, waspy, traditional stuff. For the first time suddenly, this is in July 2000, for the first time in Jerry Levin's decade as the CEO of Time Warner, he was now sharing control with AOL. And AOL boards had always been chaotic.

20:42You know, directors would just chat and say whatever they wanted. People would put their feet up on the table. Any executive who wanted to walk in and out could come. And Jerry Levin looks over this boardroom table. It's in Dulles, Virginia. And the table's littered with bags of Cheetos and Pringles and the AOLers are drinking Snapple iced tea. That was then a big thing, you know, right straight from the bottle. And the meeting turns into literally screaming matches. And Levin was shocked. And I remember he said to me, Nina, it went on endlessly. It was like, he described it to me as a frat party.

21:20He said, it just wasn't what I was used to. There was this, and I remember so because he said, there was a lack of discipline and decorum. And I remember thinking, my goodness, that was the first time that you recognized that? You know, had this not occurred to you much, much earlier? You know, Time Warner, as you know, had come out of one of the oldest, most paternalistic, most elegant, for lack of better words, WASP -y firms in America, Time Inc. It had aspired to great things. It wasn't just about making money, God forbid. It was about something much more important than that. And even after the merger with Warner, which had taken place in 1990 and at the time had sort of shaken up the old-fashioned Time Inc.

22:14and made it much more Hollywood and fast-moving, nevertheless, at the time of the AOL merger, Time Warner was the world's biggest and most powerful media and entertainment company. This is no joke in a time when these companies really mattered. We've discussed earlier why Steve Case felt it important to connect with Time Warner. Given Time Warner's position at that time, what was the thinking in Jerry Levin's office about why Time Warner needed AOL, especially given all the question marks about where this Internet revolution was going to go? That's such an important question because on the face of it, you would have thought that Time Warner, as the world's largest media and entertainment company, kind of didn't really need to do a whole lot, right?

23:06We've got these magnificent assets, Warner Brother Picture Company, Warner Music Group. We've got the most important consumer magazines, Life Magazine, Sports Illustrated, Fortune with these great histories. And we've also got Time Warner Cable, the country's second largest cable system. Warner Books, cable networks like CNN and HBO. They even owned a baseball team. The Braves you're talking about. Yeah. But what became increasingly clear by the late 1990s was that it was over if you were not an internet company, or at least that's what it felt like at that moment. And you have to understand that following the merger in 1990 with Warner, this is Time Inc.'s merger with Warner, the company had been saddled with an enormous amount of debt.

23:54Debt, yeah. An enormous amount of debt. And Jerry Levin running this company by the mid-1990s was in a panic. Time Warner was actually in freefall. It was losing money. The stock price was going nowhere. There were rumors of takeover attempts because, in large part, the company's overwhelming debt had reached this obscene sum of$15 billion. And the New York Post used to print this daily Jerry-o-meter that gauged Jerry Levin's chances of being fired that day. And that's how precarious his position was. So they needed a catalyst. And the only catalyst that in a short period could completely alter the growth rate of a company like Time Warner was an Internet company.

24:42And you had no choice anymore. Jerry Levin's back, he felt, was up against the wall. And every day that he paused, that he hesitated, that he thought more about it, AOL's stock price went up higher and higher and higher. And AOL was worth more and more, even while Time Warner was worth less and less. And in the end, Jerry Levin, and he said exactly this to me, I had no choice. I had to do a transformative transaction. Even if it was clear, well, certainly in retrospect, that he didn't know what he was getting himself into, he felt he had to do this. I think Jerry Levin was sufficiently arrogant or sufficiently lacking in humility, as far as anyone who ever worked with him or knew him would acknowledge, would recognize, that there was no doubt in Jerry Levin's mind that this deal was going to be brilliant.

25:37There was no doubt in his mind that he and Steve Case were soulmates. There was no doubt in his mind that this merger made perfect sense. Not for a moment did Jerry Levin think this was a bubble. I think he genuinely, I suspect AOL, feared that their stock was a bubble. But I think Jerry Levin was as sold on this stuff as anyone. He believed this was the right thing for his company. Let's move from the big announcement to when it begins to fall apart. What were the signs that all was not well in Paradise City here? Could you see him on the outside? Were the cracks visible? It's a good question.

26:18I mean, I think it happened almost immediately. The deal was announced on January 10th, which was a Monday. Jerry Levin and Steve Case had only agreed on Thursday evening, January 6th, to do this deal. They basically called their bankers, their lawyers that night. Late at night, these guys are pulled out of bed. All of the top lieutenants here, their top bankers, the top lawyers, And they're given instructions that they have three days to pull off this deal. Three days. And from Friday, January 7th to Monday morning, January 10, there were 50-plus Time Warner executives, bankers, lawyers, accountants.

27:03They worked around the clock across town. AOL set up shop on the top two floors of their law firm's offices. that both the companies were given code names because they were trying to prevent leaks. Black for AOL, blue for Time Warner. There is no way, there is no way on earth that you can do proper due diligence for a deal of this size in three days. There's no way. It goes on and on and on. There's just no way. And already during these meetings, because the AOL folks, executives, and the Time Warner executives, they hated each other immediately. Every story I heard was the Time Warner guys calling the AOL guys sloppy, cowboys, abusive, sons of and much worse.

27:51And all I heard from the AOL guys was what uptight pricks the Time Warner guys were, how snooty and how slow moving and what a bunch of dinosaurs they were and how clueless they were. I've never seen two groups of executives who despised each other as much as these two. It wasn't long before people inside Time Warner began to feel betrayed by Levin, right? Well, this in so many ways gets to the crux of the problem, which is that Jerry Levin had not brought in any members of his team. He hadn't even tried to sell the deal. They first learn about the deal basically at the same time as the media, as the public learns about the deal.

28:43And I remember hearing stories from guys saying, I had no idea. Like I was listening, I was in the car going to work and I heard this on the radio and I nearly drove the car off the road. And the sense of having had a knife, right, thrown into your back. Practically every AOL executive was being named to the top positions. And almost all of the Time Warner folks were being either pushed, shunted aside or pushed out entirely, with the exception, of course, of Jerry Levin himself. When do you think reality began to hit that this merger was not going anywhere? Quite, quite quickly. The deal was announced the very beginning of 2000, as you know.