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Business Wars: The AOL Time Warner Disaster | Episode 1 Summary
Podcast Overview Podcast Title: *Business Wars* Host: David Brown Description: *Business Wars* explores the intense rivalries between major companies, revealing the inner workings and decisions of leaders, innovators, and executives that shape the business landscape.
Episode Title
The AOL Time Warner Disaster | You've Got Mail | Episode 1
Episode Description In 1999, with America Online (AOL) riding high on the dot-com boom, CEO Steve Case makes a bold move to acquire media giant Time Warner in a historic merger. This episode explores the lead-up to this merger and the cultural clashes that would unfold between two distinct corporate entities.
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Key Themes and Concepts
- Cultural Clashes
- AOL vs. Time Warner: The episode highlights stark differences in corporate culture between AOL’s enthusiastic, youthful tech environment and Time Warner’s traditional, formal media atmosphere.
- Board Meeting Dynamics: The first joint board meeting serves as a microcosm of the larger cultural clash, showcasing differences in presentation styles, attitudes towards business, and communication methods.
- Ambition and Vision
- Steve Case’s Vision: Steve Case is depicted as a visionary leader, driven to revolutionize how Americans connect online and confident in AOL’s growth trajectory.
- Skepticism from Time Warner Executives: Time Warner executives express doubt about AOL’s aggressive revenue projections and business model, highlighting a potential disconnect in strategic vision.
- The Boom and Bust of the Dot-Com Era
- Hyper Growth vs. Sustainable Growth: The episode discusses the challenges of maintaining rapid growth, suggesting that the larger a company gets, the harder it is to sustain high growth rates.
- Investor Anxiety: Case’s concerns regarding AOL’s inflated stock value introduce the concept of speculative booms and the risks associated with them.
- Historical Context of AOL’s Development
- Origins of AOL: The narrative traces AOL back to its beginnings as Control Video Corporation, led by the ambitious Steve Case, highlighting its early struggles and transformation into a major online service provider.
- Marketing Innovations: Case's marketing strategies, including direct mail campaigns, are credited with significantly increasing AOL's user base, demonstrating the importance of innovative marketing tactics.
- Strategic Acquisitions
- Merger Considerations: The episode outlines the strategic considerations surrounding AOL's desire to merge with Time Warner, focusing on the need for content as broadband technology evolved.
- Negotiation Dynamics: The negotiations between Case and Time Warner CEO Jerry Levin reveal the complexities and egos involved in corporate mergers.
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Key Takeaways
- Cultural Compatibility Matters: Mergers can fail if the corporate cultures of merging companies clash too significantly, a theme illustrated through AOL and Time Warner's interactions.
- Vision vs. Reality: Ambitious growth projections must be tempered with a realistic understanding of market dynamics and consumer behavior.
- The Importance of Adaptation: Companies must remain adaptable to survive shifts in technology and consumer expectations, as seen with AOL's transition from subscription fees to flat-rate models.
- Maximizing Opportunities: Utilizing advantageous market conditions to acquire strong assets can protect companies from future downturns.
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Conclusion The first episode of *Business Wars* delves into the ambitious but ultimately troubled merger of AOL and Time Warner, setting the stage for a series of corporate challenges that arise from clashes in culture, vision, and market dynamics. As the narrative unfolds, it becomes clear that the high-stakes world of business is fraught with risks, where the best-laid plans can quickly unravel.
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For further insights into this riveting corporate saga, tune in for the next episode where the drama of the AOL Time Warner merger continues to unfold.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:07It's July 2000, and in Atlanta, Georgia, the forces of old and new media are about to collide. because inside the CNN Center, the directors of Time Warner and AOL are holding their first joint board meeting. Time Warner is the world's biggest media company. Its holdings include CNN, cable TV, movies, music labels, Fortune magazine, HBO, and more. Its leaders are gray and grizzled and used to striking deals over expensive meals. Their counterparts at AOL couldn't be more different. They built the Internet service provider that's the toast of the dot-com boom. They're rowdy, newly rich, and munching Cheetos.
0:51And six months ago, they decided to buy Time Warner for$182 billion. It's the biggest merger in U.S. history. Or will be, once the government approves it. To prepare for that day, the two companies are using this board meeting to learn how to work together. But they're already struggling. At the front of the room, AOL President Bob Pittman is delivering a presentation. He used to work at Time Warner until he got fired by its CEO, Jerry Levin. Now, thanks to AOL's high-priced stock, Pittman's on the Forbes 400 rich list. While Time Warner's executives flew commercial to be here, he arrived on his private jet.
1:35And now, the tables have turned. Pittman's telling Levin how it's going to be. AOL is delivering$2 billion in ad and commerce sales. In five years' time, we'll be delivering$7 billion. One AOL executive shouts out, And that's a conservative estimate. But while the AOL crew is pumped, the Time Warner team is poker-faced. To them, board meetings are serious affairs, not free-for-alls where people yell out and snack like they're at the movies. Not sure anyone's ever run the numbers on this, but here's a pretty safe bet. Culture clashes have probably killed more deals than bad math. Put Cheetos next to caviar, and I'm thinking someone's going to choke.
2:23Pittman hauls a large piece of cardboard onto a stand. It's a graph where a thick line swoops towards the heavens. It's AOL's revenue projections. Our trajectory is clear. Revenues will reach$40 billion. In the audience, Time Inc. boss Don Logan can't believe what he's seeing. He thinks Pittman's projections are nonsense. His numbers assume AOL's growth will never slow. And that's nearly impossible. You know, there's a law of gravity in business. The bigger a company gets, the harder it is to keep growth high. It's easy to double sales when you're only making a buck. But the double sales from one to two million?
3:07That's far tougher. On top of that, new markets mature. In the year 2000, Internet use is still growing. Only half of Americans are online. But one day, everyone who wants to be online will be. And the entire market's growth will inevitably slow. But Pittman's talking as if AOL's immune to that. The Time Warner executive next to Logan leans over. I want what he's smoking. Logan would smirk, but this is no laughing matter. AOL is about to take control of Time Warner. And what he and most of the Time Warner crew still can't wrap their heads around is this. How did a company as big and storied as they are end up prey for these computer freaks?
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6:04From Wondery, I'm David Brown, and this is Business Wars.
6:34In this season, we're going to explore why the biggest merger in U.S. history turned into a corporate catastrophe. In the year 2000, the merger of AOL and Time Warner seemed like the moment power shifted from offline to online medium. But the mega-merger went off script fast. Infighting cookbooks and incompatible corporate cultures would turn it into a marriage from hell, one that would scar both companies. But before any of that could happen, AOL had to overcome the odds to take America online. This is Episode 1, You've Got Mail.
7:21It's January 1983, and at the Consumer Electronics Show in Las Vegas, two scantily clad showgirls are leading a store buyer away from the exhibition hall and slot machines. They drop him off at a hotel suite that's home to the Control Video Corporation, CVC for short. CVC is a startup and too cheap to buy an exhibition stand, so it's luring buyers here with showgirls and the chance to win a gold bar. CBC founder Bill von Meister bounds over to the buyer, all handshakes and smiles. He thrusts a champagne glass into the buyer's hand and gets him to drop a business card into the prize draw bowl. Then he guides him to the gadget CBC wants to get into stores.
8:08It's something called GameLine, and it's resting on a pedestal in the middle of the room. It's not impressive, just a small block of black plastic. Von Meister wraps an arm around the buyer and tells him he's looking at the future. GameLine is a modem. It plugs into a regular Atari game console. For a monthly fee, it lets users download games through their home phone line. Yeah, I know. Today, downloading games is no big deal, but this is 1983. The Internet's barely a week old, at least in terms of consumer use. Only defense contractors can use it, or have been able to so far. Von Meister pulls the buyer closer and tells him, GameLine will sell a million of its modems this year.
8:58The buyer believes him. Games are red hot. Kids are wild for Donkey Kong, Frogger, and Pac-Man. Then, von Meister drops another doozy. Games are just the start. CBC's tech will soon let people download music, book hotels, and check stock prices. The buyer places an order and leaves excited. On the way out, he hands his empty glass to a young CBC employee with a prominent chin. The buyer doesn't give the guy a second look. But he should have, because that 24-year-old is Steve Case. and he's the man who will turn CVC into AOL.
9:46One year later, 1984, in a hotel conference room in Palo Alto, California, CVC's board is meeting and the mood is gloomy. The video game boom's gone bust and taken CVC down with it. Stores have canceled their game line orders. CVC spent$9 million launching it and sold fewer than 3 ,000 units. CVC is now debt-ridden and nearly bankrupt. Hey, listen. You can have a visionary founder and a world-changing idea, but if you burn through money faster than it comes in, the lights go out. It's that simple. Let me put it another way. Startups don't usually die from competition. They die from cash flow. The board sidelines von Meister.
10:33A visionary isn't what the company needs now. In his place, they parachute in Jim Kimsey, an airborne ranger turned management consultant. Kimsey's first step is to reduce headcount from 100 people to around 10. He works through the list of employees striking out names, including everyone in marketing. One of the survivors is Steve Case, mainly because he's cheap. Case is the runt of the marketing department, barely more than an intern. But Kimsey also sees more in Case than cheap labor. No, he's not the most experienced or charming employee, but he is the most driven. He's a bit like the Terminator.
11:17He brute forces his way through problems and doesn't do downtime. He shows few emotions, shares little about himself. He listens to what colleagues tell him, but rarely reveals his own thoughts. It's why they call him the wall behind his back.
11:36Let me tell you something. Many longtime managers already know this, but let's get it on the record. Sometimes, your quietest hire is your biggest and best bet. Steve Case wasn't the loudest guy in the room, but he got things done when everyone else was panicking. Execution beats charisma. Keep an eye on the ones who show up early, stay late, and never stop learning.
12:04Case burns with ambition. He grew up in Hawaii but left because he felt becoming the most successful person on the island wouldn't be enough for him. For Kimsey, Case's relentlessness is an asset. CVC is small and in critical condition. It's a real shot in the arm to have someone like Case, who gets things done and does the work of three people for the price of one. The two men become brothers in arms. Kimsey mentors Case. Case becomes Kimsey's go-to guy. Together, they fight to save the company from its suburban office in Vienna, Virginia. The first priority is to stop CVC's creditors from sending in the sheriff.
12:48Kimsey tackles this by threatening to declare CVC bankrupt. It's a serious threat. CVC has few assets. If he goes bankrupt, the creditors get nothing. The threat works. Those creditors back down fast, realizing that the only way they'll ever get paid is if they let CVC get back on its feet. With its creditor's corral, CVC focuses on the one thing it does have, the ability to operate an online computer service. In the mid-80s, online services seem like a business full of promise. Fewer than one in ten owns a computer in 1985, but that number is creeping up. So while there are established rivals like CompuServe, there's plenty of room for growth.
13:39CVC decides it will build an online service for the market-leading personal computer of the day, the Commodore 64. And in May 1985, they mark this new direction by adopting a new name, Quantum Computer Services. Oh, you thought they were about to become AOL, huh? Well, not yet. But that moment's coming. But what exactly is an online service in 1985? We're not talking about the Internet here, let alone the World Wide Web. That's years away. In 1985, the online universe is made up of competing subscription services. They offer the stuff we take for granted nowadays. Email, chat, shopping, and news.
14:26But in 1985, each service is separate and self-contained. For instance, CompuServe users can't email quantum users. and vice versa. And online services are slow. So slow. How slow? Well, when CVC became Quantum's Simple Mind's Don't You Forget About Me, remember that song? That was at the top of the Billboard Hot 100. You know, it was the song from the Breakfast Club movie. Say you wanted to download that song as an MP3 on a mid-80s modem. You'll have that file downloaded in about three days. But it gets worse. Being online in the 80s is expensive. Quantum's Q-Link service charges a monthly subscription fee of$9.95, plus another six cents for every minute spent online.
15:16That's$3.80 an hour, back when the average hourly wage was less than nine. So downloading that Simple Minds MP3 will cost you more than$270. Just as well no one had invented MP3s yet. The long and short of it is this. It's cheaper, quicker, and easier to go to Tower Records, so going online is very niche. Something for the geeks. But that's okay with Quantum, because that's exactly who it's built the Q-Link service for. At 6 p.m. on November 1, 1985, Q-Link goes live. Connect to the QuantumLink network and suddenly, a diverse new interactive world of easy-to-use services is right at your fingertips.
16:06Beginning with People Connection, the social center of QuantumLink, where people from across the nation converse, exchange information, share ideas, and participate in informative lectures. Ah, I just smell that digital idealism. People are going to get online and take part in informative lectures. They're definitely not going to doom-scroll cat videos and argue like overtired toddlers. But chat isn't all the Q-Link offers. There's email, sports reports from USA Today, breaking news from Reuters in games like Hangman and Blackjack. There's even rock and roll news, so you'll always know what Phil Collins is up to.
16:48By early 1986, 10 ,000 people are signed up with Q-Link. It's not enough to make it profitable, but it is enough to attract investment and get Quantum on firmer financial footing. But there's a problem. Commodore computers are losing market share, so Quantum moves to bring its online services to other computers, starting with Apple. In 1986, Apple isn't the giant it is now. Its Apple II computers are past their prime, and Macintosh sales are weak. Even so, there are millions of Apple owners out there, all potential subscribers to quantum services. But Case doesn't just want to put quantum on Apple computers.
17:35He wants a marketing partnership with Apple to help attract subscribers. So, he temporarily uproots to San Francisco and spends three months lobbying Apple employees nonstop. Eventually, his relentlessness pays off when one department agrees to a deal. Case returns to the Quantum head office in Virginia, a hero, and gets promoted to executive vice president. In 1988, Quantum's Apple-linked service goes live. Soon after, it launches a service for PC owners. But Case is worried the services feel faceless. He wants them to feel friendly. Quantum's mission is to make getting online easier. So, one afternoon in 1989, he floats the idea of adding a voice to the service.
18:29Right now, all users hear when logging on are the strange buzzes and chirps of their computer connecting with a service. Which sounds like this.
18:42Case tells his colleagues these sounds aren't welcoming. He wants users to be greeted when they log on and told when they get an email. The discussion is overheard by Quantum customer service rep Karen Edwards. She tells Case her husband is a voice actor. And so Elwood Edwards lands the job. He records the lines on a cassette deck at home. Quantum pays him$200 and then adds his tones to the service. Welcome. You've got mail. By the time Elwood's voice debuts in October 1989, Quantum has 75 ,000 subscribers. But it's not sports news or Phil Collins updates that are keeping people online. It's the chat rooms, especially the ones about sex.
19:34Quantum isn't too happy about that. It wants to project a family-friendly image. The worry is that all these chat rooms could cause a scandal. But the company's executives consider shutting down the chat rooms. And then they check the numbers. Users spend a lot of time talking dirty. And the longer they stay logged on, the more money Quantum makes. So, the company looks the other way. Quantum wanted a squeaky clean image, right? But when the dirty chat room started driving revenue, he made peace with it pretty quickly. And if you're in the trenches of business, you may have to make peace with this too.
20:19In business, ideological purity can be a luxury, while pragmatism often pays the rent. So, what's the line you won't cross? and how far will you stick with it once you see what the competition's doing? But even with the sex chat rooms, Quantum is a distant third in the market. The market leader, CompuServe, has half a million subscribers, and the limited uptake of Quantum service prompts Apple to cancel its deal with the company. Losing that deal gives Case another headache. Apple owns the Apple Link name, so Quantum needs to rename its service for Apple computers. So Case holds a contest to select the new name.
21:04After sifting through the entries, he decides the best idea is his own, and it's a name that captures the company's ultimate goal, America Online. AOL is here, and soon everyone will know its name.
21:30Ready or not? Yep, the holidays are coming, and I'll be honest, I love having friends and family over. But I don't love realizing at the last minute that my serving pieces look like they've been through one too many dinner parties, or that the guest room is more college dorm chic than holiday cozy. Know what I mean? Well, that's where Wayfair comes in. We just ordered some new serving plates, a new wreath for the door, a set of crisp new sheets, and suddenly the house feels just about guest ready. Even better, it didn't feel like a chore. It felt fun. But I've been here before, I'll be honest.
22:03My secret? The Wayfair app. What I love most is how Wayfair has literally everything you need. That's no exaggeration. I was surprised to find high-quality cookware that's perfect for hosting those big family dinners. And let me tell you something, delivery was a breeze, free and fast, even for the larger items. Whether you're looking to spruce up your kids' rooms with festive touches or need new bedding for the guest room, Wayfair's got you covered. From Christmas trees and wreaths to inflatables for the yard, they're truly a one-stop shop for holiday prep. And the best part? There's something for every style and every budget.
22:39I can't wait to tackle more of my holiday home goals with Wayfair. It just makes getting ready for the season so much easier. leaving more time to enjoy with the family. That's what it's all about. Get organized, refreshed, and ready for the holidays for way less. Head to Wayfair.com right now to shop all things home. That's W-A-Y-F-A-I-R dot com. Wayfair. Every style. Every home. You hear it all the time on Business Wars, the battles between brands, the bold moves, the breakthroughs. But behind every winning business, there's something less talked about. Great IT. That's where Manage Engine comes in.
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24:20It's late 1991, and the company now known as AOL is preparing to join the stock market. Its services now have 155 ,000 subscribers, enough to make a slim profit on annual revenues of$24 million. But it still remains far behind the competition. CompuServe now has nearly 900 ,000 users, and IBM and Sears' online service Prodigy has more than a million. AOL hopes going public will arm it with the funding it needs to catch up. It also allows the company's early investors to cash out. The 90s also seems set to be the decade that the world goes online. There are now computers in more than 15 % of U.S.
25:08homes, PCs running Microsoft operating systems have won the computer wars. Commodore's dying. Apple looks like it'll go the same way. Modems are getting faster. PC visuals are improving and computers are getting easier to use. All of which makes Case believe AOL is primed for the big time. It makes going online easy. AOL software has visuals, unlike the text-only CompuServe. And its cheery, you've got mail messages give AOL the warmth the competition lacks. But few share his confidence. The Internet and World Wide Web exist, but access remains restricted to government, military, and research institutions.
25:53Many think AOL and other online services are just the new CB radio, a nerdy novelty, not something that will transform human communication. In fact, they think this so much that several investment banks pass on the job of bringing AOL to the stock market. Eventually, on March 19, 1992, AOL joins the Nasdaq. The initial public offering values the company at$62 million and adds more than$10 million to its bank account. Case's own stake in AOL is now worth roughly$2 million. So he's now 33 and a millionaire. Soon after the IPO, he's promoted to CEO. And now, it's his job to take AOL mainstream.
26:49In early 1993, marketing executive Jan Brandt arrives for work at AOL's office in Vienna, Virginia. It's her first day, and she soon learns AOL struggling. Subscriber growth has stalled. There are no more early adopters to get. AOL has to win over less committed computer owners. And it's her responsibility to figure out how. AOL rival Prodigy is now advertising on TV. But Brandt thinks that's a mistake. Most folks don't even understand what going online is yet, let alone why they'd want to. She was the same. She doesn't care about tech. She only got hooked on AOL after trying out its chat rooms.
27:37Her takeaway is simple. People will be converted if they try AOL, but trying AOL is a hassle. People have to buy the software and a monthly subscription before they can get online. She wants to make it as effortless as possible, and so she turns to direct mail. Her plan is to mail people disks containing AOL software and 15 free hours of time online. That way, all people would need to do to try out AOL is stick the disk in their computer. Case is skeptical. Brandt wants to test the idea by mailing 200 ,000 disks, at a cost of a quarter of a million dollars. That's a big sum for a medium-sized business like AOL.
28:28Case asks what kind of response rate she expects. She tells him 1 % is good for direct mail. Case's skepticism deepens. But she points out it's not the cost of the campaign that matters, but the cost of recruiting a customer. And on that measure, direct mail is a good value. Case isn't convinced. He agrees to the test, but tells Brandt it's not going to work. But he's wrong. The test smashes expectations. The response rate is nearly 10%. AOL gains 20 ,000 users with a single mailing. If those users stick with AOL for just a month, the campaign will have paid for itself. The lesson? Listen to your skeptics, but trust the data.
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29:19Brant's direct mail gamble sounded old school, but her logic was right on target, and the test results airtight. You know, in marketing, the best ideas often come from ignoring trends and focusing on what actually gets people to act. After that, AOL goes all in on direct mail. Case fears his rivals will copy its new marketing breakthrough, so he wants to maximize its edge while it can. But its competitors aren't paying attention. AOL's direct mail push sails under the radar. By the time the competition wakes up, AOL is gaining tens of thousands of new subscribers every month. By August 1994, AOL has a million subscribers.
30:11AOL discs flood the nation. They fall out of magazines, turn up at blockbuster video rental stores, get served with in-flight meals and hide in breakfast cereal boxes. They even show up in packs of flash-frozen Omaha steaks. At its peak, around half of CD manufacturing is devoted to producing discs for AOL. And for ordinary folks, encounters with AOL disks become a nearly daily experience. AOL shoots past CompuServe and Prodigy. By late 1995, it's got 4 million users. But there's a threat closing in. It's called the Internet. The World Wide Web went public in 1993, opening the door for people to build and access web pages online.
31:02And unlike AOL and its peers, the web is an open system that no one owns or controls. In 1995, an estimated 18 million Americans are online. Most use services like AOL. Fewer than 4 million use the web. But that seems destined to change. Internet service providers are entering the market and offering unlimited access to the web for a flat monthly fee. So, AOL fights back by presenting itself as the gateway to the web. I used to be intimidated by the internet and the World Wide Web, but thanks to America Online's great new web browser, I'm right at home. This is what AOL's all about, making going online simpler.
31:51It also helps that in the mid-90s, the web is, well, a bit janky. Websites are hand-coded and homespun. Many web pages are nothing more than under-construction notices. Search engines work like phone directories. To find something interesting, people just follow random links to see where they end up. They call it surfing the web. The web feels like a chaotic yard sale where the useless and unexpected sit side by side. In comparison, AOL service is an orderly shopping mall. But as 1996 continues, AOL discovers it's not the Internet that's its biggest problem. Its biggest problem is its own success.
32:36Its spending on direct mail campaigns now outstrips its revenues. And the rush of new subscribers from those campaigns is piling pressure on its servers. And in August 1996, AOL finds itself overwhelmed. It could be called the silence of the techno nerds. The world's largest computer service, America Online, went down yesterday for 19 hours, taking with it millions of subscribers who were suddenly cut off from their information wonderland. Disconnected AOL users go ballistic. They barrage the customer service center with angry calls. Websites with names like AmericaOnlineSucks.com start to appear.
33:20People nicknamed the company America on Hold. All of this unsettles investors, as do the mounting losses from its all-out push to win over subscribers and the growing threat from the web. AOL's stock price starts drifting down. At AOL headquarters in Dulles, Virginia, despair breaks out. But Case doesn't offer employees any reassurance. Not that they expected any. Warm words aren't his style. But he got them this far. They just hope he can find a way out of this mess. Kay spends the next few weeks thinking about how to respond to the rise of Internet service providers. They charge a monthly fee for unlimited time online.
34:06AOL still charges a monthly subscription and a per-minute fee. This makes AOL look overpriced. But AOL offers more than just Internet access. If it charges a flat fee, its profits will vanish. But if it doesn't join the flat rate club, it's finished. There seems to be only one option. Case just has to hope he can find a way back to profit later.
34:34In October 1996, Case announces AOL will charge a monthly fee of$19.95 for unlimited online access. The new pricing causes a stampede of new customers and a huge rise in the time people spend online. That pushes up AOL's running costs and the number of server meltdowns. The extra costs and reduced income alarms investors. They start selling their AOL stock. AOL shares have now fallen nearly 70 % in just eight months. Case realizes he needs help. He hires Bob Pittman as AOL's new president. He's a former Time Warner executive and knows how to run big companies. The plan is for Case to focus on strategy, Pittman on operations.
35:26And Pittman crushes costs fast. He orders mass layoffs, sets aggressive financial goals, and demands faster decision-making. AOL workers are stunned. Most have never been asked to stick to their budgets before. But reducing costs isn't enough. AOL also needs a new source of revenue. Pittman looks to advertising. After all, AOL doesn't sell ad space. But now, selling advertisers' access to its millions of users seems like the best way to get back to profit. But there's a problem. Major advertisers aren't interested. Online ads are new and no one's sure if they'll work. AOL seems doomed. But then, the boss of a startup called Tellsave turns up at AOL's door.
36:23Tellsave offers low-cost, long-distance calls, and it thinks the best way to get customers is to tap into AOL's subscriber base. But Tellsave doesn't just want a few banner ads. It wants an exclusive partnership, one that will ensure Telsave is the only long-distance call provider AOL users ever encounter online. In return, Telsave offers to pay AOL$100 million. That deal is transformative. AOL helps Telsave attract 100 ,000 customers a month, and that success turns heads. Advertisers realize AOL's online portal is the perfect online storefront. Every dot-com hoping to make it big online beats a path to AOL seeking a partnership like Telsaves.
37:171-800-Flowers pays$25 million to become the only fresh flowers vendor on AOL. Amazon.com pays$19 million to be the sole bookseller on AOL's website. Barnes & Noble pays$40 million to be the only bookseller on AOL's online portal. Each exclusive deal attracts more advertisers. Companies worry their competitors will lock down AOL before they can. AOL spent years attracting millions of subscribers. No other Internet company has anywhere near as many users to offer advertisers. AOL becomes the hottest internet stock of all. Fortune magazine declares it the only brand that counts in cyberspace. The launch of AOL Instant Messenger only cements the image that AOL is the king of the dot-coms.
38:14At the start of 1997, AOL stock cost$2. By the end of 1998, it's worth$40. That's a rise big enough to turn$10 ,000 to$200 ,000 in just two years. And its rising share price also allows AOL to go on an acquisition spree. It buys its old rival CompuServe, then pays more than$4 billion for the Netscape Navigator web browser. By the summer of 1999, AOL has more than 17 million subscribers and another 25 million registered users of AOL Instant Messenger. Annual revenues are now$4.8 billion and profits more than$700 million. Case is now worth$1.5 billion himself, and more than 2 ,000 AOL employees are millionaires.
39:11But behind closed doors, Case is worried Worried that the good times won't last So he and Pittman set a new goal They call it GBF Get big fast And to do it, they're going to use AOL's sky-high stock price To swallow a corporate giant
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41:57It's spring 1999, and at AOL headquarters in Dulles, Virginia, CEO Steve Case has assembled his top team. He's gathered them here with one goal, to identify which business titans AOL should try and buy. AOL is now worth more than Boeing and General Motors combined. It's the business success story of the Internet revolution. But Case, he doesn't believe the hype. Sure, he thinks online is the future. He believed that before the Internet even existed. But he knows that the sky-high stock prices of AOL and other dot-coms is fiction. AOL's only real asset is its users. But how loyal are they, really?
42:43If Microsoft offered them free Internet access tomorrow, how many would stay with AOL? AOL has no factories, no intellectual property of note, no cables in the ground, just a bland suburban office overlooking a Walmart. One day, maybe soon, investors will wake up to this, and the whole internet stock mania will be over. So, Case wants to lock in AOL stock price gains by buying a company with real assets that won't devalue when tech stocks stop being hot. You know, if there's a business axiom buried here, it might go something like this. When you're rich on paper, spend like the bubble's gonna burst.
43:27Case, he was just trying to play it smart. He knew AOL's evaluation was frothy, so what did he do? He moved to convert the hype into hard assets. Here's a better way to think about the general principle. Smart founders use boom times to hedge for the bust. In business, timing isn't everything, but it's awfully close. But now that Case has identified the strategy, AOL needs to decide who to buy. In their meeting at headquarters, one of the executives throws out the first names. I'm thinking telecoms, AT &T, maybe Sprint or WorldCom. Case nods approvingly. AT &T's good. Would set us up for when the switch from dial-up to broadband happens.
44:13AOL's chief strategist cuts in. AT &T's main revenue stream is long-distance calls. Broadband will eat away at that. Let's think of something else. How about eBay or Electronic Arts? Will they diversify us enough? I prefer the idea of owning content. When broadband comes, the value of media brands will rise, especially video. For a while, but longer term, broadband is going to lower the barrier to entry in content. That'll commodify content and devalue media brands. This doesn't need to be an either-or. In terms of content owners, Disney seems like a good option. Disney might resist a buyout. In fact, they probably will.
44:51Well, if so, it won't work, but no harm in asking. Who else in media? Another executive shouts out. What about News Corp? Case shakes his head. No, Murdoch will never sell. Viacom, maybe, but Time Warner's better. The room falls silent. Time Warner. Time Warner makes total sense. It's not just content, it's telecommunications too. Time Warner Cable is the nation's second biggest provider of cable TV. Owning that would help AOL make the most of the broadband. Case adds Time Warner to the list of targets on the whiteboard. Over the next few weeks, AOL sounds out its merger targets. AT &T isn't interested.
45:38Disney warns Case to back off. Preliminary talks take place with eBay and Electronic Arts. But the more Case thinks about it, the more convinced he is that Time Warner's the one. Question is, will Time Warner want AOL?
46:03It's summer 1999, and Time Warner CEO Jerry Levin is frustrated. He spent years urging his division chiefs to embrace the online revolution, but nothing ever changes. Time Warner's big online hope was Pathfinder, a website built by its magazine division Time Inc. at a cost of$100 million. dollars. Pathfinder was supposed to bring the company's content to the web, but few within Time Warner wanted anything to do with it. Some parts of the business refused point-blank to cooperate with it. So a few months ago, Levin pulled the plug on the project, and that lack of internal cooperation didn't happen by accident.
46:46It happened by design. See, here's the thing. Levin runs Time Warner like a feudal king. Each division head gets to run their fiefdom how they see fit. And when divisions don't see eye to eye, sparks fly. It's called a divisional structure, and it might sound like a crazy way to run a business, but it's not. The thing about big conglomerates like Time Warner is they aren't really one business. They're more like a family of businesses. and each member of the family has their own personalities, their own motivations. And just like any family, they're not always aligned. What a divisional structure does is let each division pursue their own best interests.
47:32It gives divisions more freedom, allows them to make decisions faster, and lets them focus on their business specialty. The drawbacks? Well, those would be less collaboration, more duplication of effort and internal conflict when different divisions find themselves pulling in different directions. But every corporate structure comes with pros and cons, right? And at Time Warner, dynamism within divisions is more valued than cooperation between them. But the failure of Pathfinder is making Levin question all this. He's getting pressure from Wall Street to embrace digital. He's also thinking about his own legacy.
48:13Levin just turned 60. He wants to be remembered as more than a guy with a bushy mustache who made profits. He's been thinking about that a lot since the brutal murder of his adult son two years earlier. When he retires, he wants to leave having found the answer to Time Warner's online problem. He's still thinking about that when in October 1999, he gets a call from Steve Case. He's met Case before, but doesn't really know him well. Case gets straight to business. AOL wants to merge with Time Warner. Before Levin can even respond, Case adds that he wants Levin to be the CEO of the new company. Case will settle for being the chairman.
48:58Case thought through that last part of the offer carefully. Acquisitions aren't just about money, they're about ego, too. Levin won't want the final act of his career to be selling to a company best known for flooding the nation with junk mail CDs. Letting Levin be CEO takes ego out of the merger equation. Levin tells Case he'll call him back and heads out of the office for a walk. He pads around the streets of Manhattan, turning over Case's offer in his head. Merging with AOL would solve the company's online headaches. It would lift its stock price, too. But people are proud to work at Time Warner.
49:41Most employees will be horrified at being bought out by a tech business, but Levin also thinks if he stays as CEO, he could convince them it's for the best. Levin returns to his office, calls Case back, and invites him to dinner.
50:05A few days later, Case and Levin meet in New York. They agree the merger would be good for both companies, but they need to do the deal fast and on the down low. AOL is buying Time Warner with its stock. The finances of the deal depend on its stock price. If word leaks about the merger, AOL stock will fall and Time Warner stock will rise, and that could make the deal unworkable. So, they get to work. The first job is to meet Ted Turner, the billionaire media mogul. Turner sits on Time Warner's board and is the company's biggest individual shareholder. Levin can't keep him in the dark. But Turner's got a rep as a motormouth.
50:50If he opposes the deal, he might torch it. Turner is suspicious about the high valuations of Internet companies. But to Case and Levin's relief, he supports the idea of a merger. Now, with Turner on their side, Case and Levin's secret talks begin in earnest. They agree to name the new company AOL Time Warner. Case wants to lock Time Warner into going ahead with a merger even if AOL's stock price tanks while waiting for approval from regulators and stockholders. Levin refuses, but agrees that if Time Warner wants out, it will pay AOL billions of dollars in compensation. Then, they move on to the most gnarly topic of all.
51:34How much of the new business will be owned by each side's stockholders? Case wants 60%. AOL is worth double what Time Warner is. Levin insists on 50-50. AOL stock price is frothy and Time Warner will form the bulk of the new company. It's a deadlock. And neither man will budge. So, with Christmas bearing down, Case and Levin call the whole thing off. They head home for the holiday, wondering what might have been. The mega-merger is canceled. Or so they think.
52:16On the next episode, AOL cuts corners to save the merger. Panic strikes inside Time Warner. and the Tasmanian devil takes on the U.S. government.
52:34From Wondery, this is Episode 1 of the AOL Time Warner Disaster for Business Wars. We've used lots of sources for this season, including Stealing Time by Alec Klein, Fool's Rush In by Nina Monk, The Third Wave by Steve Case, AOL.com by Kara Swisher, and On the Way to the Web by Michael A. Banks. Quick note about the recreations you've been hearing. In most cases, we can't know exactly what was said at the time. These scenes are dramatizations, but they are based on historical research. I'm your host, David Brown, written and produced by Tristan Donovan of Yellow End. Sound design by Josh Morales.
53:09Kyle Randall is our lead sound designer. Fact-checking by Gabrielle Drolet. Our producer is Kate Young. Our managing producer is Desi Blalock. Our senior managing producer is Callum Plews. Our senior producers are Emily Frost and Dave Schilling. Karen Lowe is our producer emeritus. Our executive producers are Jenny Lauer Beckman and Marshall Louis for Wondery.
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54:18It's gonna be sexy, freaky messy, and you know what? You'll just have to watch the show. So don't be shy. Join the conversation and head over to YouTube to watch Nick Cannon at night or subscribe on the Wondery app or wherever you get your podcasts. Want to watch episodes early and ad-free? Join Wondery Plus right now.
From the publisher
It’s 1999 and America Online’s the hot stock of the dot.com boom. But when AOL’s CEO Steve Case gets nervous about the future, he settles on a bold plan: to buy media giant Time Warner in the biggest merger in U.S. history.
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