Merciful End to AOL Time Warner?

Today's news has developments that might mean we are getting close to a merciful end to the ill conceived AOL Time Warner merger.

Time Warner Inc said it would split AOL's dial-up Internet and advertising businesses into separate divisions by early 2009, a move that could ease a sale or merger of either business

The media conglomerate also reported a lower quarterly profit, dragged by AOL, but it still slightly beat Wall Street expectations on strong advertising sales from its cable TV networks such as CNN and films like "Sex and the City."

The AOL split underscores Time Warner's focus on creating content rather than distributing it. "As we continue to reshape Time Warner, we'll increasingly focus on our goal to create and manage high-quality branded content," Chief Executive Jeffrey Bewkes said.

When these two companies, AOL and Time Warner, merged, the possibilities seemed endless. Ted Turner famously said that he hadn't been this excited since he lost his virginity. The company looked like it would turn into an all powerful media giant, and it would have tentacles in any sort of media form. Furthermore, the new and old media could cross sell and market in an almost endless array of possibilities.

In fact, the thing that broke the company seemed to be the thing that was most appealing at the time. AOL/Time Warner combined the most of the new internet media along with the most of the traditional print media.

As it turned out, the culture clash between the buttoned down Time Warner types and the short sleeved AOL types became a recipe for disaster. This came about because all involved saw only the possibilities and had little consideration for the drawbacks. The main principle on the side of Time Warner was Jerry Levin. Levin had made a name for himself by putting on the Ali/Foreman fight live on HBO. Prior to that, it was difficult to market a pay television station. After the fight, HBO's subscribership exploded and the rest is history. The problem is that much of the rest of Levin's career within Time Warner was marked by visionary ideas that lacked practicality. For instance, he came up with the idea of the ticker at the bottom of most news stations. Only he came up with it in the early 1990's, and he couldn't put it together so that it was marketable.

Steve Case, on the other hand, had taken AOL right at the start of the internet revolution and grown it into a giant in less than fifteen years. Both saw this merger as an opportunity to move media and content into ways no one could imagine. The result was a disastrous nightmare rather than the dream they each had. The problems were compounded when, to cover up errors, the company began funny accounting. Often times, they would inflate sales and revenues by counting revenue from one branch of the company when they sold to another, and not accounting for it on the other side. Problems were compounded by the confluence of events of the burst of the internet bubble immediately following the merger. At the time of the merger, AOL accounted for 80% of the market capitalization while Time Warner accounted for 80% of the assets. This was one of several red flags overlooked by the principles and once the bubble burst it was also one of many things that was exposed.

Now, nearly a decade later this company is in tatters and, as the article points out, much of the internet side is nothing more than a drag on the more performing traditional media side. The grandiose ideas are nothing more than wishful thinking of the past, and most of the players that put the deal together have long moved on to other ventures. Hopefully for the current entity, the recent move is a pre cursor to a much needed split. Ironically enough, the best thing for all parties is to bring things back to the way they were prior to the merger.

This is all recounted quite well in the book, Fools Rush In, which I highly recommend.