Wanted at AOL: Another Bob Pittman

The veteran exec's replacement will need to boost subscriptions, stave off rivals, and dampen internal friction. Who would want such a job?

By David Shook

As Robert W. Pittman cleans out his office in New York and says goodbye -- and maybe good riddance -- to the AOL Time Warner (AOL ) combo he helped forge, the spurned chief operating officer will take with him a reputation as one of the better operational maestros ever to grace the media business. More important, however, will be what he leaves behind: a big question mark over the future of the world's largest consumer Internet company.

Pittman, who took temporary charge of the America Online unit in April, will remain on the job only until a new chief executive for the Internet unit is found. A Pittman-less future has observers calculating the odds that the division will ever get back on track. Says Robert Burgoyne, a private money manager and the founder of Robert Burgoyne Investment Service in Ellicott City, Md.: "I think America Online's best days are behind it. If Bob Pittman can't fix America Online, who can?"

Burgoyne, a former AOL shareholder who sold the last of his stock in early July, views AOL Time Warner as the Rodney Dangerfield of the media business. "It gets no respect," he says, "and part of the reason is that the company has done a poor job articulating its plans."


  Many other shareholders have had the same allergic reaction to the now 18-month-old merger. Since America Online and its hotshot execs, Pittman and current Chairman Steve Case, acquired Time Warner in January, 2001, the stock has plummeted 75%, closing at $12.45 on July 18. Earnings guidance has been lowered three times, and the once-mighty America Online, known for its dazzling growth during the Internet boom of the late '90s, has suffered an astounding fall. Says Burgoyne: "It's hard to imagine how a new exec at America Online is going to get things moving again."

Pittman, too, may have had his doubts -- though he had great incentive to get things moving. While he cashed out $73 million in stock last year, he still has millions of dollars worth of options. But people who know the exec say he was fed up with the resistance he found in nearly every corner of Time Warner.

An entertainment impresario, Pittman wanted to implement Case's vision -- marrying AOL's Internet gusto and technology with Time Warner's storied, brand-name entertainment and news properties. Alas, "the synergies were never really there," says a former AOL exec. And with the Internet service market becoming more saturated every month, America Online may never regain the gravity-defying growth it enjoyed as a stand-alone operation in the late '90s. That would mean the Internet business would be a less important contributor to the bottom line over the long term.

Nor do the numbers bode well for America Online's immediate future. The Internet operation still accounts for 24% of total AOL Time Warner sales, yet the division's first-quarter operating income fell 15%, to $433 million, with sales flat at $2.3 billion and advertising revenue down 31% over the same period last year.


  In the coming second-quarter results, expected July 24, the Internet division may well show another year-over-year decline in operating income of 30% or more, says First Albany analyst Youssef Squali, who thinks AOL's stablemates, the Time Warner movie and network divisions, should report respectable numbers despite the economic downturn.

For America Online, the concerns don't stop with the current slump in ad sales (which afflicts not only online properties, but all media properties). Subscription growth, which has been decelerated steadily, is even more important to the Internet unit's future, analysts say. Indeed, the subscription situation may be what's really spooking investors. America Online's net subscriber growth slowed from 4.1 million new members in 2000, to 3.7 million last year. Squali expects to see 2.5 million this year and perhaps 2 million in 2003.

Growth? Yes. But given that assaults by the likes of Microsoft, Comcast, and other competitors selling speedy broadband Internet service are heating up, AOL's once-dominant market share may well erode even further.


  While the company says Pittman is leaving to "take a break" and press reports speculate that he was forced out because of AOL's poor performance over the past year, the truth probably lies somewhere in between. It's more likely that Pittman may have realized that the AOL culture he helped forge had been subsumed as each of Time Warner's fiefdoms fought to keep its independence.

As part of this latest restructuring, which was announced July 18 by AOL Time Warner CEO Richard Parsons, America Online will now become one piece of a major Time Warner operating unit called the Media & Communications Group, with everyone at America Online now ultimately answering to a Time Warner magazine exec, Don Logan. Clearly, the Time Warner culture has won out. If you thought AOL Time Warner was becoming an old media company before (see BW Online, 5/15/02 , "Old Trumps New at AOL Time Warner"), expect to see that process accelerate.

Now begins the search for someone to head the AOL service. Many analysts wonder if any successor can work the magic that Pittman seemed to summon so many times at America Online. He'll be a hard act to follow, say analysts, several of whom point out that Pittman was in his current position for only a few months -- scarcely enough time to make the kinds of changes that were needed.


  Pittman, after all, was widely revered for saving AOL just as it was about to collapse under the competitive weight of rivals Prodigy and CompuServe in the nascent days of the Internet service business back in the mid '90s. Pittman is credited with revamping AOL's business strategy, focusing on brand-name advertisers and quality content providers, figuring out a more efficient and structured subscription model for the Internet service, and for making mostly smart acquisitions along the way.

Those flourishes gave AOL an edge, especially with technology, and made it the preferred Internet service among American families. It's no wonder Pittman had been widely expected to head AOL Time Warner.

Time to forget that scenario. In some ways, America Online's future looks as uncertain today as it did when Pittman took over in 1996. But the problems now appear more intractable and much harder for a new executive to fix. The online business -- which was supposed to breathe fresh air into the old media culture at Time Warner -- may instead become a steadily decreasing piece of the overall outfit's bottom-line performance. Unless the new head of America Online can work the magic again, the vision put forth in 2000 by Case and Pittman, his once-lionized right-hand man, may be history.

Shook covers media for BusinessWeek Online in New York

Edited by Douglas Harbrecht

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