Analysis: AOL's tough challenges

Analysis

Media giant AOL Time Warner has posted the largest annual loss in US corporate history, while its single largest shareholder, Ted Turner, has thrown in the towel and resigned from his post as the company's vice president. What has gone wrong? When internet giant AOL and old-media conglomerate Time Warner announced their merger three years ago, Ted Turner described pulling off the deal as "better than sex".

But love has gone out of the relationship, and corporate viagra is in short supply.

Hopes had been high. Let's combine clicks and bricks, industry gurus said, and we make sure that old media giants are not toppled by the internet revolution.

The internet upstarts, meanwhile, powered by their high-flying share prices, hoped to finally make good profits by using old media content to attract more customers.

Down 80% and falling

The dream is long over.

AOL has dragged down Time Warner, and the combined company made a loss of just under $100bn for the past year. During the past three months alone it recorded a loss per share of $10.

That's hard to swallow considering that AOL's share price has plummeted more than 80% from its peak and is now trading at a mere $14 - and falling.

Culture clash

The story of AOL Time Warner is not just a story about the bursting of the internet economy bubble or the decline of the media industry, savaged by the global economic downturn and advertising slump.

The AOL Time Warner saga

But it is the story of a culture clash, and a textbook example for why mergers so often go so horribly wrong.

By all accounts, AOL was never an easy firm to deal with.

When the two companies merged, AOL's executives took key positions, and its brasher managers are said to have lorded it over their old media colleagues.

Mutual dislike or contempt of key executives was the result, and made it difficult to integrate the media giant's platforms - online, movies, television, radio and print.

This, in turn, made the merger virtually pointless.

And to round it off a typical new economy ailment - dodgy accounting - has reared its head at the group's online unit.

Waiting for the wizard

Now chairman Steve Case (AOL), chief executive Gerald Levin (Time Warner) and chief operating officer Robert Pittman (AOL) are gone and the old media types are back in charge again.

The wizard to rescue AOL Time Warner is no Gandalf or Harry Potter - even though both have done nicely for the group's film division - but new chairman and chief executive Richard Parsons.

The firm's old media divisions are actually ticking along nicely.

But AOL's subscriber numbers and profits are down sharply.

Mr Parson's "major focus" now is on "stabilising and revitalising America Online", he says.

"2003 will be a challenging year," warns Mr Parsons as he tries to "reset" investor's expectations.

Tough going

His top priority will be to tackle AOL Time Warner's debt mountain, which currently weighs in at $25.8bn.

In two year's time, Mr Parsons hopes to have it cut back to $20bn, which may be tricky, because ongoing commitments and little demand for media assets will give him not much room for manoeuvre.

Unless the economy and thus advertising revenue recovers, AOL Time Warner will have trouble getting back on its feet.

And the going may get tougher not just in economic terms.

Once Mr Turner leaves the company in May, he will be free to offer advice in public from the sidelines, and he was never one to mince his words.

With little good news for investors, Mr Parsons may want to consider a name change for the company.

What about calling it "Time Warner"? On Wall Street, this once had a nice ring to it.