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AOL And Time Warner: Better Off Divorced NEW YORK - Some marriages--like Angelina Jolie and Billy Bob Thornton--seemed destined to last forever and it is shocking when they do not. Others appear troubled from the start: The union of AOL and Time Warner falls into the second category and congratulations are due to the partners for acknowledging what all their friends have been whispering about for a while. Thursday, the AOL Time Warner (nyse: AOL - news - people ) chief operating officer resigned his position in a move that has been widely hailed as the ascension of the old guard at Time Warner over their arriviste partners from AOL, the internet service provider--and as one last kick in the teeth to the so-called Internet economy now that it's down. But Robert Pittman's exit and his replacement by two Time Warner veterans as seconds to Chief Executive Richard Parsons signal a more fundamental rethinking: the decline of the conglomerate idea.
Tyco and Vivendi lost their heads, Dennis Kozlowski and Jean-Marie Messier. AOL managed to signal its devolution by ousting its number-two executive, Pittman (though CEO Parsons is fairly new, his predecessor Gerald Levin retired as part of an orderly transition). For investors, the management reshuffling comes a bit late as the company's share price has continued to fall below levels previously understood as floors. The shares are now down more than 75% since the deal closed. The financial community no longer believes in AOL's growth prospects, doubts its complex accounting, worries about its debt load and wonders about its lack of a clear strategy. As for the synergies, for the most part they never happened. If anything, they happened in reverse--as executives racing madly to prove the value of an idea that was never very good kept fighting with each other. (See: AOL Time Warner's Tragic Marriage.) Pittman, who helped create MTV and ran AOL before it bought Time Warner, personified the Internet side of the business. The AOL division is not in sorry shape: It's still doing far better than most other Internet companies and may even be profitable on its own--though its stunning growth rates of the 1990s were not sustainable and it has been forced to rely on giveaways to keep growing at all. It has also failed to sign up broadband Internet customers in sufficient numbers partly for fear of cannibalizing its dominant dial-up franchise and partly due to dissension within the AOL Time Warner family.
Tyco shares have declined even faster than AOL's over the past year. Like AOL, it has some unique problems. But they also suffer from the same issue: a belief that one diversified company can do it better than two focused firms. Compare AOL to Microsoft (nasdaq: MSFT - news - people ), the company once seen as its rival for dominance of the Internet. The colossus of Redmond has had its own media mergers, such as the creation of MSNBC both on television and the World Wide Web, and it has diversified into areas such as computer games and personal digital assistants. But it kept mostly focused on its high-margin, high-growth software business. AOL still owns a company that publishes leading magazines such as People, Time and Sports Illustrated, top cable networks like HBO, and Warner Brothers, a leading film and television producer. It also owns the still-dominant ISP. The problem was getting these companies to work together, analysts say. But the bigger problem was and is that they were cobbled together in the first place when they all might be better off alone. As of now, though, there is little chance AOL Time Warner will spin off assets. Even Thursday, Parsons was still mouthing the integration mantra: "We have the best media, entertainment and communications businesses in the world, but our challenge--and our goal in making these changes--is to take the lessons we've learned over the past two years and use them to make the parts work together to create greater value for our shareholders." The question is: What lessons were learned? More From ForbesPittman Is Past History 07.18.02Lo, how the Internet has fallen: America Online's front man has resigned from AOL Time Warner.
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