AOL Co-Founder Urges Time Warner to Split Up

Now he tells us.

Six years after arranging the ill-fated marriage between America Online and Time Warner Inc., Steve Case on Monday admitted he was wrong and echoed investor Carl Icahn’s call to break up the company.

“Obviously I was a big believer in convergence and a big believer in cross-divisional collaboration to drive innovation and growth,” the AOL co-founder said in a chat Monday on Washingtonpost.com, a day after the Post published an essay he wrote favoring a corporate split. “That was the underlying theory of the merger.... But it has not happened, and I have reluctantly concluded it will not happen.”

The move increased pressure on Time Warner’s beleaguered management, which is trying to counter Icahn’s argument that the various parts of the world’s largest media company are worth more separately than combined. The combined companies have lost more than $200 billion in shareholder value since the merger in January 2001.

“Now, we have two smart guys saying that the best thing for public shareholders is to break it off into pieces,” said Laura Martin, senior media analyst with Soleil-Media Metrics. “There’s this concept of the snowball effect that at some point has to get heard by the board.”

More broadly, Time Warner’s struggle suggests that although Hollywood may dabble on the Internet through acquisitions such as News Corp.’s purchase of MySpace.com in July, Wall Street is unlikely to back mega-mergers between old media and new. Don’t, she said, expect to see Google Inc. or Yahoo Inc. snap up Walt Disney Co.

After four years of trying to make the combined company work, Case said he concluded that AOL and Time Warner’s divisions could never fully integrate as envisioned.

In July, he said, he urged the Time Warner board to split the company into four independent entities: Time Warner Cable, Time Warner Entertainment, Time Inc. and AOL.

The board “carefully considered” his arguments but dismissed them as offering “no evidence that the steps he has proposed will improve shareholder value,” a Time Warner spokeswoman said. Case resigned from the board in October.

The debate over whether AOL can thrive within Time Warner comes ironically at a time when the Internet unit appears to be making strides toward finding the “synergies” promised at the conception of the $99-billion merger.

Its ties to Time Warner movie and television studios have helped AOL establish itself as a leader in online distribution of filmed entertainment. The AOL search engine is stocked with video clips courtesy of Time Warner, and the Internet unit has created several joint ventures with fellow Time Warner properties to create such services as In2TV, a free online archive of TV reruns, and TMZ.com, a celebrity news network on the Web.

In other cases, though, the merger has held AOL back. Richard Greenfield, an independent analyst who follows media companies, said he recently tried to sign up for AOL’s voice over Internet protocol phone service in his Manhattan apartment but could not because the Internet unit had promised to not sell the product in markets where Time Warner Cable offers the same service.

Case, who still owns about $250 million in Time Warner stock, said he decided to voice his views because AOL appeared poised to sell a stake to Microsoft Corp. or create an online-advertising joint venture with the software titan. Google, which places ads on AOL’s search engine, is reportedly also talking to AOL.

AOL continues to negotiate with Microsoft and Google about an ad partnership, not an investment, with hopes of reaching a deal before Christmas, a person close to Time Warner who has been briefed on the discussions said Monday. The person spoke on condition of anonymity because of the sensitive nature of the talks.

Case said a joint venture would slow down AOL even more. It already lacks the ability that Yahoo and Google have to move nimbly, he said.

For example, he said, AOL needs its own stock so it can more easily snap up start-ups with promising technology. An AOL spokesman noted that the unit has acquired six Internet companies and taken a stake in a seventh during the last two years.

“Instead of propelling AOL to new heights, the association with Time Warner has weighed AOL down, while its competitors, such as Google and Yahoo, have made important strides forward,” Case wrote in his essay.

He could not be reached for comment.

Analyst Greenfield said AOL had made significant progress in the last year, but he endorsed a breakup. One possibility is to spin off the cable and publishing units, he said, but keep AOL and the entertainment group together so they can work on digital media distribution.

“The stock has stalled for a long period of time,” Greenfield said. “Steve Case presents a pretty compelling argument for how the company could be better off in pieces.”

Whatever happens, Case said in the Monday chat, he will not help manage AOL. He said he was busy with his new business ventures, including investments in healthcare companies and resorts.

“It’s time for me to move on to other challenges,” he said.