Struggling AOL Time Warner Shakes Up Top Management

AOL Time Warner Inc., the world’s largest media conglomerate, shook up its top management ranks Thursday in an effort to breathe new life into a hybrid company that has seen its vision for a digital future fade as its fortunes sank.

The latest casualty of the company’s miserable stock performance was Robert W. Pittman, who resigned under pressure as chief operating officer of the corporation and head of the struggling Internet flagship, America Online.

Pittman, a college dropout who founded MTV network, had been a key architect of the merger between Internet giant AOL and entertainment powerhouse Time Warner. He had been touted as a potential successor to then-Chief Executive Gerald Levin, who himself was forced out in May.

In the wake of upstart AOL’s $99-billion purchase of venerable Time Warner 18 months ago, Pittman, 48, has been widely blamed for its failures: The company’s stock has slid 61% this year and 78% from its post-merger peak.

Pittman’s replacement by two veteran Time Warner executives puts the old-media executives very much back in control and leaves Chairman Steve Case without his closest ally.

Richard D. Parsons, the Time Inc. veteran who took over as AOL Time Warner chief executive in May, announced a new, two-legged structure for the sprawling company, intended to restore some of the autonomy stripped away by the merger.

Don Logan, chairman and chief executive of Time Inc., will head a new Media & Communications Group consisting of America Online, Time Inc., Time Warner Cable and the AOL Time Warner Book Group and Interactive Video unit.

Jeffrey Bewkes, chairman and chief executive of HBO, will run the new Entertainment & Networks Group, including HBO, New Line Cinema, the WB Network, Turner Networks, Warner Bros. and Warner Music.

Both executives will report directly to Parsons. And significantly, analysts said, both men tend to let subordinates run their operations as they see fit, providing that they produce results.

Unfairly or not, Pittman was most closely identified with the company’s efforts to integrate its operations by, for example, coordinating advertising and marketing efforts across the film, TV, music, publishing and Internet platforms. That push met increasing resistance from the operating divisions, especially in the last year as the advertising market has crumbled.

The advertising downturn, which hit America Online especially hard, helped erode Pittman’s authority, analysts said.

Indeed, Thursday’s moves underline the stunning reversal of fortune that has taken place since the merger.

When the deal was announced in January 2000, AOL was riding so high on the crest of the Internet stock wave that it was able to offer $163 billion worth of its shares for Time Warner, which the stock market valued at about $100 billion, despite its having three times as much revenue as AOL.

The merger was presented as a way to tie Time Warner global brand names in news and entertainment--from CNN to Time magazine to Warner Bros. studios--to the apparently untiring growth engine of the Internet.

By the time the merger closed a year and a day later, its value had shrunk to $99 billion as the frenzy for Internet stocks abated. Still, the company’s top executives continued to profess their belief that the solid but slow-growing media properties would be jet-propelled by the online business.

Today, America Online is the only part of the company that is conspicuously slumping.

“The rest of our businesses are, frankly, shooting the lights out,” Parsons said.

Investors are so sour on the online business, said analyst Jeffrey Logsdon of Gerard Klauer Mattison & Co., that they essentially value America Online at zero--a development that helped lead to Levin’s resignation.

“With $1.5 billion to $2 billion in EBITDA, America Online is clearly worth something,” Logsdon said, referring to earnings before interest, taxes, depreciation and amortization--a favorite yardstick for media companies. But, he added, “the market is not efficiently valuing the Time Warner assets because of the stream of bad news and estimate reductions coming out of AOL.”

On Thursday, for example, the Washington Post raised questions about whether the Internet unit had improperly inflated revenue through questionable accounting.

The parent company denied any impropriety, but the article, and questions about the impending management shake-up, weighed heavily on the stock, which closed at a new 52-week low of $12.45 in trading on the New York Stock Exchange.

Logsdon and other analysts said that a divorce--splitting the AOL and Time Warner properties apart again--may be the best way to get the stock moving ahead.

Pittman, who ran AOL alongside founder Case, will stay at the online unit until a successor is named, the company announced.

Parsons said Pittman’s departure was of his own accord. He began discussing it with Parsons just before the July 4 holiday, Parsons said.

“He’d been carrying this rock on his shoulders as long as he could,” Parsons said. “He felt he needed a break to rethink what he wanted to do with his life.”

Several insiders said Pittman was taking the fall for hyping expectations for the merger on Wall Street that were never delivered upon. Said one: “Investors feel betrayed.”

One media executive said it was unfair to blame Pittman for all the problems at AOL.

“It may have worked if not for 9/11,” he said, noting that the stock dropped dramatically after the terrorist attacks. That created internal unrest at AOL Time Warner, with Time Warner executives particularly upset that their stock options were losing money.

The backlash toward Pittman began, with division heads looking to scuttle the top executives’ synergy initiatives. “These executives had no incentive to concentrate on synergy. They were focused on the performance of their own division,” the media executive added.

Jessica Reif Cohen, an analyst at Merrill Lynch Global Securities, said Pittman’s departure “should help calm thing down,” and added: “I give him credit for stepping down because the instability was bad for AOL.”

Analysts said they expected additional departures from AOL because of the poor performance of the division and the credibility problem the corporate culture has created on Wall Street. As a result, some question whether Case’s power base eventually will erode.

Said one analyst: “Every top AOL executive should be gone because of issues of credibility and aggressive accounting.”

Mulligan reported from New York, Hofmeister from Los Angeles.