AOL Time Warner
Encyclopedia of Business, 2nd ed. AOL Time Warner: A-F
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In 2001, America Online (AOL) bought media company Time Warner for $163 billion in the largest corporate purchase ever. The deal brought together the "new media" of digital technology and the Internet and the "old media" of publishing, television, and films. AOL, only fifteen years old at the time, had become one of America's hottest companies during the 1990s, when the stocks of any firm connected to the Internet and high technology soared. Buying Time Warner, business experts thought, would give AOL new content for its on-line service and access to more homes seeking high-speed Internet connections through Time Warner's cable TV operations.

An Historic Past

The different parts of AOL Time Warner were assembled over many years, with some of the biggest names in the media and entertainment industries playing key roles. The Warner in the company name refers to the Warner brothers, four Polish Jewish immigrants who built one of the great Hollywood film studios. Time, Inc. was launched in 1922 by Henry Luce (1898-1967). The flagship magazine Time first appeared the next year, making it the oldest of the major U.S. weekly news magazines. The company also published books before entering into television. During the late 1970s, Time, Inc.'s Home Box Office (HBO) gave millions of Americans a reason to try cable TV for the first time.

Time and what was later known as Warner Communications Inc., merged in 1989, creating what was then the largest media company in the world. Warner Communications was headed by Steven Ross, whose business experience came from running funeral parlors, parking lots, and janitorial services. In 1969, his company bought Warner Brothers-Seven Arts, which included film, television, publishing, and music ventures. Ross turned Warner Communications into one of the best entertainment companies in the world. At the new Time Warner, however, Ross and other executives were forced to work under the weight of more than $16 billion in debt. The company had been forced to borrow large sums to prevent a takeover from rival Paramount Communications, Inc.

Gerald Levin took over as chief executive officer (CEO) and chairman after Ross died in 1992. In 1996, Time Warner made another huge deal when it purchased Turner Broadcasting System. The flamboyant Ted Turner had shaped cable television in the United States with his "Superstation," WTBS, and the first twenty-four hour news channel, CNN. With the Turner deal, Time Warner acquired these and several other cable properties, as well as a library of classic films and cartoons. Turner himself came along with the deal: he became the largest single shareholder in the new Time Warner and was named vice chairman.

The Case for On-line Services

While Time and Warner were joining forces in the old media world, a small Virginia company was shaping the new one. America Online (AOL) had begun offering a national online service in 1989. The company was owned by Quantum Computer Services, which was started by Steve Case and several partners using money from Commodore International, a personal computer manufacturer. Quantum's first service let Commodore owners play games and chat on-line. It then struck deals with Apple Computer (see entry) and Tandy (the corporate name of Radio Shack). The more ambitious AOL offered e-mail, forums, and news as well as games and chat. With AOL, Quantum competed against two larger and better funded online services, CompuServe and Prodigy.

Quantum Computer Services became America Online, Inc. in 1991, and Case was named CEO. Case, unlike other leaders in the computer industry, was not a high-tech wizard. His background was in marketing. But he saw that computers connected to on-line services could provide communication and information services that people would pay for. Case wanted to make the AOL name known everywhere and make the service easy to use. Early in 1992, just after AOL offered shares of its stock to the public, Case was clear in his goals. According to Wall Street Journal reporter Walter Mossberg (as quoted in aol.com by Kara Swisher), "Without blinking, he said he was going to blow away all the other competitors."

At the time, AOL had about two hundred thousand customers; Prodigy claimed it had almost two million. But in a review of the services, Mossberg praised AOL and called it "the sophisticated wave of the future among [online] services." AOL had already caught the attention of Paul Allen, cofounder of software giant Microsoft Corporation (see entry). He bought fifty thousand shares of AOL and later tried to take it over; Microsoft itself considered buying AOL. The company, however, remained independent, with Case still in charge.

You've Got Profits

Through the 1990s, more people learned about AOL and its on-line service. The company mailed its software to potential customers and offered them hours of free service. The assumption was that once customers used AOL's e-mail, chat rooms, news, and shopping services, they would pay for the service when the free trial ended. AOL guessed right and by the end of 1996 the company had eight million users, making it the world's largest on-line service. By then, the company had expanded in to Europe and introduced a new pricing policy. Customers paid a flat monthly fee for unlimited use, instead of paying by the hour.

More customers meant large revenues and profits. For 1997, revenues were more than $2 billion, with profits of $92 million. The next year, profits jumped to $762 million on sales of almost $5 billion. In 1998, Case told Fortune that "Suddenly, almost overnight, we became part of everyday life." By then, about 60 percent of all American homes used AOL, and about 40 percent of all on-line traffic went through the service. The company also added to its base with the purchase of CompuServe. Although Microsoft started its own on-line service, and some people preferred to access the Internet directly through local companies, AOL continued to grow.

As profits passed the $1 billion mark in 1999, AOL bought other companies. It purchased Netscape Communications Corporation (see entry), maker of a popular browser, the software used to access the Internet. It also bought several Internet companies, such as MovieFone, Spinner, and MapQuest. The ultimate purchase, however, came in 2001, with Time Warner. The deal first began in October 1999, when Case approached Time Warner's Gerald Levin. Case said he wanted to be in charge of the new company's long-term strategies, while Levin would be the CEO and handle daily operations. Ted Turner approved the deal, and kept his title of vice chairman.

New Company, New Problems

The merger of AOL and Time Warner created a buzz in the media industry. Thomas Mottola, chairman of Sony Music, told the Los Angeles Times, "It's incredible. They've created a

giant powerhouse here." But between the first talk of the deal and its final closing, the U.S. economy changed dramatically. The boom in high-technology stocks crashed and the country went into a recession, or an economic downturn. AOL had trouble getting advertisers for its on-line service, and several of its newer businesses did poorly. Despite all the attention paid to new media, the company's old media services, particularly film and publishing, were making money, while, AOL was losing it.

The biggest shock for the new company came early in 2002 when it announced the largest quarterly loss in U.S. history—$54 billion—most of it tied to accounting rules associated with the merger. Still, AOL Time Warner did see a way out: by using one branch of the company to boost another. For example, advertising on AOL helped increase record sales for Warner recording artist Alanis Morrisette (1974-) and seemed to increase subscriptions to Time's magazines.

Despite the losses—and the suggestion by some business analysts that AOL and Time Warner should separate—Steve Case remained positive. He told Fortune in May 2002, "I'm confident that AOL Time Warner, even though there have been missteps in the first year, is on a path to emerge as one of the truly great companies in the world."

If they had new e-mail messages waiting for them AOL users were greeted with a computerized voice saying, "You've got mail." The popular saying was later featured in company ads and became an instant part of popular American culture. In 1998, it served as the title of a Warner Brothers movie starring Tom Hanks (1956—) and Meg Ryan (1961-).