All For One, One For Aol

Last summer, months before the Federal Trade Commission approved America Online's $110 billion merger with Time Warner, a new arrival at the Manhattan headquarters of the world's largest media and entertainment company had executives there buzzing. Robert Pittman, AOL's president, had quietly moved into a 32d-floor office at Time Warner's

Rockefeller Center digs. Around the same time, AOL subscribers were greeted by an offer to buy Sports Illustrated, a Time Warner title, as they logged on to the nation's biggest Internet service provider. The two companies held a joint board meeting in Atlanta last summer, and the directors even attended a ball game played by the Time Warner-owned Atlanta Braves. And Time Warner employees are already enjoying a new perk: free access to AOL.

Were they jumping the gun? When the Dec. 13 FTC approval was announced at a news conference in Washington, D.C., it seemed as though the deal had squeaked past hostile regulators. During 11 months of review by the government agency, aggressive antitrust lawyers regularly leaked accounts of their tough stance against the merger. Clearing the FTC was a considerable hurdle, particularly since well-connected rivals like Disney and Microsoft had lobbied hard to kill the deal. After months of bruising negotiations, the FTC imposed a far-reaching agreement that lays out the rules of the road for broadband--the speedy Internet connections that will make the Net a viable option for delivering movies, music, news and television shows to your TV or computer. Before it would approve the deal, the FTC insisted that AOL Time Warner make its powerful cable network available to competing Internet services. "Our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology,'' said FTC chairman Robert Pitofsky.

Yet long before AOL Time Warner got the government's blessing, the two powerhouses had been confidently working away on their vision of a digital future--and knitting themselves together as if the deal had already happened. While the merger still requires approval by the Federal Communications Commission and shareholders, the combined AOL Time Warner is surprisingly ready for business. Almost as soon as the deal closes (most likely in January), the new giant is poised to transform everything from how magazines are sold to how we watch television. That's not to say there won't be glitches along the way. The weakening economy may spell trouble for a company with a big dependence on advertising. And melding the Old Media/New Media cultures has been a buggy process.

In fact, very little has gone according to plan since last January, when AOL stunned the media world by agreeing to acquire Time Warner in a deal then valued at $160 billion. The combined holdings were daunting, linking AOL's 26 million subscribers to Time Warner's media empire of top brand names, including HBO, cable networks like CNN and TBS, and Time Inc.'s publishing empire, which includes such magazines as People and Time. For AOL, it looked like all was an undisputed triumph. It had used its hyperinflated stock, fueled to wacky levels along with the rest of the Internet sector, to buy a much more diverse and revenue-rich company. And though it was billed as a merger, AOL's Steve Case was tapped as chairman of the combined company, with Time Warner's Gerald Levin serving as CEO. AOL's Pittman, a former MTV executive, was named co-chief operating officer and the presumed heir apparent.

Yet the deal quickly came under attack, with rivals charging that the new company would be too big and too powerful. The real trouble started last spring when Time Warner booted Disney's ABC network off its cable systems in several large cities for nearly two days because of a dispute over fees. The widely publicized flap gave Disney and other critics plenty of ammunition. Time Warner was an abusive monopoly, they charged, and it would only get worse once it linked up with AOL. Regulators listened. To worsen matters, in March, Wall Street woke up to the unrealistically high valuations of tech stocks. The value of many fledgling dot-coms vaporized overnight, dragging down even the more established AOL. Just months after the deal was unveiled, AOL's shares had plunged by 30 percent, setting off grumbling among big Time Warner shareholders, who were getting paid in stock. Levin and Case quickly made a round of reassuring calls to worried shareholders. But with tech stocks still falling, the transaction today is valued at $110 billion, $50 billion less than the original price.

Despite the turmoil, the companies have been remarkably focused on moving ahead. Teams of executives have been developing detailed cost-cutting plans that will yield hundreds of millions of dollars in savings. Much of it is dull stuff, such as jointly purchasing supplies and using the same computer systems. But the drawing board is overflowing with other cost-trimming and cross-marketing schemes. Among other things, Warner Music is distributing AOL.com software in CD packages of such recording artists as matchbox twenty. AOL has also quietly started hosting Web sites for its partner's film, music and magazine divisions, a big saving for Time Warner.

The new company is also planning an assault on the world of advertising. Under the auspices of a newly created in-house Ad Council, AOL Time Warner is readying an ambitious campaign to transform how it does business with top marketers. The idea is to offer huge advertisers like Ford and Procter & Gamble one-stop shopping across AOL Time Warner's vast panoply of old and new media outlets--from Time Inc. magazines to AOL.com to the WB Network. "It will fundamentally change the way we communicate with customers," says Myer Berlow, AOL's top advertising executive.

The early collaborations point to the rich promise of AOL Time Warner, but they've also shown the difficulty of melding vastly differently corporate cultures. While Time Warner execs tend to view the deal as a merger of equals, AOL honchos clearly see it as a takeover. The reality became clear when the key assignments were doled out. AOL people have largely been responsible for planning how the two companies will fit together. And except for the CEO post, which Case yielded to Levin, AOL execs landed most of the plum corporate jobs, including top finance and legal posts. "There has been a real anxiety throughout Time Warner's executive ranks from the beginning," says a senior Time Warner official. With good cause. In one early planning session between senior executives of the two companies, Mike Kelly, AOL's top finance officer, came in with elbows flying, says one attendee. Recalling AOL's 1998 purchase of Netscape, Kelly said, "We fired everyone. We will do that here," remembers the attendee. Those remarks created such distress that Time Warner's president Richard Parsons and AOL's Pittman (the co-chief operating officers of the new company) convened several meetings to calm the hurt feelings.

Part of the problem is that very different personality types inhabit the two executive suites. At Time Warner, Levin presided over a decentralized collection of powerful, often warring fiefdoms--cable systems, cable networks, HBO and Warner Bros. studio, among them. While AOL maintained tight control over its operations, its employees were stock-optioned storm troopers out to create a brave new world. And they did, with AOL cheating death along the way to become the dominant Internet company, staffed by a work force filled with millionaires. "They really believe they're out to change the world," says Michael Lynton, chief of AOL International. "To that end, they are very aggressive, abrupt, excitable, in your face. There's no attempt to be polite." Berlow, AOL's advertising boss, acknowledges there are "many more adults" at Time Warner. Once, he recalls, he "pre-apologized" to a Time Inc. exec who would be meeting with Berlow staffers, who typically arrive late yakking on phones. Berlow says, "We have trouble following protocols of traditional businesses. We're working on it."

Other tensions have gone beyond differences in style. In particular, AOL and Time Warner have hit sour notes in their efforts to tackle online music. The music industry has been struggling to prevent the free copying of songs off the Internet. So last March Warner Music execs went ballistic when an AOL unit posted a music-sharing program called Gnutella, which allowed users to swap files freely. Under pressure from Time Warner, AOL pulled Gnutella the next day, saying one of its programmers had posted the software as an "unauthorized freelance project." Says AOL's president Barry Schuler, "We made it clear it wasn't an official AOL product and not an official music strategy." Still, some Warner Music label execs remain suspicious of AOL's intentions, believing their Internet colleagues simply want cheap access to Warner's prized music library to use as digital bait to lure more AOL subscribers.

There's bound to be more internal discord ahead. And powerful rivals will give AOL Time Warner a run for its money. But company execs insist they are devoted to making the digital age happen now for consumers. Soon after the deal closes, AOL Time Warner will begin an experiment that could energize the market for interactive television, a promising new technology that allows viewers to direct TV camera angles or order clothes worn by their favorite TV characters with a click of the remote. NEWSWEEK has learned that Time Warner Cable, which reaches 20 percent of homes, will begin marketing and installing AOL TV, an interactive service. With such combined muscle, the future could arrive faster than you think.