You've Got New Management

Avoiding "Sex" was a sure sign that the marriage of AOL Time Warner was in trouble. Last Tuesday, top company execs were supposed to show up for a welcome break from the relentless gloom of AOL's sagging stock price: premiere night for the new season of "Sex and the City," the smash series on AOL Time Warner's HBO. But CEO Richard Parsons didn't appear at the glittering event at the Museum of Natural History. Nor did Bob Pittman, his No. 2. The most glaring no-show, however, was the night's host, Jeff Bewkes, HBO's boss. One of his lieutenants tried to wave off his absence. "Some family thing," he explained, as a beaming Sarah Jessica Parker and "Sex" costars sashayed down a pink carpet.

But Bewkes was off at dinner with Parsons, along with chairman Steve Case and Don Logan, CEO of the Time Inc. unit. With Pittman poised to quit after being blamed for many of the company's ills, Parsons had decided that Bewkes and Logan were going to move up in a big restructuring. Case, though, was slow to embrace the moves, say senior executives. No surprise there, since the shake-up would signal a clear reversal of AOL's fortunes. The company that acquired Time Warner would be surrendering the top three operational jobs to Time Warner hands. Only Case remained, but in a hands-off role, and his co-architect of the deal, ex-CEO of Time Warner Gerald Levin, had abruptly retired. And Case, senior executives told NEWSWEEK, didn't endorse the change until the night before last Thursday's board meeting, when directors voted on the new lineup. Not that he had much choice. In a showdown, these same executives said, he might have been asked to resign. "This was about [Parsons's] putting his stamp on the company," says one senior executive.

It could certainly use a new stamp. AOL Time Warner now stands mostly as a lesson in the power of hype. The merger, financed with AOL's stock just before the dot-com crash, was to be the ultimate melding of old and new media, a synergistic supercharger for investors that would dominate the Internet Age. But advertisers and subscribers have cooled on AOL. That's triggered a plunge in AOL's market value of more than $100 billion, even as the Time Warner film, TV, cable and entertainment empire largely thrives. Saddled with worthless stock options, employees of the old Time Warner have been in virtual revolt.

The organizational chart at AOL was as busy as a chessboard last week. For a time, some insiders were pushing Logan to be the sole chief operating officer, and Bewkes would run the troubled AOL unit. But Bewkes balked; he's down on its prospects, say some executives. It's the chessboard's king--Steve Case--whose fate is the greatest mystery. Senior insiders are already speculating that Case, who has been largely absent from the company since the deal, could find himself shown the door, too. He spent time caring for his older brother, who died recently of cancer. But one AOL exec says Case's low profile was calculated. "He kind of took himself out of it for self-protection," this executive says. "The problems for the merger were evident pretty early." Now company insiders are wondering what role, if any, Case now plays--a question that will become more urgent if the new team reverses the company's fortunes. "It's [Parsons's] company to run; Steve weighs in, but we all know it's Dick's decisions," says one top exec.

Describing Case as the "non-executive" chairman, Parsons says the former CEO of the old AOL "is an active partner in developing a [new] strategy." With a search underway for someone to run the AOL unit, Parsons said that Case "is going to have to be front and center in helping that person getting AOL to hit on all eight cylinders."

Until last week the face of this sputtering engine was Pittman's. After the merger with Time Warner, the former AOL whiz was on equal footing with Parsons as co-chief operating officer. But when Parsons moved up to replace Levin, he sent Pittman to rev up the faltering AOL division. No easy task. But with Levin gone and Case out of sight, Pittman emerged as the "personification of the AOL swagger, arrogance and business ethos," says an insider. Some were asking Parsons for Pittman's head. Without the respect of many of his troops, Pittman's clout as a chief operating officer was limited.

He was also losing Parsons's support. After he was named Levin's successor, Parsons strongly admonished colleagues to end the hype surrounding financial projections. But soon after, Pittman spoke at an investor conference and remained overly bullish, saying that the company would still be able to squeeze about $260 a year from each online subscriber through its various businesses, only it would take longer to meet that goal.

Adding to the tension were new questions about accounting issues at AOL, laid out in an article in The Washington Post last week. But even before the Post article, corporate bosses were harboring doubts about the way ad revenues were booked at the AOL unit, insiders say. But Parsons said "the accounting is proper." Yet he also said that things will change at the AOL division, adding that he will end "some of the practices that grew up around the dot-com and go-go eras of the 1990s." There are also disputes about business strategy. Parsons believes the continuing emphasis on AOL as an advertising medium was misguided, and that it is now primarily a subscription service. "The base of the advertising and e-commerce revenues that AOL created and grew over the last five years is probably gone," he said.

Pittman, shrewd if nothing else, understood the signals. "I saw in his eyes about a month ago that he was done," says an executive close to him. It had all become too much--the criticism, the travel and the plummeting stock price. The New York Post had taken to running the "Pittman Meter," which offered daily measurements of whether he was "toast" or "safe." "I think he just got tired," says one exec. Parsons says Pittman approached him shortly before the July 4 holiday, saying in so many words that he wanted out.

Now it's Bewkes's and Logan's turn. Bewkes earned his stripes building on the success of HBO. Logan built his rep solidifying Time Warner as a dominant mag publisher. Adding to their credibility: they've been consistent critics of lofty notions of convergence within the company. Logan, too, is no tech bumpkin, as many think. He wrote computer code for NASA as an undergrad, and for Shell Oil after grad school. Parsons says the two men were natural choices to implement new corporate strategy. "They get it, and can deliver on it," Parsons says. And what is that emerging strategy? In a phrase, Parsons offers this: "Operate independently, compete collectively." A fitting epigraph to almost two years of synergy hype.