TOWARD THE end of 1999, AOL was in an enviable position. We had more than 22 million subscribers,1 up from only 1 million in 1994,2 an exponential growth rate matched only by our rising stock price. When we went public in 1992, our market value was about $70 million. By October 1997, it was $8 billion.3 Nine months later, we were worth three times as much.4 And by the time we announced the merger with Time Warner in January 2000, a mere eighteen months later, we were valued at $163 billion.5 AOL ended up being the best-performing stock of the 1990s.
The market was declaring us the victor of the Internet, and to the victor went the spoils. The surge in value gave us ample capital. We decided to use stock to make a number of acquisitions. One of the highest-profile among them was our purchase of Netscape for $4.2 billion. The Silicon Valley–based company had rocketed to a leadership position on the strength of its web browsing software. Its wunderkind founder, Marc Andreessen, had become one of the most successful young entrepreneurs of the time. After AOL acquired Netscape, Marc moved to Virginia to become the CTO of AOL, reporting directly to me. He stayed for a year, then returned to California, where he would start a software company and later a venture capital firm with Ben Horowitz, a fellow Netscape executive. Acquiring companies like Netscape improved our overall market position, but we soon realized we needed to do more. We needed to lock in the value we created, while further diversifying the business.
After some lengthy deliberations, we came up with a few options for our next move. We decided to go big—to try to pull off a large, transformational merger while our stock was riding high, to lock in shareholder gains while we expanded our strategic reach. We spent months analyzing a range of options.
We could expand further into content, we concluded, by acquiring a company like Disney. We could deepen our communications offerings by merging with a company like AT&T. Or we could double down on the Internet by acquiring companies like eBay and Electronic Arts. We pursued all of those paths simultaneously—having merger discussions with each of those companies, along with many others.
Financial considerations helped guide our hand. Our stock had skyrocketed twenty-fold in less than three years, and we worried that the Internet mania might end. So buying other businesses that would expand our portfolio and put a floor under our valuation was key. But we didn’t just want to hedge any potential financial downside. We also wanted to maximize our strategic upside.
Buying more content had appeal. We believed that as broadband took hold, the value of media brands and especially video would increase. Hence the interest in Disney. But while we were intrigued, we were concerned that as barriers to entry lowered over time, content would become commoditized, leading to an eventual decline in the value of media brands.
Expanding our communications offerings made some sense. AOL had always been, first and foremost, about connecting people. Our success with AOL Instant Messenger made us the dominant player in online messaging, and we figured we could leverage that into a full suite of communications offerings (remember, this was years before Skype and more than a decade before WhatsApp was released). A storied American brand like AT&T would also enhance our credibility as we expanded globally. But the communications path seemed risky. We expected AT&T’s core revenue stream—long-distance calls—to be eroded by new technologies, including our own.
Acquiring other Internet companies had its appeal, although it felt like the safe path. We would have partners who were culturally aligned and who shared our conviction about the Internet’s potential, making the post-merger company easier to manage. We initiated M&A discussions with eBay and Electronic Arts. In fact, when we were negotiating with Time Warner, Meg Whitman, who had taken eBay from startup to global force in just a few short years, was waiting in an adjacent conference room at our headquarters in Virginia. Had the negotiation deteriorated with Time Warner, we were prepared to close an acquisition deal with her.
But doubling down on the Internet was counter to our goal of diversifying. These other Internet companies were highly valued, too, and if the stock market took a turn against tech, our combined company would likely be eviscerated.
In the end, it was fairly clear that the best merger partner would be Time Warner. In many ways, the company had everything we needed. Time Warner had been formed a decade earlier through the merger of two media giants, Time Inc. and Warner Communications. Time Inc. was co-founded in the 1920s by a young entrepreneur named Henry Luce, who, in the process of selling Time, Life, Sports Illustrated, and Fortune to a growing, educated middle class, became the most influential publisher of the mid-twentieth century. Warner Communications had been built by Steve Ross, a charismatic company builder who went from owning parking garages to assembling one of the world’s largest media companies, which included the Warner Brothers movie studio, the industry-leading Warner Music company, and a range of other content businesses, including Lorimar-Telepictures. Later, Time and Warner (by then renamed Time Warner) also acquired Turner Broadcasting, led by the energetic, if idiosyncratic, Ted Turner. By the time we started contemplating a merger with them, Time Warner had serious heft—nearly $30 billion of revenue and $8 billion of profits. It had a trove of content brands—Time Inc., HBO, CNN, TBS, Warner Brothers, Warner Music, and many others. And it owned Time Warner Cable, one of the largest cable companies, so we would have a clear path to broadband, something we believed essential.
Broadband was coming, and, with it, a major threat to our dial-up–driven business. (In a world of smartphones, it’s amazing to think back to a time, less than fifteen years ago, when you couldn’t use the Internet and your phone at the same time!) Instead of phone lines, broadband used cable lines that we didn’t have open access to—and couldn’t get access to ourselves. Cable companies didn’t have to share their broadband lines the way phone companies had to with their dial-up lines. The regulations made it possible for them to shut out their competition altogether.
The “open access” fight, as it became known in the late 1990s, was a preview of the net neutrality fight that would come much later. Both dealt with the question of whether the owner of the “pipes”—the wire into your home—can control what you see over the Internet. During the open access battle, the cable companies took the view that they could just say no, refusing access to companies like AOL. During the net neutrality fight, they were subtler; they no longer sought to lock out competition, but they did seek to disadvantage it. They took the view that they could simply make some sites perform less well, unless those sites paid an extra fee to the cable company. And, in fact, when Tom Wheeler, chairman of the Federal Communications Commission (FCC), approved the commission’s net neutrality rules in 2015, he cited his fights with me in those early days as having been instructive to his decision.
We urged the government to intervene, giving us the same access to broadband as we had to phone lines. I spoke wherever and to whomever I could, whether to members of the FCC, members of Congress, or presidential candidates. In fact, when then-governor George W. Bush was campaigning in Virginia, I met with him to make my case for open access. He listened to what I had to say, and he had his aides follow up. But about a month later, he came out against our proposal, arguing that the market could sort the issue out without government intervention. In retrospect, he was probably right. But that he was not willing to take a stand was unhelpful, and it was one of the key factors that made a merger with Time Warner seem not just sensible but necessary. If we couldn’t partner with a cable company, the thinking went, maybe we needed to buy one. And Time Warner had both a large broadband footprint and a number of valuable other brands and businesses. We concluded that we needed Time Warner. And we thought Time Warner needed us.
The content companies—HBO, Turner Broadcasting System (TBS), Warner Brothers—had a lot to gain from the digital delivery of their product. The print journalism companies, which were already in the throes of an irrevocable, Internet-induced transformation, risked rapid decline if they didn’t incorporate an aggressive digital strategy into their business model. The video entertainment businesses would have a way to distribute their content digitally—and, over time, directly—to consumers, bypassing distribution intermediaries. And Time Warner Cable would have the chance to become the biggest company in the industry, giving them numerous synergies to wring out of a merger with AOL. They would control the pipeline of access that brought consumers to the Internet, the platform consumers used to explore it, and the content they consumed on it.
Together, AOL and Time Warner would have what seemed like the perfect platform. But there was one big question: Could we get them to agree? Most insiders assumed that there was no way they would ever consider it. Our bankers suggested we not even bother trying.
I decided to give it a shot.
I was hoping to enter into a negotiation with Time Warner CEO Jerry Levin on a lot more than price. In combining two different companies, we’d have to come to terms on a range of issues, from operational structure to strategic priorities. And at the top of that list was a threshold question we would have to get past in order to move on to more important matters: Who would run the merged company?
I was reluctant to give up control over AOL, which I had watched grow—and helped build—into a company beyond anything I could have imagined. It was like my child. I was confident it had a bright future—brighter still, I thought, if we could execute the merger.
At the same time, I understood enough about Jerry to know that he would never go for it if he wasn’t to be in charge. It would be hard enough for executives at Time Warner to accept that AOL, still relatively young, had a significantly higher valuation than they did; it would be impossible to convince them to give me the power to run the combined company.
I decided, before picking up the phone to call Jerry, that I would offer to step aside as CEO so that he could run the merged entity. And that was the first thing I told him when he answered the phone, in the same sentence in which I asked him to consider the merger. There was a long pause. “Let’s have dinner,” he finally responded.
Later, in an interview in April 2001, David Frost asked Jerry and me about our “courtship.” I guess you could say that this dinner was our first big date, and it went well. Jerry saw the potential of technology and was doing his best impression of Paul Revere inside his company: “The Internet is coming! The Internet is coming!” But all of his attempts to get people in line and marshal a change—to attack rather than defend—had fallen flat. In the mid-1990s Jerry spent more than $100 million on internal digital efforts like Pathfinder, a web portal that was supposed to be a one-stop shop for Time Warner content. But it never went anywhere, largely because of internal squabbles over turf. This merger was his chance to get Time Warner equipped for the Internet age.
But over the next several months, in conversations about organization and exchange ratios (essentially the price of the acquisition), the negotiations often looked more like a couple on the verge of a breakup rather than one ready to get married. Both sides walked away multiple times.
There was a point in November 1999 when I was on a panel at Time Inc.’s headquarters with Ted Turner and Richard Branson, the founder of Virgin Group. After we all finished speaking, Ted and I walked out onto the patio. As the vice chair of Time Warner’s board (and its largest individual shareholder), Ted knew about the proposed merger—and that we were at an impasse. He urged me to keep at it. “Steve, we should make this work,” he said, putting his arm around my shoulder. “You need us and we need you. Let’s figure out a way to get a deal done. Don’t give up.”
I followed his advice. We kept on negotiating among a small group of executives, in order to keep the number of decision makers within reasonable limits and to prevent the discussions from leaking. Had it leaked, both of our stock prices would have been affected, and merging could have easily become unfeasible. Negotiating this way ultimately led to a good deal at the right price. But it also meant that some of the most senior executives at Time Warner, including several who were running entire businesses within Time Warner, only found out about the deal the night before we announced it. Many were frustrated—indeed, blindsided and embarrassed—and the animosity lingered, poisoning a lot of what we had planned to achieve together.
Should we have approached the negotiation differently? I don’t think so. There’s no doubt that, had we come to terms in a way that involved consensus from all senior executives, there would have been more support and less anger. But I have trouble believing that we could have come to consensus with such a large group, or that a group that size could have kept the negotiations private. As I and many other CEOs have found in the past, opposition inside the room often finds expression outside the room, sometimes in the form of a leak to a reporter. I believed then, and still believe, that we had to protect the integrity of the deal. And I was convinced we would have the time and space to rebuild any bridges we’d burned.
Besides, other than bruised egos, the Time Warner executives had little to complain about. I tried to take the high road, describing the merger in the press and elsewhere as a “merger of equals.” But the truth was, it was anything but. At the time of the merger, we were the younger company, sure, but with a market cap of $163 billion, we were worth more than General Motors and Ford combined. The deal was structured as an acquisition of Time Warner by AOL. AOL shareholders went from owning 100 percent of a company that generated $5 billion of revenue and $1 billion of profit to owning 55 percent of a more diversified company that was expected to generate nearly $40 billion of revenue and $10 billion of profit. We paid a 70 percent premium, and we let Time Warner executives accelerate their vesting period, so they could sell their stock and get a windfall. And, in fact, some did. Those who didn’t stayed by choice. They believed in what we were doing.
On Saturday, January 8, 2000, we came to terms on the deal. I flew to New York the next day to prepare for a major press conference. We were announcing the merger Monday morning. It was surreal.
The AOL executive managing our communications effort was Kenny Lerer (who would later go on to co-found the Huffington Post). He knew the Time Warner culture because he had worked with them in the past, and I remember him saying to me, “Tomorrow, when this is announced, your life is going to change, and not in a good way.”
“Why is that?” I asked.
“Because you’re going to go from being the CEO of a really hot company to being a chairman without any of the businesses reporting to you. AOL’s not even reporting to you. You’ll have a nice title, but no operating responsibilities, and people will start ignoring you. You’ve gotten used to being in the front seat driving, but now you’ll be in the back seat watching.”
I didn’t have a moment of hesitation about the deal we were announcing. I was confident it was the right thing to do for AOL and its shareholders, and I was well aware of the difference in job responsibilities between a chairman, who runs board meetings, and a CEO, who runs the actual company. Nonetheless, Kenny’s certainty surprised me. Particularly his closing remark: “At the press conference tomorrow, just don’t look like you got the raw end of the stick when you go out there, or people will assume you got shoved aside.”
In the end, I think I may have overcompensated. I was determined to give people the impression that I was the victor, not the one losing out. On front pages of newspapers across the country were pictures of me pumping my fist into the sky like I’d won a gold medal, a giant smile on my face.
My performance worked. Almost too well, actually. Within a few days of the announcement, it looked like AOL was taking over the world. I remember landing at Dulles Airport, seeing my face on the cover of what seemed like just about every magazine on the newsstand. That week felt like AOL’s coming-of-age—as if the Internet had finally arrived. And yet, in retrospect, ratcheting up my performance gave the false impression that I was running the combined company. And that exacerbated the perception later that it was mostly my fault that the combined company was faltering. I had ceded my operating responsibility but none of the accountability for the company’s performance. And it wouldn’t be long before problems emerged.
The day we launched, we filled the press release with bold promises for our shared future. “AOL Time Warner Will Be Premier Global Company Delivering Branded Information, Entertainment, and Communications Across Rapidly Converging Media Platforms and Changing Technology,” we declared.6 That was the vision. That was what we believed we were building, and what our collective shareholders—98 percent of whom voted for the merger—embraced. But that is not where we ended up. And the internal and external problems that would undo the company were already taking shape.
The first was internal. As part of the merger, we had committed to $1 billion worth of cost cuts across the company. My sense at the time was that it was a reasonable target. The combined companies had costs of about $30 billion, so we were talking about trimming 3 percent. But the decision forced layoffs and reprioritization among the businesses in the first months after the merger.
“I now have to cut people and projects because of this merger,” frustrated executives would say. “And I wouldn’t have had to otherwise.”
That bred an immediate and spiraling resentment among senior executives and severely undercut our ability to build trust. There was rising tension about the merger, even before the stock market took its tumble.
Exactly two months to the day after announcing the merger, the NASDAQ hit its all-time high.7 Then the dot-com bubble collapsed. Our valuation plummeted. In the year to come, we would lose nearly 80 percent of our value. But the crash didn’t just hurt our valuation; it decimated the 401(k) plans of Time Warner employees who were already embarrassed that an upstart had taken them over. Now they were angry. It created a climate that, for some, confirmed—and even exacerbated—fears about and biases against the merger. You could feel the tide turning in the headlines, but it was nothing compared to the shift in posture among Time Warner executives, many of whom were already suspicious about the Internet’s potential. The plummeting market was bringing out the skeptic in everyone. And you don’t want to get in the way of a bear market when she’s protecting her cubs.
But even after such a drastic market correction, we were still positioned well. Would it have been better for AOL Time Warner had the Internet had a few more years of boom? Sure. Do I think it would have made a difference? Absolutely. A rising stock price might have convinced the media (and more of our executives) that the merger was a good idea, or at least given us the time and the credibility to better integrate the two companies.
By the same token, I’m skeptical that more time would have produced a meaningfully different result. In the end, what did us in was that we were trying to join two companies that were incompatible in structure, in culture, and in mission. From an organizational perspective, Time Warner operated like a portfolio of independent companies—with Turner Broadcasting, Time Inc., HBO, Warner Brothers, New Line Cinema, Warner Music, and Time Warner Cable all operating largely autonomously. The result was rule by fiefdom. Rupert Murdoch once told me that it was easier for News Corp to get a deal with Time Warner Cable than it was for HBO. And they were part of the same company! And because the individual businesses that made up Time Warner functioned independently, AOL wasn’t really merging with Time Warner—it was engaged in nearly a dozen different mergers simultaneously.
From a cultural perspective, there was an enormous and fundamental disconnect between AOL and much of Time Warner about the potential of the Internet. Several top executives who had been at Time Warner for decades believed the Internet to be overhyped and had a large constituency within the company who agreed.
The Wall Street Journal quoted Time Warner executives as saying I was too focused on “shaky theories about convergence of technology and entertainment.” What they thought was unlikely, we knew was inevitable—and coming soon. Once speeds were fast enough, there was no reason why HBO’s shows, for example, needed to be limited to one platform. But back then, the idea of a streaming HBO GO app would have seemed downright ludicrous to many of the executives at HBO.
In May 2000, Jerry announced a new management structure, and it sent shock waves through the company. When I’d first talked to Ted Turner about the idea of the merger, he had loved it. He thought that Time Warner was too bureaucratic and slow-moving, and he was convinced that the merger would shake things up. But in May, Jerry decided that Ted should remain vice chairman but should no longer have a day-to-day-operational role at the Turner Broadcasting division. Ted was out—and he was angry. He viewed the decision as an affront to his self-worth. When the stock plunged and he started losing billions, he boiled over. His temper exploded frequently at board meetings, and he used whatever opportunity he could to direct venom and vitriol our way. He wanted Jerry gone (and would soon want me gone, too), and he wasn’t shy about it.
Disagreement generated discord, not just between Ted and Jerry but throughout the company. The environment became toxic. To this day, I am still surprised by what people did out of embarrassment or anger, how petty the situation became. Instead of discussing how we could work together to put properties like Time on a path of sustained success in a digital future, people were more interested in bitter debates over whether or not Time reporters should use AOL’s email service. At times it seemed that no matter where you turned in the company, you’d find contentious arguments and needless sniping over little disagreements, resulting in near-total neglect of the bigger picture.
I was hopeful that Jerry would be effective as CEO in bringing people together to execute our vision. But as smart as Jerry is, he couldn’t sell the idea throughout the company, and I underestimated how much mistrust there already was within Time Warner. People from the various divisions of the company just weren’t coming together. The companies were so isolated from one another that AOL never even got access to Time Warner’s broadband infrastructure, the easiest deliverable of the entire merger. AOL had the biggest Internet brand in the world, but the executives at Time Warner Cable wanted to continue doing things their own way, on their own.
I grew increasingly frustrated that Jerry wasn’t making enough of an effort to deliver broadband to AOL, or to push the other key strategic initiatives made possible by the merger. But things really boiled over when I learned that he was starting to pursue another acquisition, this time of AT&T’s broadband system. We hadn’t even figured out how to manage what we already had, and Jerry was looking to add more complexity.
It was aggravating. “If we’re not doing any of the things that the merger was supposed to do, why the hell did we do it to begin with?” I asked him.
“You know what, Steve,” he shouted back, “I ask myself that question every single day.”
Less than a year after the merger’s approval, it was clear to me that to save it, we needed a change in leadership and direction. In truth, the fault did not lie solely with Jerry or the Time Warner executives. There was a swagger and arrogance to some of the AOL executives that created problems. And I wasn’t as engaged as I needed to be. I made the calculation that it was better not to spend too much time with the management and the divisions so as to avoid creating confusion about who was in charge. But in the end, that distance only crystallized a view that I was arrogant and uninterested.
I needed to make a decision. We needed to replace Jerry. But removing him would require the votes of three-fourths of the board, which meant I would need a consensus candidate to replace him. I knew I couldn’t be a candidate myself. I wasn’t sure I was up to the challenge, but it didn’t matter either way. I knew there was no way I could rally Time Warner executives and board members to support a CEO coming from AOL, and even if we could, Bob Pittman would have been the likeliest option, and that made me uncomfortable. Bob, a media pioneer, had been president and COO of AOL before the merger. He was very numbers-driven, very focused on execution. He’d helped us tighten up our operation, making us more profitable more quickly, which contributed in a very significant way to our skyrocketing stock price. He deserves a lot of credit for that.
At the same time, he was predominantly focused on the short term, sometimes at the expense of the longer view. He was reluctant to do more acquisitions, or make many strategic investments. There was even a time in 1996 when we had the chance to take a 5 percent equity stake in Amazon, a year after it first came online. But Bob refused, pushing through a deal with Barnes & Noble instead—an exclusive with AOL in exchange for tens of millions of dollars up front. It was a classic case of sacrificing long-term strategic value creation for short-term profitability. And so, years later, as I considered how to proceed with Time Warner, I knew that Bob as CEO was a nonstarter. There was only one person who I could imagine getting enough board votes to replace Jerry: Dick Parsons.
Dick had been the president of Time Warner since 1995 and on the board since 1991. He was involved in the merger negotiations and became co-COO with Bob Pittman afterward. Dick was well respected as a manager. Before Time Warner, he’d spent time in government working for Governor and then Vice President Nelson Rockefeller, and he was the president of Dime Savings Bank. He was accomplished, trusted, and well liked, and in many ways, he was already being groomed as Jerry’s successor.
From the beginning, I wondered if Dick was the right person to lead the company. He was smart, and he had a great way with people. But he was old-school. He didn’t handle his own emails, let alone use a computer—and it’s tough to understand technology if you don’t engage with it. Dick knew this—by his own admission, he wasn’t a “vision” guy, particularly when it came to the Internet. He was there to craft partnerships, comfort regulators, and settle disagreements among strong-willed executives. He was political—a diplomat, not a disruptor. His preference was to settle things down rather than shake them up—even as the world changed all around him. Given the lack of options, however, I felt that whether or not Dick was the right person was somewhat immaterial. The status quo was unworkable, and we needed a different direction. Dick was the only person who could muster the requisite support. And I was confident I could partner with Dick; I could take the lead on the strategy, and he could drive the day-to-day execution.
It was settled. Over a weekend in early December 2001, I reached out to Dick to convey my growing concerns about Jerry’s leadership and to let him know I planned to talk to board members about removing Jerry as CEO and promoting Dick to fill the role. I told Dick that I would be much more engaged, working hand in hand with him to get things back on track. He understood and was supportive. He and I made dozens of calls to various directors over a single weekend in an effort to secure the votes. By the time Jerry learned of our efforts, it was too late. He knew what was coming. A few days later, he announced his retirement. He was gone by May. And it wasn’t long before I missed him.
A few months after Dick was named CEO, I set up a dinner with the two of us and Lou Gerstner, then the CEO of IBM. I was pushing Dick to be more strategic and drive more integration throughout the company, and I thought that Lou, who had done the same at IBM, would be a helpful voice in that conversation.
We met at an Italian restaurant in New York’s West Village. After about an hour, Dick excused himself from the table to use the restroom. As soon as he was gone, Lou turned to me and whispered, “Boy, Steve, you sure have your work cut out for you with Dick.” He was shocked by how little Dick seemed to understand about technology.
“Why do you think I set up this dinner?” I replied. “I feel like we need an intervention.”
Not long after the meeting, Dick decided to reorganize the company. His plan was to have half of the company report to Jeff Bewkes, CEO of HBO, and the other half report to Time Inc. CEO Don Logan. Under Dick’s plan, both AOL and Time Warner Cable would be part of Don’s portfolio.
I opposed this structure. It’s not that I didn’t respect Don. On the contrary, I thought that he was an excellent publishing executive. My problem was that Don didn’t have a deep understanding of digital technology, and he hated the Internet. He had referred to it as a “black hole”—as in, money goes in and it doesn’t come out. And he, along with Jeff, had been among the noisiest antagonists after the merger, angry that AOL had gotten the deal done, and seemingly eager to get retribution.
If Dick put AOL, the Internet’s premier platform of the decade, and Time Warner Cable, one of the company’s most tech-centric businesses, in the hands of someone who didn’t believe the Internet had much of a future, he could end up destroying both. I made this very point to Dick, Jeff, and Don over dinner. I suggested some organizational alternatives. But it was clear that my opinion didn’t really matter.
We talked about changing the name of the company, but not about changing its culture. The perception was that it couldn’t be done. Maybe that was right, but the reality was, almost no one was interested in trying. Not that I didn’t make the effort. After Dick took over, I got an apartment in New York and started spending a lot more time at headquarters—and a lot more time with Dick. And I pushed to create a strategy committee, made up of leaders from each division, which I chaired. We made some progress, and outlined a handful of initiatives, but after six months it became clear that the committee members didn’t have the support of the executives above them—or of Dick as the new CEO. At one point, Jeff Bewkes blasted me during a strategy committee meeting. He panned AOL as being the division “most off its plan.” He directed his vitriol at me, even though he knew it had been more than a year since I’d had any direct authority over AOL. It was maddening; I was sidelined, watching my “baby” being weakened by fuzzy strategy and poor execution, yet I was the one being blamed for the predictably poor results.
Not surprisingly, the clash of culture wasn’t limited to the management team. There were heated discussions in board meetings. Half of the merged company’s board came from AOL and the other half from Time Warner, and they remained largely warring camps. Neither side seemed to really listen to the other. We were often talking past each other, when we even talked at all.
As chairman of the board, I was accountable without having much authority, culpable without real control. I had gone from being the CEO of one of the hottest companies in the world, leading a board and a management team, to being something of a pariah with waning influence. And meanwhile, the company’s self-inflicted wounds kept accruing. There was a time, for example, when AOL wanted to add voice services to AIM, our instant messaging service. On the AOL side, we knew there was big market potential in doing so—a view confirmed a few years later when Skype launched in 2003. But Time Warner Cable was promoting a “Triple Play” digital package at the time, and they didn’t want anything to interfere with it. Eventually the cable guys succeeded in squashing AOL’s new services because they believed they could get a higher margin in the short term, in essence killing a new business to protect an existing one.
In February 2002, I attended the Grammys. Ahmet Ertegun, the legendary music executive who founded Atlantic Records (which, by then, was part of Warner Music), heard I was coming and asked for a private meeting with me. We sat in a corner of the Peninsula hotel in Beverly Hills and talked about the state of our businesses. He shared his frustration with Warner Music, his disappointment about no longer being consulted. He was a hero of mine—an icon of the music business (indeed, a member of the Rock and Roll Hall of Fame). It was sad to hear. What was sadder, perhaps, was that I felt the exact same way. I was increasingly isolated, increasingly powerless, and yet shouldering much of the blame, both in private and public. I wanted to intervene to help Ahmet, but I had no real ability to do so by then.
In the midst of this turmoil, the merger was hit with some very bad press. In July 2002, our hometown paper, the Washington Post, ran a couple of very harsh and negative stories about AOL. They were about the culture—excesses in personality and behavior when AOL was the dominant Internet company of the late 1990s. But one, which ran under the headline “Unconventional Transactions Boosted Sales,” raised the claim that AOL had made errors in accounting. Coming at a time when the merged AOL Time Warner was foundering, and Time Warner legacy executives were looking to blame whatever they could on the AOL team, the stories provided an opportunity for many people inside and outside of the company to seize on these claims as evidence that Time Warner had been “hoodwinked” into merging with AOL.
There were three problems with this notion. First, virtually all of the specific transactions cited by the Post (and by a later SEC investigation) as reflecting improper accounting had occurred after the AOL Time Warner merger deal. So the transactions and their accounting could not have “misled” Time Warner into merging with AOL, because they happened after Time Warner agreed to the merger (mostly during the year-long period between the merger agreement and the deal’s closing). Second, though this scandal took place against a backdrop of a period during which several big companies got in trouble for accounting on transactions that were made up, the problems with AOL’s accounting were nothing of that sort. The transactions called out by critics and reviewed by the SEC were real deals involving real payments to AOL—but with some debate about how the payments were labeled.
And third, the transactions didn’t really add up to all that much. The sum total of these deals amounted to a few percent of AOL’s total revenues. As Slate wrote in August 2002, under the reading line “What did AOL’s accountants do wrong? Not much”: “The thing to bear in mind is that even the worst-case scenario—that AOL had no business booking the revenue as its own but did anyway—isn’t especially serious.”
Still, the damage was done. With the media frenzy about accounting issues at companies like Enron in 2002, and the widespread criticism of the merger, it was all fuel on a burning fire. I knew we had to do something, but with little remaining influence over the management team, I focused my efforts on swaying the board instead. I distributed a memo outlining a wide range of strategic moves that I thought merited consideration. I suggested that we consider buying Google, back when it was worth $2 billion, long before it went public. (We already owned 5 percent of Google, which AOL obtained in exchange for integrating Google search within the service. Today, that stake would be worth upwards of $20 billion.) I also floated the idea of buying Apple, to benefit from their expertise in software, hardware, and design. These suggestions, and many others, were dismissed or ignored. It was clear I was out of options.
It was time for me to go.
The year we were trying to get the merger approved, several companies asked the government to block the deal, arguing that the combined company would be so powerful that no one would be able to compete. It turned out we couldn’t get out of our own way. Three years after our competitors marched on Washington to stop us, we stopped ourselves. We had terrific assets—and a great group of executives. But it was a little like the 2004 Olympics: You put together what should have been a dream team, only to go on to lose to Puerto Rico and Lithuania.
There were factors like the stock market meltdown that played a role. But mostly, it came down to people. It came down to emotions and egos and, ultimately, the culture itself. That something with the potential to be the first trillion-dollar company could end up losing $200 billion in value8 should tell you just how important the people factor is. It doesn’t really matter what the plan is if you can’t get your people aligned around achieving the same objectives. As Jim Collins once wrote, “you not only need the right people on the bus, but you also need the right people in the right seats.”
In 2015, Fortune held its Global Forum in San Francisco, the very same event I had attended in Shanghai in 1999. The comments almost uniformly made the case that culture is critical. “Fifty percent of our business has changed in the last ten years,” said Joe Kaeser, CEO of Siemens. “The key to surviving is having an ownership culture. You have to get to people’s hearts. You have to get to people’s pride.”
“The culture is the one thing I’ve got to get right,” added Brian Roberts, CEO of Comcast. Mark Bertolini, CEO of Aetna, agreed: “Culture does trump strategy, every day.”
• • •
At the time of the merger, I didn’t fully appreciate how much of a role personal emotions could play in professional decisions. In retrospect, I was naïve to think that strategic moves that seemed obvious to me would be equally obvious to others. For example, I was confident that the best approach for the company was to embrace technology and new business models, and was shocked when my attempts to encourage investment in Napster and other early pioneering digital services were soundly rejected. I didn’t appreciate the work it would take to convince the company’s executives of things that seemed so clear to me. In one board meeting, I even noted that the two sides seemed to be speaking different languages and speaking past each other. And while some of the differences related to different world views and strategic perspectives, I think much of it, sadly, related to personal mistrust and lingering resentments.
I could have done a better job of managing that mistrust. I could have done a better job of repairing burned bridges and establishing meaningful working relationships with those who treated me with such skepticism. And I could have done a better job of making it clear that I wanted to be part of the solution. My plan, from the beginning, was to take a step back, to make sure people knew that Jerry was the one making the decisions. But in hindsight, I think I stepped too far back. That was in part the result of circumstances in my personal life: Three years before the merger, my first wife and I divorced, which led me to want to devote more time to my children. And just six months after the merger was announced, doctors diagnosed my brother Dan with terminal brain cancer. He didn’t have much time left. I bought a house on his block in San Francisco, and visited frequently in the fifteen months before he died. I don’t regret spending the time I needed with my family. But I do regret not spending more time with key executives. What I intended to be good for the company—staying out of the way—looked to some like arrogance, even indifference.
Perhaps we could have brought in an outside CEO to replace Jerry. But that wasn’t really possible in practice. I’m certain my efforts to oust Jerry would have failed if I hadn’t proposed Dick as his replacement. When I floated the idea of trying to buy Apple later, I had a side agenda: bringing Steve Jobs into the company, with the thought that perhaps he could eventually become CEO. He had the credibility and skill in the tech and digital worlds, and because of the success of Pixar, he also had the trust of content creators, particularly in Hollywood. I still like that idea, but there were never the votes for it. It was never even seriously discussed.
In the end, resigning from AOL Time Warner was hard. Soon after the merger was announced, Vanity Fair had ranked me the most powerful person of the “new establishment,” ahead of Bill Gates, Rupert Murdoch, Warren Buffett, and Steve Jobs. A couple years later, I wasn’t even on the list. I went from running one of the most celebrated companies in the country to not running anything, and being publicly embarrassed. It was not a happy time in my life. I spent much of it reflecting on what had gone so right—and so wrong—and about what I should do next.
A week after stepping down, I met with Donn Davis, who had been an executive at AOL and then my chief of staff when I was chairman of AOL Time Warner. I told him that I wasn’t sure precisely what I wanted to do next, but I knew I wanted to get back to my entrepreneurial roots, and I wanted to work with him to help figure out the path forward.
I started making investments later that year and found that I really enjoyed it. There was something empowering and hopeful about using the money I’d made from AOL to back the next generation of entrepreneurs. As the size and scale of those investments picked up, I decided to formalize my efforts by creating an investment firm. I called it Revolution, to signal my desire to back entrepreneurs seeking to revolutionize important aspects of our lives. As our planning efforts accelerated, I reached out to Tige Savage, who had been at Time Warner Ventures, and asked him to join our effort. I made the same ask of David Golden, who had worked for my brother Dan at Hambrecht & Quist, and of Ron Klain, who had been my attorney and had become a trusted counselor. Ted Leonsis later joined us, after he left AOL.
I was putting the band back together to pursue a new dream: building Revolution into one of the world’s leading investment companies. I didn’t want us to be passive; I wanted to leverage all we had learned to help entrepreneurs succeed. We wouldn’t just write checks; we would roll up our sleeves and do everything we could to help the entrepreneurs we backed fulfill their dreams.
We spent the winter of late 2004 and early 2005 preparing to launch. We designed a logo—a stylized red R in a black circle—and began to scout businesses and industries. We met with experts and entrepreneurs in a variety of fields. We locked down the domain names and trademarks we wanted. While I had built AOL in what was then a remote part of northern Virginia (and thereby had helped create a whole tech corridor in the outskirts of suburban Virginia), I decided to launch Revolution in downtown DC, hoping to spur a new tech boom inside this urban hub.
In March 2005, we officially launched Revolution. On launch day, I turned up the speakers at our headquarters and blasted my favorite Steve Earle song, “The Revolution Starts Now.”