May/June 2001

AOL/TW SPELLS BIG

BY FRANK HOUSTON

Even on a clear, crisp Manhattan day, it was difficult to imagine the colossus about to take shape at Columbus Circle, at the southwest corner of Central Park, where three construction cranes hovered over the remains of the Robert Moses-era Coliseum. This hole in the ground is to become AOL Time Warner Center, the headquarters of the newly united company. The $1.7 billion complex will feature a pair of sheer glass towers that will command park views at sunrise and Hudson River sunsets and -- along with retail stores, office space, luxury condos and hotel rooms, and Jazz at Lincoln Center -- will house broadcast and digital production facilities for the world's biggest media company.

Like its earthly manifestation, which also encompasses portions of Rockefeller Center eight blocks downtown and AOL's digs in Dulles, Virginia, the intangible cultural sprawl of AOL Time Warner is also vast and diverse. With content spanning much of mainstream music, movies, television, magazines, and other media; with access to the distribution of cable and online services; with some 90,000 employees including some 17,000 at Time Inc. and CNN; and with a combined customer base 130 million subscribers strong, the new company is dealing with the convergence of old media and new on an incomparably large scale. Because of its sheer size and the strength of its news brands, CNN and Time Inc., the forces and patterns set in motion by AOL/TW may well affect everyone in journalism -- in print, on TV, and in the evolving online frontier.

Time Inc. is dealing with changes in corporate culture even as it scales back, following an amazingly profitable stretch. At CNN, the corporate shift comes as the twenty-one-year-old network is struggling to retain its dominance in cable news, as Fox and MSNBC challenge it for audience (see page 28). In the online realm, editors are mapping the digital future of the company's considerable journalistic assets in ways that could well shape the future of news delivery.

As new ownership settles in, how should journalists evaluate what happens? Henry Grunwald, who spent more than forty years at Time Inc., and served as editor-in-chief from 1979 until 1987, says he has "no idea where it will go. But the Internet is such a clearly important development in communications, I'm pleased that the magazines I care about are somehow connected to this almost magical instrument." Others worry about the confluence of a sliding economy, AOL's devotion to the bottom line, and the absence of journalism in its pedigree. Jonathan Larsen, a former Village Voice editor who also spent part of his career at Time Inc., wonders if AOL, in its "attempt to wring out the last vestiges of the old fraternalism" -- the Time Inc. sense of entitlement and privilege, expressed by everything from ample mastheads to lavish perks and salaries -- could, along the way, "just do irreparable damage" to the journalistic mission.

The day the largest corporate merger in history was announced, January 10, 2000, the stock market took away $30 billion from the combined value of America Online and Time Warner. But that was nothing compared to the tech stock dive three months later. In the aftermath, some see the union of AOL and Time Warner as the ultimate product of the boom, a defining moment at the crest of Internet hype. The only moment at which AOL could have bought the huge and successful and profitable Time Warner was in that window, says Larsen. "It's one of the sideshows of the whole e-commerce-techno bubble that this smaller and less impressive company ate up the big one."

At the moment, though, there are no clear signs of AOL's directly threatening Time's fabled journalism. Editor-in-chief Norman Pearlstine, who succeeded Jason McManus in 1995, was schooled in part by the 1989 Time merger with Warner and has both mandate and mechanisms in place to protect news coverage -- including coverage of the company itself -- from corporate interlopers.

But the biggest pressures on Time Inc. are indirect: fierce cost-cutting because of the current advertising decline, and also because of the new company's earnings targets. "We had a great run," says Pearlstine. "We had seven years where the ad cycle and the economy were performing beautifully, and you have to staff up to do some of that. Fortune magazine published 4,600 editorial pages last year, so we had to do some staffing just to get the suckers out the door." So far this year, Fortune has eliminated at least thirteen of its roughly 200 editorial positions, through buyouts and layoffs, and Time's managing editor, James Kelley, is said to be looking to cut 16 editorial positions.

Pearlstine allows that AOL has set some aggressive targets for itself and for Time Inc. But he doesn't consider the pressure misplaced or unfair. "Frankly, I like profits, and when you're making money you feel like you're a winner," he says. "You feel emboldened to do stuff, you're willing to take risks with start-ups, with investments. When you're just struggling to get by, you know, it's just an awful lot harder."

DIGITAL SYNERGIES

The usual culture-clash story line of the merged companies features the upstart AOL and the stodgy Time Inc. trying to force square pegs into round holes. AOL is streamlined and of the moment, while Time Inc. is composed of individual fiefdoms united by their dedication to tradition. (An old Time Inc. joke: "How many Time employees does it take to change a light bulb?" Answer: "One hundred. One to change the bulb, and ninety-nine to say how much better they used to change light bulbs.")

Still, in an odd twist, AOL/TW magazine employees have complained of technological deficiencies in the AOL e-mail system to which they are being switched. Nonetheless, the best fit between the merged companies will be the online arena, where several initiatives are under way. AOL is now the Web backbone for the Time Inc. magazine sites. During the first half of 2001, a common set of browser tools was added to each magazine's home page utilizing the Netscape platform (AOL bought the company in 1999).

By registering their personal data through any Time Inc. magazine site, Web users can access Netscape's search engine, popular Instant Messaging service, and Calendar, which allows users to browse an event directory for items to add to their daybooks along with personal entries. The idea is to begin integrating online habits -- in these cases chatting, Web searching, and to-do lists -- with news-consuming. The Netscape navigational bar at the top of the page also draws on AOL's ability to measure its audience, something the Time Inc. editorial brass defines as a desirable synergy that could one day lead to new titles through niche publishing.

On a larger scale, executives from Time Inc., CNN, AOL, and Netscape have hammered out the logistics of putting a new brand, the CNN Money television network (which is replacing CNNfn), into service as a personal-finance Web site. The television and online service could be a promising model for new broadband efforts. Walter Isaacson, Time Inc.'s editorial director and one of Pearlstine's two deputies, describes the "general strategy" of the whole company as: "anytime, anywhere, you get whatever you want. And by combining the video of CNN and the content of Money magazine we're prepared to do that with whatever devices you use to get to personal finance information." Isaacson acts as editorial liaison between Time Inc., CNN, AOL, and Netscape. Similar content-sharing is being developed in news (Time), entertainment (Entertainment Weekly), and the teen market (Teen People). The sites will be geared toward Netscape and AOL users and will also cater to the online habits of AOL users, such as buddy lists and live chats. Much of the content is being designed to span alternative online platforms such as Palm Pilots and cell phones.

Pearlstine points out that many of the AOL Time Warner people charged with exploring the digital frontier were already doing so before the merger. "Walter Isaacson put Time magazine on AOL in 1994, when it was the fifth largest online service," he says. Jesse Kornbluth, AOL editorial director, says, "These people were our partners before -- Time, People, In Style. The Sports Illustrated swimsuit edition was insane traffic" on the AOL service.

Time Inc.'s top editors believe AOL, through its audience measurement and targeted marketing, might even be able to point the way to new magazine titles, bucking the company's recent trend toward acquisition (Times Mirror magazines, Business 2.0). "In terms of the magazines," says Pearlstine, "we haven't yet figured out whether the research that can be derived from AOL -- and the targeted marketing that can come from AOL -- will enable us to create some new titles, and, if so, what they'll be."

Another form of synergy has already paid off in a big way: AOL now offers Time Inc. magazine subscriptions online, and has garnered more than a million new subscriptions, at a rate of 100,000 a month, according to spokesperson Peter Costiglio. Total Time Inc. subscribers now number 51.6 million. Meanwhile, Anne Zehren, the publisher of Teen People, recently told The New York Times that 65 percent of the visitors to the magazine's Web site came through AOL.

Where all this digital synergy is ultimately headed depends, for the most part, on new technologies and their adoption rate. As for the much-touted broadband future, Pearlstine asks, "Does CNN, which is identified with twenty-four-hour, on-air-all-the-time news, have more potential in the online world than does Time?" The direction of technology will decide.

Isaacson thinks that eventually, video may be the future of targeted networks like CNN-Money. "It makes sense right now to start combining video, print, and pictures both in the television network and in the online service," he says.

The dollars AOL Time Warner allocates for acquisition and development, and how they are distributed between print and online ventures, will reflect the company's own long-term judgment about emerging technologies, and also influence the direction of those technologies.

WHO ANSWERS TO WHOM?

Pearlstine believes the merger of AOL and Time Warner is not nearly the biggest change to hit Time Inc. in its seventy-eight-year history. "The real shock to the system was the merger of Time Inc. with Warner" in 1989, he says. As the company grew and diversified, and as Time Inc. magazines became a smaller and smaller part of its assets, the top editor became increasingly distanced from the board of directors.

First, in May 1993, the editor-in-chief ceased to serve as a member of Time Warner's board of directors. Jason McManus was the last editor-in-chief to have a seat on the board. Pearlstine became editor-in-chief on January 1, 1995. In 1996 came the merger with Turner Broadcasting, bringing CNN into the Time Warner family. At that point, rather than report to the board directly, Pearlstine felt it would be more practical for the editor-in-chief to report to the c.e.o., a move that was agreed to and adopted by Gerald Levin, then Time Warner's c.e.o., and the board. In the newly merged company, Time Inc. c.e.o. Don Logan reports to AOL Time Warner's co-chief operating officer, Robert Pittman (see sidebar, page 26).

AOL Time Warner executives say there will be no changes in the editorial hierarchy or in its celebrated independence. "I'm final editor on anything that involves AOL Time Warner and its competitors, which is a fair amount," Pearlstine says. "But I was final editor when it was just Time Warner and that was a fair amount too. In fact, AOL was often part of the competitive set I was looking at.

"So I can't say there's been significant change," he says. "Despite the fact that 55 percent of the shares of this merged company go to the former shareholders of AOL, from a functional, operational point of view, a six-division company became a seven-division company. The implications for the editorial of Time Inc. have been minimal."

In public, key corporate executives have expressed an admiration for the journalistic legacy of Time Inc. In January 2000, Levin told PBS's Jim Lehrer that Henry Luce's will decreed that Time Inc. was to be operated not only in the interest of shareholders, but in the public interest. "We have the skill, the resources and the intellectual capacity to play a role in the articulation of public policy," Levin added.

Richard D. Parsons is co-chief operating officer along with Pittman. But Pittman is the AOL figure widely seen as having the larger role in Time Inc.'s future. Pearlstine says Pittman's focus is on the business side. "I haven't sensed any focus at all on his part on the words and pictures of our magazines," he says, "and I wouldn't expect it." A former c.e.o. of MTV, Pittman has declared his respect for the journalistic roots of the new corporate giant. Steve Case, the company's chairman, has also made a commitment to editorial independence, telling Lehrer, "I completely respect the journalistic traditions of Time magazine . . . of Henry Luce and many others and recognize it's important to have a separation of church and state and recognize it's important to really empower journalists to do their job . . . . The whole thing unravels if there is any question about that."

Case predicted that the coverage "of AOL and me" would "get tougher in the Time Warner publications over the next few years, because it's like when you're coaching your kid's soccer team, you're less likely to put your kid into play because you want to make sure nobody thinks there is any favoritism." Fortune's coverage seems to have borne out Case's prediction. The magazine has published articles with headlines such as "Dumb and Dumber," about the Time Warner Cable-Disney/ABC imbroglio. Another was titled: "AOL + TWX = ???," with the subhead adding, "Do the math, and you might wonder if this company's long-term annual return to investors can beat a Treasury bond's." Marshall Loeb, of CBS Marketwatch, a former managing editor of Money and Fortune magazines (and a former editor of cjr), remembers that when Time merged with Warner, "there was all sorts of talk on the outside about how can you trust these guys? When there's a Warner Brothers movie out they'll slap it on the cover of Time. Time is just going to roll over.

"And that's just all bullshit," Loeb says. "None of that happened."

All eyes are on Pearlstine as a barometer of the changing weather at Time Inc. So far, he expresses nothing but support for his new corporate parent and betrays no hint that his tenure might be in doubt. Given this early support, any sign of dissatisfaction on Pearlstine's part would be a clear distress signal in editorial budget terms. No one outside the company (and only a handful within it) know just how much cutting will take place within AOL Time Warner's divisions, so it's unclear how much cutting Pearlstine will have to accept. Will he be forced to draw a line, and if so where? Walter Isaacson is considered a likely successor should Pearlstine depart.

As for c.e.o. Logan, according to a Time Inc. executive quoted in The Industry Standard, he has indicated there are limits to the belt-tightening measures he'll accept, saying at a breakfast meeting last spring, "I'm not going to make cuts that hurt us in the long run."

ECONOMIC PRESSURES

Time Inc. aficionados -- inside the company and among its many alumni, as well as the media reporters who cover it -- point out that "economy drives" are nothing new there and that layoffs and buyouts should not be surprising in belt-tightening times. The division laid off a reported 10 percent of its employees in 1991, for example.

It is difficult to assess how much of the division's editorial scaleback -- fairly modest so far at Time, harder hitting at Fortune -- stems from the demanding bottom-line orientation of AOL's business model. At the beginning of the year, leaders of the new regime promised investors it would trim its $30 billion combined annual expense base by taking advantage of the new company's "shared infrastructure," according to c.f.o. Mike Kelly. They also told Wall Street that revenue would grow by 12 to 15 percent to $40 billion this year, and that earnings before interest, taxes, depreciation, and amortization would rise 30 percent, to $11 billion. The company will not divulge how the burden imposed by its financial targets is to be shared among its divisions, but Kelly said he expected to find as much as $1 billion in savings from synergies. "That is a steamroller," a former Time Inc., editor said of the budget cutting required to reach such targets. "That is a hard bullet to dodge."

Time Inc. offered a one-time, voluntary early retirement package to about 530 employees (out of 13,000) the last week of May. The Enhanced Retirement Incentive Program has been extended to employees over fifty and having fifteen years experience as of June 30, 2001. How many positions the company wants to eliminate is unclear; many fear layoffs if not enough people take the buyouts. Employees have until mid-July to decide whether they wish to participate in the buyouts.

Meanwhile, Time Inc.'s set of talented editors-at-large, a team of wide-ranging journalists put together by Pearlstine to combat what he calls Time Inc.'s "silo mentality," has been dismantled. Some have resigned, such as Steve Lovelady, a prize-winning former Philadelphia Inquirer editor, along with columnist Steve Lopez (who was lured to the Los Angeles Times), and former Texas Monthly editor Gregory Curtis. Others are now tied to specific magazines and no longer float among several titles, as Pearlstine originally intended. Daniel Okrent, a former Life editor, new-media editor, and editor-at-large, opted for early retirement to finish a book. While the changes were seen by some as a blow to Pearlstine, he says simply, "Some things are tough to justify in terms of the cost at a time when I was asking the titles to cut back."

FYI, the division's sixty-year-old internal newsletter, was discontinued in May, though it will survive, in diminished form, online. The Time Inc. research library was ordered shut down the same month. About three dozen library staff positions will be eliminated; some staff members may be dispersed between the individual libraries of Time and Fortune, in what spokesman Peter Costiglio has referred to as a "decentralization." The library, a collection of archives occupying a floor and a half at the Time-Life Building as well as warehouse space, was available to all Time Inc. employees. But the library's overhead was funded by Time and Fortune, its primary customers, and it was a victim of the magazines' tightening edit budgets.

WHAT TURNAROUND?

All this comes after a string of very good years. In business terms, Time Inc. magazines are already the gold standard. Under c.e.o. Don Logan, Time Inc.'s revenues went from $3.1 billion in 1992 to $4.6 billion last year. "Don is a demanding c.e.o. who had committed this company to healthy profit growth long before AOL got here," says Pearlstine. The core titles, including People, Sports Illustrated, Fortune, and the flagship Time, are all top earners of ad revenue. This has led many journalists to question the assertion, reported in The New York Times last April, that AOL executives viewed Time Inc. as a "turnaround" operation.

The publishing division, including over sixty Time Inc. titles and book publishers Little, Brown and Warner Books, has performed impressively. For the first quarter, cash flow rose by 20 percent to $113 million, and revenue rose 3 percent, to $966 million (see chart, page 25).

But employee compensation is one manifestation of a shifting corporate mindset. The venerated Time Inc. profit-sharing plan has been eliminated in favor of less dependable stock-based compensation, a far less certain proposition than the good old days. "Almost every year I was there we had almost ten percent of our base salaries put away, and boy, that money certainly could compound," Marshall Loeb remembers. "It's hard to beat profit sharing for creating a comfortable retirement for your long-term employees."

AOL has a different approach. At its "campus" in Dulles, Virginia, "you can find a whole bunch of employees making $40,000 a year, but they are millionaires because of their stock options," says Steve Lovelady. "For those people it worked. But a company can't have that kind of growth two decades in a row. It's just too big. It's one thing for a mouse to gain ten percent of its weight, but it's another thing for an elephant to gain ten percent of its weight."

So far the impact of diminished mastheads is hard to discern in the pages of the magazines. Loeb, for one, thinks the quality of "almost all of the magazines is as good as it's ever been." But the ultimate impact of the AOL culture on Time Inc.'s journalism remains to be seen. Will the emphasis on productivity, for example, cause a decline in reporting projects that take time or involve risk, such as investigative work?

"The most important thing is the authority of the reporting, and reporting is a very labor-intensive, very expensive business," says Grunwald. "If there were to be a sign that the reporting is getting thinner than it used to be, or that fewer stories are being assigned, or that stories are being covered more superficially, those would be symptoms to watch for."

Henry Grunwald came to Time in 1943 as an office boy and retired more than four decades later as editor-in-chief. In his farewell speech in 1987, he told his co-workers that "things would happen at the intersection of electronics and print that we cannot even imagine yet." He thinks that with the new merger, his prediction is beginning to come true. "I am excited by the connection between the magazine business and the online business," Grunwald says.

Would Time's founder and patron saint, Henry Luce, have shared the excitement? "He was always very interested in the new, and I'm sure he would've been interested in AOL, just as he would have been interested in Turner Broadcasting" in 1996, says Loeb. The key questions for Luce, he says, then as now, would have been, "Do we have that dynamism, that intellectual quality? Are we helping to influence the world in constructive ways?"

Frank Houston is a writer who lives in Brooklyn. His articles about new media, culture, and technology have appeared in Salon.com and The New York Times.