New York Times
January 16, 2000

How Blind Alleys Led Old Media to New

By AMY HARMON

Stephen Case, right, of America Online and Gerald Levin of Time Warner high-five last week. Both men's longtime interest in digital technology brought them, and their companies together.

In the fall of 1994, when America Online, with just about a million subscribers, lagged behind its competitors -- and when the smart money was betting that the free World Wide Web would quickly eclipse the paid online services -- Time Warner unveiled a site that aspired to be the emerging Web's prime destination.

Time Warner's mixed experience in the digital realm also explains how the company came to appreciate its own weaknesses and see the benefits of the merger.

Asked last week why Time Warner, with all its resources and reach, did not simply start its own online service, Ted Turner, the company's vice chairman, said simply: "It's not that easy to build an AOL."

Even so, it may be simplistic to label the deal a triumph for America Online. Case's eagerness to make an acquisition -- at a huge premium -- that will surely slow the momentum of his company's stock is an indication that he expects the formula of America Online's success to change radically in the coming years.

As the Internet becomes available over television, telephone and particularly over high-speed networks, Case believes that content, even more than community-building, will grow in importance. That is where his company has stumbled in the past. And at $21.95 a month, its main service faces new competition from several fast-growing free Internet services. Case sees the need to diversify.

"We went from one million to 20 million subscribers in the last five years. That's great, but a billion people watch CNN," Case said. "We've gone from members spending an average of one hour a week to one hour a day on the service -- but there are 23 other hours in a day. This is the reality of how consumers live their lives, and if we really want to have an impact, we have to paint on the broadest possible canvas."

The most obvious benefit of the deal to America Online is that, in buying Time Warner, it is acquiring the nation's second-largest cable provider. Without guaranteed access to the cable modems that will increasingly enable subscribers to surf the Internet at 50 times today's average speed, America Online could have been shut out of a big chunk of what looks to be the lucrative future of broadband service.

But whether the two companies will be able to find other kinds of synergies -- ways of serving up Time Warner's rich media brew to America Online's loyal users -- may ultimately depend on how much they have learned from their past successes and failures.

In many ways, Steve Case and Gerald Levin were both ahead of their time.

In 1981, Case, just out of college, took a job at Procter & Gamble in large part because it was in Cincinnati, one of two places in the country where interactive television was being tested. But the neighborhood in which he chose to live did not have access to the service, called Qube -- which happened to be provided by a company, Warner Amex Cable, that was a venture of a predecessor to Time Warner.

At a friend's house, his excitement dimmed as he repeatedly used the service. Clunky interactive quiz shows somehow were not what he had in mind. Instead, Case bought a computer, connected it to a phone line and began exploring the early versions of online communities.

Levin's fascination with interactive television was not so quickly put aside. As a rising star at Time Inc. in the early 1970s, Levin had built an early satellite network for the company's HBO movie channel.

By the time he became chief executive in 1992, Time had merged with Warner Communications and its cable division had won a special Emmy Award for entwining thick coaxial cable with slender fiber optic strands so that cable subscribers could both send and receive information.

That meant a lot of things, theoretically. It meant that you could order a pizza through your cable system, pay your bills through your cable system, shop through your cable system. But the main thing it meant -- theoretically -- was what cable executives came to call video on demand. The fantasy of having millions of cable subscribers pay to summon up any movie they wanted, at any time, blinded much of the industry to the lack, or exorbitant cost, of the technology to make it happen.

Many cable companies sponsored interactive television tests, but none as lavish as the one Time Warner rolled out in Orlando, Fla. After a small trial in New York City, Levin was so taken with the idea that he authorized tens of millions of dollars to be spent on proprietary equipment for the project, which was announced in December 1994 to a gathering of 450 journalists from 10 countries.

In the spring of 1997, having garnered a total of 4,000 subscribers, Time Warner shut the network down, declaring it a valuable trial for a system that could be extended nationally once the technology became less expensive.

But the company's plans to make such Jetsonian technology available to its millions of cable subscribers were delayed as upgrading its systems with fiber took longer than expected, and the price of the complicated set-top boxes remained exorbitantly high.

Attention then turned to the Internet as the source for interactive activities. It is just now, as Time Warner prepares to merge with an Internet company, that it has started to offer interactive television in Honolulu and is on the cusp of being able to provide it on a much wider scale.

"We had hoped it would happen faster for sure," said Jim Chiddix, chief technical officer for Time Warner Cable. "There was a theory that interactive TV would have been the way this all happened. In hindsight that wasn't realistic."

Still, Levin's conviction that his company needed to be retrofitted for the digital age was growing only stronger. In 1994, a month before the introduction of the Orlando project, he announced Pathfinder, a Web site that allowed Internet users to read articles of Time Inc. magazines including Time, Life and Sports Illustrated. The idea was to make it the first Web portal, a free competitor to services like America Online that would earn its keep through advertising, magazine subscriptions and other products.

From the start, however, Pathfinder was criticized by insiders and outsiders alike as chronically failing to live up to its promise. Not only were the company's music and film divisions not interested in taking part, but the magazines themselves didn't have much incentive to contribute resources to a project that, at least initially, showed no sign of generating any cash in return.

Levin, who was busy buying cable franchises against the better judgment of many investors -- in addition to overseeing the rest of the Time Warner empire -- seemed to have neither the clout nor the attention to carry out his vision. A year after Pathfinder's introduction, it was famously dubbed a "black hole" by Time Inc.'s executive editor, Don Logan, at a magazine conference.

Several key executives left: Walter Isaacson, a Time editor who lent the project credibility as its managing editor, fled back to the print world as soon as he was offered the job of managing editor at Time.

Paul Sagan, once Time Inc.'s president of new media, is now president of a high-profile Internet start-up called Akamai Technologies, with a stake worth hundreds of millions of dollars.

James Kinsella, the founding managing editor of Pathfinder, who is now president of MSNBC.com, recalls the frustration of trying to get the company's disparate divisions to work together on a centralized online service.

"It was all such a struggle," Kinsella said. "You didn't have a strong leader saying, 'We're going to make this our core.' They all wanted to have their own titles and own look and feel, so it was clearly a hodgepodge of stuff."

In April last year, , after pouring more than $100 million into Pathfinder with little to show for it, Time Warner announced it was disbanding that service, too. In recent months, the individual magazines have been fending for themselves on the Web, developing advertising deals across both media in what Time Inc. executives contend is likely to be a far more lucrative business model. The online division of Warner Brothers, meanwhile, has developed a well-received entertainment site called Entertaindom. What America Online will do with all that has yet to be seen.

Time Warner executives say Pathfinder's costs were less than those of many an Internet start-up, but they agree that the corporate setting wasn't always an advantage.

"I never lost my zeal," Levin said in an interview last week. "But Pathfinder never became the central focus of the company."

The slower pace of decision-making in a large company also frustrated efforts by other Time Warner outposts to make money from the Internet. One former manager at CNN recalled a plan three years ago to create a search and directory portal like Yahoo, called "Gotwo," for Time Warner Online. Despite support from Levin, the plan went nowhere.

"We sometimes felt on the team like we were preparing for one of those G-7 summit meetings," said the former manager. "You had to go make your case to the publishing guys, the film guys, the cable guys. You had to waste a lot of time. It ultimately got studied to death."

Perhaps nobody was more frustrated than Levin. Last summer, he moved to impose his long-held views on the importance of digital technology. He created a new division called Time Warner Digital Media and appointed his chief financial officer, Richard Bressler, to run it.

In October, however, Levin received a phone call from Case. And Levin attributes his receptiveness to his own long history of digital experimentation.

"I am not defensive about any of this," Levin said in an interview last week. "Every one of these experiences enhanced my consciousness level about what the right thing to do is. It helped me recognize why this merger made sense. You won't find too many CEOs that would do it."

YOU might not find too many chief executives who would propose such a merger, either. But Case's well-known single-mindedness may be the key to America Online's unlikely success.

While more-established competitors like CompuServe still doled out e-mail addresses composed of long strings of digits, and Prodigy offered neither e-mail nor online chat, America Online's service was easy to navigate and encouraged interaction. "We believed the soul of the medium was people interacting with each other," Case said.

Yet early on, Case learned the value of content, too. A contract with Time magazine in 1993 helped legitimize AOL in the eyes of traditional media companies, he said. With a sharp focus on the consumer, as opposed to the technology, along with a heavy-duty marketing campaign, the company began to add subscribers quickly.

There were plenty of stumbles and recoveries along the way. From 1985, when Case helped form AOL's predecessor company, until about 1992, he developed almost no market for his service. But by the mid-1990s, rather than competing with the Internet, America Online simply incorporated it into its own offerings.

In late 1996, America Online switched to a flat-rate pricing plan, but failed to account for its popularity, resulting in well-publicized busy signals for many customers. The company apologized, then furiously added capacity.

But America Online has never quite mastered the creation of its own original content. AOL programming -- like Entertainment Asylum, which Case now characterizes as "just another entertainment site" -- has not performed well.

"We realize it's hard; it requires a different kind of culture," Case said. "We were always better at building the community brands that rely on people contributing content."

Hence the deal with Time Warner, Case said. But rather than reviewing how his company came so far, he would rather spin a story about the virtues of convergence among all forms of communication: "I understand the need to talk about the past, but I'd rather talk about the future."

Case may prefer to take the long view in part because the stock market's more immediate response last week was less than enthusiastic. Time Warner's share price soared after the merger was announced on Monday, to a high of $102, but it closed at $83.25 on Friday, $6.75 below Monday's close. Shares of America Online fell more than 14 percent over the week.

But the market also may have been reacting to the merger's long-term risks. Whatever the two companies have learned from their pasts, they will be confronting a new and shifting series of obstacles in the future.

As chairman of a huge media conglomerate, Case will no longer have a founder's unique power to rally troops around his message. And as chief executive of an Internet company, Levin, will face for the first time the brutal pace of change and expectations of rapid growth.

Other questions abound. If America Online's strength has been its dogged pursuit of online subscribers, what happens when it merges with a company that is so notoriously scattered?

"AOL has been built really on just one idea, making it easy for people to get online," said John Battelle, publisher of The Industry Standard, a technology trade publication. "Time Warner is a company with almost indecipherable conflicts of interest. It will be interesting to see how AOL sorts out the priorities."

And if one of America Online's chief virtues has been ease of use, what happens when consumer electronics manufacturers begin marketing devices that make it far simpler to tap the Internet?

"If the Internet was about bringing an appliance home, plug it in, get on and go, that's a threat to the core of AOL," said Paul Saffo, director of the Institute for the Future in Menlo Park, Calif. "They have this marvelous community of users, but one could see the world changing where all those people are lured away in other directions."

As the four executives on the AOL-Time Warner "integration team" ordered in Chinese food to America Online's board room last Wednesday evening, a range of other opinions asserted themselves on new message boards that America Online had set up. "Think maybe now we can switch screen names faster?" asked one user, referring to online aliases. "Big is not always better," wrote another, while yet another said, "Good only if monthly fee comes down."

Typing in www.pathfinder.com still brings users to the Time magazine site. No message boards on the subject of the merger appeared there last week, although those interested could vote in a poll on whether or not it was good for the Internet.