As I discussed the post, and the event, with my business partner over lunch yesterday, more nuances came out which I honestly don't think I've ever seen mentioned about the ill-fated deal.
What I wrote earlier this week,
"Let's be really frank here. In 1999, nobody wrote blogs, and I didn't write this one. But at the time, I verbally declared to all who would listen that the TimeWarner-AOL merger was simply a case of the latter cashing in on its temporary valuation surge, at the expense of the former. Nothing more, nothing less.
There was zero business reason for the merger. I immediately sold the shares I held by virtue of my AOL position when the merger closed.
Levin isn't some accomplished graybeard former CEO. He is a failed wannabe-CEO. Steve Case induced Levin to snooker his own board and rob his own shareholders' wealth to give it to investors in AOL."
My partner asked whether I thought AOL, now spun off, had actually declined in value by more than, say, Yahoo, from its 1999 highs.
As the nearby price chart shows, Yahoo is down significantly from its 2000 high. For purposes of this post, a rough estimate is sufficient. It looks like Yahoo peaked in 2000 at around 100. Today, it's trading at 16-17. That's about a 84% decline on the $50 base.
By 2002, one news article of the day noted that the combined AOL-TW had already plunged by some 70% in value.
Looking at the TW price chart, we see the company's equity price fell from the $300 range to around $29 now, ex-spin off of the remaining stump of AOL. The per-share numbers for the old and new AOL wouldn't be meaningful, until adjusted for number of shares, so a straight market value comparison would be appropriate.
However, here's where the real genius of Steve Case becomes apparent. When we got to this point, I suggested to my business partner that there wasn't really much point in comparing the two values, because cable internet access had, would have, destroyed the core value of AOL anyway.
And this is where you have to give Steve Case credit far, far beyond what anyone has even hinted at so far.
As my colleague and I discussed why we were members of AOL back in the 1990s, we agreed it was the simplicity of access. The site's content was never very important to either of us. In fact, as we remembered those days, I pointed out that the content was added mostly as a freebie to give subscribers something more than bare-bones dial-up access. It differentiated AOL from the other ISPs of the day which only provided simple web access and an email address.
But by 1999, any really smart industry player or observer could see that AOL's very success was already about to undermine its business model. To wit, the huge subscriber base it had created was rapidly learning to stay logged in all day.
Remember when modem speed was an important feature on your desktop PC? When your local phone company had to create new area codes just to generate new telephone numbers for second phone lines dedicated to online access? I cancelled mine only about seven years ago, when I elected to use my main landline as a dial-up backup access mode, should my high-speed cable connection fail.
Who even bothers with that anymore? How many are already just closing their landline accounts?
So, back to AOL and Steve Case.
By 1999, I think Steve Case already saw the flattening of growth in AOL's subscriber base, as people began to migrate to their local cable television's high-speed internet service. Even if AOL's membership and revenue hadn't actually declined, the slowing of its growth would have immediately poppled the company's equity price bubble.
Remember, we're talking about the final days of the famed 'tech bubble' in equity markets.
I think Steve Case, by early 1999, or perhaps even mid-1998, knew he had about 24 months to find someone willing to monetize the incredible bubble of temporary, excess franchise value inherent in AOL's equity price. Left on its own, AOL would have become another Yahoo.
But Steve Case managed a masterful sleight-of-hand trick. By convincing TimeWarner's Gerald Levin that AOL's content and distribution, married with TW's content, would make for the first great internet content-plus-access giant, he successfully off-loaded his shareholders' price risk to TW's hapless owners.
Case exited the combined company rather quickly. It was fairly easy, as a former AOL shareholder, to immediately sell TW shares at a decent price.
To see how big a con game Case managed to pull on Levin and his board, note how tepid the market's response has been to Comcast's purchase of NBC from GE. Yesterday's Wall Street Journal editorial by Holman Jenkins castigates Comcast for being late and myopic in understanding what is at stake. How fast the movement of viewing platforms has moved, so that the real game is already beyond television, and onto laptop and cell phone screens.
Steve Case managed to convince Gerald Levin ten years earlier that there was value in combining distribution and content. A concept about which I've written in prior posts over the past years, as have others in other media. It's never worked. It's always been a flawed strategy.
In the case of AOL-TW, as I mentioned to my colleague, when he asked, neither Case nor Levin addressed the price issue on CNBC Monday morning. Neither did any of the co-anchors. Amazingly, everyone simply bought the story of implementation failure, electing to ignore the obvious overpayment by TW for fleeting value temporarily resident in AOL's equity price at the time of the merger.
Case solemnly spoke to issues of implementation with a straight face!
What an actor! What a magician! He duped Levin into overpaying for a dial-up based internet access firm about to be crushed by high-speed cable. He adroitly invited Levin on air to confess to his errors, leaving Case to avoid the spotlight.
The truth is, Case delivered for his shareholders, then moved on to new ventures. By inviting Levin to appear with him and take all the blame, as well as conveniently ignore his own culpability in even doing the merger, Case publicly shut the door on ever being viewed as a charlatan.
Credit Steve Case with continuing brilliance. He saw the end of AOL's dominance long before anyone else, and, unusual for a CEO, actually accepted reality and moved to get ahead of it. He found a dupe to pay full price in advance of the decline of value in AOL's business model. He rewarded his own shareholders, then smartly left the scene, moving on and away from the developing disaster at TW-AOL.
The best part of the story Monday morning, and probably forever, about the AOL-TW merger, will never emerge from Case's lips. He's much too smart and clever for that.
didn't go far enough. Or give Steve Case due credit.
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