These Guys Want It All The AOL-Time Warner merger isn't really about TV, movies, cable, and music, let alone Time, Life, Money, or Fortune. It's about your time, your life, your money--and their fortune.
By Marc Gunther Reporter Associate Margaret Boitano

(FORTUNE Magazine) – When Steve Case applied for a job at Time Inc.'s cable TV network, HBO, in 1980, he was fresh out of college and brimming with big ideas about the future. Brashly, he predicted that "innovations in telecommunications (especially two-way cable systems) will result in our television sets (big screen, of course!) becoming an information line, newspaper, school, computer, referendum machine, and catalog." Alas, he didn't get the job, or even a chance to meet the man in charge, a little-known executive named Gerald Levin.

Now when Case peers into the future, Levin will listen--and so, perhaps, should the rest of us. Hollywood, Silicon Valley, Wall Street, and Madison Avenue were dumbfounded by the news that America Online was going to buy media giant Time Warner for stock valued at about $165 billion in the biggest merger ever. They shouldn't have been. For a year or so, the soft-spoken CEO of America Online has been saying that he wants to build the most valuable, most respected, most important company in the world. He describes AOL's mission this way: "To build a global medium as central to people's lives as the telephone or television ... and even more valuable." Take him at his word, and this merger was almost predictable: You don't get bigger than phones or TV by taking small steps.

Even now, though, Case's vision still isn't well understood. Media coverage of the AOL-Time Warner merger has focused, understandably, on media. And certainly AOL and Time Warner together will package, distribute, and sell information and entertainment in radically new ways. But Case, as usual, is a step or two ahead of public perception. This deal, for him, isn't about the triumph of new media over old; he doesn't even think of America Online as a media company anymore. He's thinking bigger. During the strategic review that led to the Time Warner deal, Case and his senior staff surveyed a broad landscape and raised the names of such targets as eBay,, Intuit, and Bell Atlantic. The ink on the agreement was still wet when Merrill Lynch's Internet guru, Henry Blodget, speculated that America Online might go after Wal-Mart next.

Not likely, Case says. But, he says, America Online does want to become a Wal-Mart-style superstore of interactivity, linking people to each other and to information, entertainment, shopping, and learning through a variety of devices, including PC, TV, and phone. He paints a picture of a customer-focused behemoth--if that's not a contradiction in terms--that will be a force in media, communications, retailing, financial services, health care, education, and travel, competing with everything from newspapers, TV, and radio stations to phone companies, banks, brokerage firms, auto dealerships, travel agencies, the local photo shop, and the corner bar. "Interactivity will become more and more a part of everyday life for more and more people," Case says. "This company is perfectly positioned at the epicenter of change." And he's attached a timetable to his goal: He tells FORTUNE that he'd like to make AOL Time Warner the world's biggest corporation, as measured by market capitalization, in five years. To get there, AOL and Time Warner, with their combined valuation of about $290 billion, will have to outperform Microsoft ($585 billion), GE ($485 billion), Cisco ($393 billion), and Intel ($332 billion).

A grandiose ambition? Absolutely, but how many 41-year-olds do you know who have the moxie to name a new century before it's even begun? Even Time Inc. founder Henry Luce waited until 1941 to dub the last one the "American Century." Last fall Case took it upon himself to anoint this the "Internet Century." Ten days into the new year he stood on a stage with Levin, the 60-year-old Time Warner chief who, lo and behold, called it the Internet Century too. See? Levin's listening already.

"When I met Steve," recalls Ken Novack, vice chairman of AOL and Case's closest adviser, "he was 30 years old, and he already had a messianic vision of a connected world where the Internet was going to be part of daily life in every way imaginable. AOL is about being the leader in making this medium all that it has the potential to be."

Says Case: "There is probably going to be more confusion in the business world in the next decade than there has been in any decade, maybe, in history. I can't think of any that brought the kind of topsy-turvy change that's starting to happen now, and the pace is only going to accelerate." As the gatekeeper to the Internet for 21 million homes worldwide, far more than anyone else, AOL is ready to capitalize on the tumult. "That kind of massive dislocation is wonderful," Case grins. "Particularly if you're an attacker."

To understand Case's plan of attack, think of AOL's core online service as the locomotive that drives a bigger, more complex enterprise--or, if you prefer, a battering ram that can be deployed to smash barriers to entry and clear the way for building new businesses. Even before the Time Warner deal, America Online had grown from a company that focused on one brand (AOL) for one platform (the PC) in one country (the U.S.) to a company with many brands (CompuServe, Netscape, ICQ, Digital City, MovieFone, Spinner, iPlanet, and MapQuest) for many platforms (TVs, phones, etc.) that are distributed in seven languages and 15 countries. Already America Online sells long-distance telephone service and movie tickets, operates 100 Internet music channels, publishes 60 digital city guides, and delivers more stock quotes than any newspaper and more mail than the U.S. Postal Service. It owns stakes in an Internet telephone company, an online travel service, an online education firm that links parents and teachers, and technology businesses like PC maker Gateway and satellite TV distributor DirecTV.

The nonstop growth of AOL's flagship service, which added five million members in 1999--more than Microsoft's MSN and AT&T's WorldNet online services together have signed up in five years--has also powered the company's stock, one of the half-dozen best performers of the 1990s. A $10,000 investment when AOL went public in 1992 would now be worth $6.8 million. (Case owns or has options to buy 30.8 million shares, currently worth $1.8 billion.) As AOL's market cap rocketed past $100 billion last year, Case and his senior staff--a small group that includes Novack, AOL President Bob Pittman, CFO Mike Kelly, and strategic planner Miles Gilburne--were able to set their sights on bigger prey.

Time Warner stood out as the only company with content, distribution, global reach, and customers. Case wants it all: The branded content from Warner Music, Turner cable networks, and Time Inc. magazines that can be digitized and sold online. The cable pipes to speed delivery of AOL. A global promotional platform that will save AOL a fortune in ad spending. Relationships with about 73 million subscribers to Time Warner cable systems, HBO, and Time Inc. magazines. (Both AOL and Time Warner were built on what Levin calls "the power of the subscription.") Not only that--Time Warner's old-fashioned media properties deliver a stable stream of revenues, about $27.1 billion in 1999, and cash flow, about $6 billion in earnings before interest, taxes, depreciation, and amortization, that are shielded from the vagaries of the Internet world. (One of those, the free Internet access being offered by Yahoo and Excite, among others, threatens AOL's $21.95-a-month subscription fees, which deliver nearly two-thirds of AOL's current revenues.)

Like most marriages, though, this one was driven by emotions as well as complementary attributes. Case has always been fascinated by marketing and media; after graduating from Williams College in 1980, he applied for a job at the J. Walter Thompson advertising agency as well as at HBO, and he toiled at Procter & Gamble and Pizza Hut before helping launch America Online in 1985. At AOL he's seen firsthand how valuable the aggregation of audiences can be: The company's advertising and commerce revenues have rocketed from $1.5 million in 1995 to more than $1 billion last year. As the online service for the masses, AOL has always been about ease of use, marketing, and media, not gee-whiz technology. Says Pittman, a former chief executive at MTV: "We're a very driven, consumer-centric company. That's what separates us from others in this business. Most of them are technology companies or software companies. Our DNA is right for this." Because AOL is only incidentally about PCs, software, and modems, Case has always been a fish out of water in high-tech circles.

Levin can empathize, as a cable and tech guy stuck atop a content giant. While Michael Eisner loves to test the latest Disney theme-park ride and News Corp.'s Rupert Murdoch fiddles with newspaper headlines, Levin gets juiced by the rollout of hybrid fiber coaxial cable. "I'm an interactive guy," he declared when the merger was announced. "I've been building networks all my life." Before Ted Turner dreamed up CNN, Levin made his reputation by putting HBO onto a satellite in 1975. He's also been burned by technology, notably when Time Warner spent upwards of $100 million on a prototype interactive TV network in Orlando. But his biggest tech bet, on the potential of two-way cable lines, paid off handsomely after Microsoft's Bill Gates put his stamp of approval on cable by investing in Comcast in 1997. Time Warner's stock, a so-so performer for much of the 1990s, surged, and it has now easily outgained the S&P 500--growing by 389%--during the period since Levin took over in 1993. Levin was rewarded with a $250 million pay package in 1998, the company's best year.

But Levin's hard-won reputation as a tech-savvy executive has faded since then. He passed up the opportunity to buy a portal like Lycos or Excite, and Time Warner's own Internet hub, called Pathfinder, flopped. Getting the company's strong-willed division heads to unite behind an Internet strategy proved almost impossible. So when Case called to offer him the chance to be CEO of AOL Time Warner--the biggest game in cyberspace and media!--why, how could Levin resist?

Both men share other traits too. They are brainy introverts who like to think big thoughts. Their toughness and resiliency have consistently been underestimated. Their egos are mostly in check, which is why they've agreed to share power atop the new enterprise, and they've surrounded themselves with strong leaders, like Pittman and Ted Turner, Time Warner's vice chairman. And not least of all, they worry about the so-called soft issues. Levin has proudly spearheaded a companywide "Vision and Values" initiative at Time Warner, bringing in outside consultants and encouraging lots of heartfelt sharing on topics like integrity and diversity. And while his ambitions appear boundless, Case doesn't want to own the world so much as he wants to change it. He's passionate about such AOL ventures as, a portal that connects volunteers and donors with nonprofit groups, and My Government, AOL's public-affairs site designed to help citizens become more active. Case's foundation, endowed with $150 million of his AOL gains and run by his wife, Jean, has jump-started efforts to deliver Internet access to low-income young people. (He's given away another $30 million to favorite causes, including schools and churches.) Both Case and Levin like to argue that companies need a strong commitment to the public good to attract the best people, who in turn will generate shareholder value. It's an interesting theory, if utterly unproven. (Consider Levi Strauss, a company with a conscience whose market share evaporated, or for that matter Microsoft and GE, topnotch outfits not known for their warm fuzzies.)

Case and Levin also have bonded over a strategy that, in essence, is about winning customers for life. These customers will be offered an array of services--some for free, others for a price--and once captive, their eyeballs will then be resold to advertisers and commerce partners. Content is important, to be sure, but it's just one more weapon in the war for the loyal customer.

"The battle is shifting," Case says. "It's going to be more and more about customer relationships, more than who's got the pipe or who's got the content."

Start with e-mail, still the killer application of the Internet. It's not that hard to change your e-mail address, but AOL also encourages users to build address books, track their stock portfolios online, bookmark their favorite spots on the Internet, and create buddy lists that tell them when friends or relatives are online so that they can then pop them instant messages. (Some 562 million IMs fly around AOL every day.) New features released in October include online photo albums, part of a revenue-sharing agreement with Kodak, and a Web-based calendar, two more very "sticky" applications. Six million users have created calendars already.

Bring in Time Warner, and now you can create an interactive, customized newscast, featuring columnists from Time and video from CNN. With an "electronic jukebox," you can have access to the music you want whenever you want it. ("Right now the music experience is tethered to the physical disk," laments Case, a big rock & roll fan.) If you, like Steve, are fond of R.E.M., a "reminder" about their next concert will be posted on your calendar. (Click there to order tickets.) Speaking of tickets, that flight to Tahiti you booked through AOL's travel partner Travelocity? That, too, can be placed on the calendar, along with the suggestion that you get a vaccination, courtesy of, an AOL partner to which you've entrusted your personal medical records. If you're wondering how you'll pay for all this, AOL and Intuit are tracking your bank balances and paying your bills electronically. With the time you save, you can catch a movie (click for MovieFone) or eat out at that hot new restaurant you read about in Digital Cities, get there using MapQuest, and charge it all with your AOL Visa card (with rebates applicable to all purchases made on AOL and free tickets to Warner Bros. movies for the best customers). These, by the way, aren't blue-sky notions but services that either are available now or will be soon. Notice that while you pay AOL for access, AOL's partners are paying for access to you. How's that for a business model?

The challenge then comes down to execution. That nine-letter word encompasses literally thousands of decisions, big and small. Thomas Middelhoff, the Internet-savvy CEO of global media giant Bertelsmann and an AOL board member, says, "It's not enough to say that AOL bought Time Warner and combined online services with media. Now the challenge starts. Time Warner content has to be digitized. They have to figure out what content can be offered online and then come up with cool marketing concepts. And not lose any speed." The first big question for senior managers at both companies is about structure--whether to stay decentralized, like Time Warner, or use the deal to recast the two companies into a new, different, and presumably more unified company. Case and Levin say they're inclined to shuffle the deck, but we'll see.

Then there is a host of merger-created questions. Can AOL hitch its broadband strategy to Time Warner's cable systems and Roadrunner (which is part owned by Microsoft) without disrupting the broadband alliances it crafted so carefully with cable competitors like Bell Atlantic, GTE, and DirecTV? "They absolutely can and will live side by side," says Case. Can the new company bring Time Warner's Book-of-the-Month-Club (soon to be part owned by Bertelsmann) and its Columbia House record club (part owned by Sony) online without disrupting AOL's moneymaking commerce deals with,, and Blockbuster, all of which compete with each other and the clubs? Will a vertically integrated AOL Time Warner try to shove Time Inc. and Turner content at users, at the expense of current media providers like and CBS SportsLine? Jeff Mallett, president of AOL's Web rival Yahoo, hopes so. "Consumers on the Internet want choice," he says. "They don't want to be tied to house brands." Case promises lots of choices, but how does that drive synergy?

Those are actually the easy issues. The much harder ones concern new platforms like TVs, cell phones, Palm Pilots, videogame consoles, and so-called Internet appliances yet to be invented. It's by no means clear what people want to do where, which technologies to bet on, what alliances to pursue. Do people want stock quotes on their cell phones? E-mail on a TV screen? Interactive game shows? Smart refrigerators? Maybe Levin will test out new devices, while Case digs into Warner Music.

We're kidding, of course, but the point is that AOL has just given up something terribly important: its focus. Ted Leonsis, who used to run the AOL service and now oversees Digital Cities, AOL's music properties, and the fast-growing instant-message service ICQ, once said that the best people at AOL weren't any smarter or harder working than those at Microsoft. But, he said, AOL trounced Microsoft in the online world--really trounced it--because the AOL people live, breathe, and dream online services, while Bill Gates and Steve Ballmer have too many other things to worry about. Now Case and Pittman have movies, TV networks, cable systems, magazines, books, and online services to worry about. Just as Microsoft is getting really focused on the Internet.