AOL-Time Warner Merger: A Two-Man Network

Swallow. “I’m sorry. Wait a minute.” Swallow. “Can I add something?” Time Warner chairman Jerry Levin is speaking. It is 9 a.m. on the day after Levin and Steve Case, the CEO of America Online, have inked the biggest deal in corporate history. Levin is nibbling on pieces of fruit, sipping room-temperature mineral water and projecting a becoming tranquillity. He looks as if he’s just stepped in from Harvard Yard, wrapped in a forest green corduroy jacket with an open-necked plaid shirt tucked underneath. When he speaks, his voice has the delicate cadence of a professor singing out the most violent passages of Macbeth with a studied calm. He has, it seems, left his globe-striding, Gulfstream-riding, options-exercising CEO persona somewhere on the other side of this megadeal. The only flaw in this picture, frankly, is a fist-size interactive pager that is dancing between Levin’s palm and his pocket. The pager chirps from time to time, and Levin pops it from its slate-gray plastic case, uses a thumbwheel to scroll through a few messages and then slips it back into its case. Occasionally, he pokes out a quick message on the device’s Chiclet-size keys. Chirp. Pop. Click-click-click. It’s almost a Macarena rhythm. 1-2-3-4-5. Lou Gerstner, the CEO of IBM, sends Levin a congratulatory e-mail. Chirp. Pop. Click-click-click.

As all this has been going on, almost as if it were scripted, Case, sitting at Levin’s left elbow, has been doing a little samba of his own. The Steve Case dance will be familiar to anyone who has been within two feet of a mailbox in the past decade, where Case’s dance card came along with a disk inviting the recipient to join AOL. So far, 20 million have taken him up on the offer. Case, who was raised in Hawaii and is partial to batik shirts, seems to have ditched his old look wherever Levin left his Gulfstream. Besuited and betied, Case is also clearly bewitched by a vision of a world where consumers are constantly connected to a web of entertainment and information. It’s a world, he says, where cell phones, televisions, computers, cars, maybe even refrigerators, will all be tapped into a data network that makes it as easy to talk to Singapore as to call your next-door neighbor. And AOL Time Warner, he begins to explain, will be the company that makes all that happen. But now Levin has something to say, so he puts the pager aside and begins to tell a story.

The gist of the tale is that back in 1972, when Levin started his first job at what was then Time Inc., he worked in the company’s cable-television division on 23rd Street in Manhattan. At the time, in those Pleistocene cable days, some genius had the idea of building a real-time TV news service that would allow Time Inc.’s cable subscribers to have direct access to the headlines, as opposed to having to wait for Huntley and Brinkley or Walter Cronkite or even, God forbid, the morning paper. To do this, Time Inc.’s wizards came up with a solution that would have done a kindergartner proud: first they purchased an AP teletype machine (the kind with the clattering printer and bells). Then they jacked it into the wall of Levin’s office. Then they pointed a camera at it. The result: Headline News, circa Nixon. And a love affair–between Jerry Levin and technology. “I thought,” he said last week, “‘This is terrific.'” Levin had become a geek.

In the nearly 30 years that followed, Levin rose to become one of the most powerful men in media, just as Case has rocketed to a similar throne in cyberspace. Their union last week was cemented by a number trailed by so many zeros that it was easy to miss the fact that more than anything, this was a marriage of two protogeeks. Case, who began his romance with computers by building his own Kaypro PC, and Levin, whose love of media began when he was tucked in bed as a child, snug as a bug, he recalls, listening to the Lux Radio Theater as he fell asleep.

Some looked at the two men onstage at their New York City press conference and concluded that this was a collision: the 60-year-old, scholarly and reserved titan with the 41-year-old embodiment of everything Net. But though they have different manners and tastes (Levin loves Camus’s The Stranger; Case, Toffler’s Third Wave), there is a marked similarity. Levin helped create the American cable industry, Case the nation’s mass online connection. Each has survived failure. Last week their story looked new, but each man will tell you it’s also as old as the history of technology. Geek meets geek. Geeks fall in love. Geeks get married. At AOL’s headquarters in Dulles, Va., and at Time Warner’s in Manhattan, there was hope that these nerd nuptials might join the ranks of other great pocket-protector romances: Hewlett and Packard, Allen and Gates. But there was also a worry that these two might somehow turn their partnership into a knife fight. “This is,” both men kept insisting last week, “a merger of equals.” People thought they were talking about their companies. They were talking about each other–for better or worse.

What perhaps astonished people most about last week’s deal was that AOL could be buying Time Warner. But that is the nature of the Internet economy, making the impossible (or even the implausible) possible. The speed of the Net has served to condense into Case’s short business life–he founded AOL 15 years ago–several lifetimes’ worth of hardscrabble learning. AOL has had plenty of near death experiences–the launch of Microsoft’s online service in 1995, the day AOL’s entire service blipped off-line in 1996, the easily won reputation as America On Hold after the service opened itself up to unlimited usage. You might argue that Case was in a no-lose situation, riding the biggest boom in the history of booms. But the hollow shells of other consumer online services–eWorld, Delphi, GEnie–are a reminder that this business is as lethal as they come.

Case has been selling almost since he left the crib. He was the middle of three boys who tagged behind an older sister and shared a passion for starting businesses, even going so far as to call their bedrooms “offices.” (You can imagine the formative entrepreneurial scolding at the Case house: “Steve, go to your office!”) Case’s father was a Hawaii power-lawyer; his mom taught at the school her kids attended. Case’s older brother Dan was always regarded as the family comet: Princeton, Rhodes scholarship, prestigious investment bank.

Case began his professional life as cannon fodder at Procter & Gamble, an assistant brand manager working on products such as Abound!, a failed, wipe-on hair cleanser. Case couldn’t hack the glacial pace at P&G. So in 1983, after an introduction from brother Dan, he jumped to a start-up called Control Video Corp., which was perfecting the “can’t lose” idea of shilling TV-top boxes that would download and play video games over telephone lines. The idea bombed. But a bit of financial legerdemain turned the firm into Quantum Computer Services, which ran an online network for Commodore 64 computer users, and Case stuck around.

The odds were nearly as long as they had been for CVC. Video games, after all, were an established market. Who had ever heard of anyone using a PC, let alone cranking into a copper-wire phone system to talk with other computers? But Case saw at Quantum that the applications that really suckered the geeks (and you had to be a serious geek to own a Commodore 64) were the ones that let them chatter. And as Quantum added customers (and expanded to Apple users), it began to look as much like a communications company as a technology firm. Thousands, then millions of customers began to rely on Case’s service, renamed America Online, in the same way they counted on their telephones.

Obvious as all this success seemed to Case–everyone was going to get online, right?–it was still a hard sell everywhere from Wall Street to, at times, his own boardroom. AOL spent more than $1 billion building its system. From a historical perspective this wasn’t aberrant; communications networks always swam deeply in the red before emerging into profit. It was those insane costs that prompted the U.S. government to give Ma Bell her monopoly. But no one was giving Case a monopoly over anything. He’d have to fight for every cent.

Levin’s conversion to the wired future came in 1975, although the wires were different then. He was working for a marginal Time Inc. division called Home Box Office. The HBO idea–to zap movies right into the living rooms of average Americans–was simple, easy to understand and almost universally regarded as nuts. This was particularly true since HBO was incinerating money. Levin knew he had to gamble, and in a move that foreshadowed a liking for big deals, he persuaded Time Inc.’s conservative board to burn another $7.5 million for a slot on the very first communications satellite so that HBO could be broadcast nationwide. “What do cable guys know about the space business?” skeptics on the board asked Levin. To them, space meant NASA: engineers with buzz cuts, white short-sleeved shirts and clip-on ties. How did this guy with the disco moustache and the Shaft-era hairdo plan on paying off a satellite? “Somewhere in the Time archives there is probably a memo from [the chairman] saying, ‘Who is this guy in the double-knit suit?'” Levin recalled last week. “But I knew I would win. It was the force of the idea.”

The idea turned out to be right. Overnight, HBO went from cash incinerator to cash machine. The movie channel became a dominant force in the entertainment business, leading a young Paramount executive named Barry Diller to moan in 1983 that “if HBO and Time Inc. go unchecked, the motion-picture industry will be under total control of one company in less than five years.” But even more important, it showed that consumers were willing to pay to subscribe for something that had always been given away free. Around the nation, small cable operators raced to copy Levin’s idea. In Atlanta, Ted Turner read about Levin’s exploits and borrowed the idea for a sat channel of his own, the SuperStation.

It was a kind of media trope last week to quote an anonymous Time Warner insider as saying that Levin had had a “charisma bypass.” Levin is a quiet man. He doesn’t have the voluble energy of a Mike Armstrong, the CEO of AT&T, or the raging fire of IBM’s Gerstner. But Levin’s brainpower, delivered first from a pedestal as Time Warner’s strategist and futurist, has commanded the board of directors’ attention. And so have his flameouts, riveting in the same way a NASCAR wreck is–all wheels, fire and smoking rubble. His track record, after all, includes half a dozen spectacularly costly crashes. Among them: TV-Cable Week ($47 million), a TV-information service called Teletext ($30 million) and, most famous, the Full Service Network in Orlando, Fla. (in excess of $100 million). You don’t screw up like that and survive if you’re just a waxen flack. But Levin’s legacy also includes a number of sharp, Net-speed pivots when his business has demanded them. He considered, for instance, selling Time Warner’s stake in Turner Broadcasting just months before deciding it was actually in the best interest of both firms to arrange a merger.

In the process, Levin has made an amount of money that might be considered excessive. (TIME founder Henry Luce liked to say that the profit motive, while “useful” was “not noble.”) In 1998, Levin pocketed more than $250 million, including options–nailing in one year roughly twice what Luce was worth when he died in 1967. In Levin’s mind, it is simply a case of high risk, high reward. And though Time Warner shares have had a bumpy ride, they’ve outgained the Dow–412% to 236%–since Levin took over in 1993.

In speeches, Levin likes to tell listeners about a game that H.G. Wells invented called Cheat the Prophet. Here’s how to play: gather the smartest group of futurists you can find, ask them to describe the future, proceed to go out and undertake everything the futurists consider unthinkable or downright laughable. That’s been Levin’s career–and Case’s. For decades the idea that every home in America would be wired with cable–or connected to a subscription online service–seemed unreasonable and even laughable in many minds.

A couple of days after the merger, Levin flew down to AOL’s offices on one of the Time Warner jets for a meeting and a Case-led tour of the firm’s network operations center. As Case walked Levin through the NORAD-like setup, he couldn’t resist a dig. “How many simultaneous users did we have last night?” he shouted to one techie. “One point five million,” came the answer. Case: “Hey, that beats CNN.” Wink. Case explained to Levin how–and why–AOL’s networks are built to be faster than regular Internet service providers. “How do you do that?” Levin asked. “Caching and peering,” a techie answered. “What’s that?” Levin asked about peering. Case explained how the service has direct ties into Net backbones to speed what AOL users see. Levin: “No one else is doing that? Not AT&T?” No, said Case.

On this tour, you could also see a company in the making. Case teaching Levin about instant messaging: the firm delivers 100 million e-mail messages a day–but more than a billion instant messages. Case argues that that’s evidence of a whole new medium. Levin listens and suggests that it might be harnessed to support Time Warner products. An AOL techie points out that they can tell when popular programs come on TV by watching the network traffic fall as users log off. “You could use this to tell when it was time to kill a show,” the techie suggests. “We can see when Friends’ ratings are falling,” he adds, referring to a Warner Bros.-produced show. “Not Friends,” Levin corrects as Case listens in. “ER, maybe.”

And as Levin and Case walked around, it was clear each man had his own sense of cyber-age manners. Upon arriving at a door, Case would charge through first. Levin would politely hold the door, not only for the person after him, but for everyone else in the party. It wasn’t a gesture of submission. No one would have seen him and said, “Oh, man, Jerry was holding the door for people!” Instead it was the kind of thing Levin seemed to feel would be expected of a Time Warner executive. In Case’s world, the polite thing to do is get through the door and out of the way. In Levin’s, it’s to hold it for others. But the two men do seem to have the same basic instinct: Get through the door!

Levin traces at least part of his get-there-now heritage to an old boss, David Lilienthal, one of the prototypical “great men” of the 20th century. A tall, owlish Midwesterner, Lilienthal rose to become an adviser to Presidents from Roosevelt through Carter, chairman of the Tennessee Valley Authority and then head of the Atomic Energy Commission after World War II. In 1955 he started a small firm called Development and Resources Corp. to bring power, water and communications to the developing world. In 1967, bored after just four years as a lawyer, 28-year-old Levin joined DRC and became Lilienthal’s protege. In 1971, Levin spent a year in Iran working for DRC, helping bring water to the Shah’s deserts. (Distributing water, he would later observe, wasn’t too different from distributing media.)

Lilienthal was both a passionately optimistic man and a vivid realist about his plan to wire the world–a Steve Case of the electrical era. He had seen that the simple act of stringing a wire from a country road in Tennessee to the shack of a sharecropper could change that family’s fortunes forever. Lilienthal died in 1981, before the idea of interactive communications became a reality. But after a long career, he had these words for men who would change the world: “The manager-leader of the future should combine in one personality the robust, realistic quality of the man of action with the insight of the artist, the religious leader, the poet, who explains man to himself. The man of action alone or the man of contemplation alone will not be enough; these two qualities together are required.” That, plus $350 billion, may yet be enough to change the world.