Time Inc.'s AOL Problem
Emerging from — and covering — a "train wreck" of a merger.
A joke circulating in the skyscraper headquarters of the house that Luce built: "How many Time Inc. editors does it take to screw in a lightbulb?" The answer: "A hundred. One to screw it in and ninety-nine to complain about how much better things were before AOL came along."
As the world now knows, the dot-com bubble popped just as Time Warner — parent of the Time Inc. magazine division — was being absorbed by AOL in the biggest media deal in history. The stock price of the combined company declined more than 75 percent as Wall Street went into a tailspin and advertising swooned. And the final insult: the world's most illustrious magazine company — founded in the 1920s by Henry Robinson Luce, the moralistic son of Presbyterian missionaries — is part of a corporation under scrutiny by federal regulators for possibly cooking its books to dupe Time Warner into agreeing to the deal.
But life goes on at Time Inc. Well, not Life, one of Henry Luce's original family jewels, which expired in 2000 after several incarnations. Time goes on, and so do Fortune, Sports Illustrated, People, Money, Entertainment Weekly, InStyle, Real Simple. And that's just a handful of the 140 titles (accounting for almost 300 million readers), which include many you've probably never heard of: Horse & Hound, Rugby World, Baby Talk, Bird Keeper, Angler's Mail. They help Time Inc., which boasts ten consecutive years of earnings growth, generate 12 percent of the parent company's current revenues and almost a quarter of the total advertising revenue of all U.S. consumer magazines. People, Sports Illustrated, and Time were the one-two-three ad revenue producers in the U.S. in 2001. Time, for its part, owns a 44 percent share of the newsweekly market in a three-horse race with Newsweek and U.S. News.
With the AOL-Time Warner nuptials two years old, and a possible divorce being whispered, the questions become: Has the magazine division's journalism been affected by the takeover? Are magazines like Time and Fortune doing an honest job of covering the company's conspicuous woes? What's the effect on Time Inc. of changes in top management, as old-media people move back into the power vacuum left by the youthful AOL arrivistes whose vision of a cyber-Utopia proved fatally flawed?
From where Norman Pearlstine sits as editor-in-chief of all Time Inc. magazines, the AOL deal has had no effect on the division's journalism. "We've had no interference from anyone at AOL," he says. "I have never had a conversation with anyone at AOL Time Warner about editorial budget, nor have I felt the guiding hand of new corporate overlords." The magazine division has closely monitored its costs, he says, but that's due to the advertising slump, not the AOL merger. In one cost-cutting tactic in 2001, 535 employees over fifty who had fifteen consecutive years with the company were offered early retirement, and about 300 took it.
Time Inc.'s coverage of AOL-TW has, meanwhile, been aggressive and objective. Example: On September 2, Fortune placed Steve Case's AOL number three on a list of "The Greedy Bunch" — firms whose stock had dropped 75 percent or more whose top officers had sold company stock between January 1999 and May 2002. The article pointed to the "not-so-secret dirty secret" that people like Case cashed in "hundreds of millions of dollars worth of stock . . . at vastly inflated prices. When the bubble burst, their shareholders were left holding the bag. But, hey, they had theirs."
That same issue of Fortune called the AOL-Time Warner deal "one of the great train wrecks in corporate history." One article saw "trouble on almost every conceivable front," claimed that morale in the eighteen-thousand-employee company is "awful," pointed out that AOL-TW is "a house plagued by turf wars and dissension" and that its shareholders "are in a murderous mood." Insiders, Fortune announced, were saying "to hell with grandiose visions of 'convergence'" and predicting that the company's best hope was to "wring more money" out of AOL's 35 million subscribers worldwide.
In its July 29 issue, Time wrote that the AOL invaders were "youthful, cocky and ostentatiously wealthy" from their stock options, and that they had "swooped down on Time Warner as if they held the secrets to some new business reality. They quickly alienated top executives at Time Warner and, worse, produced little in the way of results." Earlier, in its April 22 issue, Time called the decline in AOL-TW value a "meltdown," and said that Time Warner division heads were wondering, "Why was a solid company sold for overinflated AOL stock?"
In brief, Time Inc. editors and writers have yanked their owner's beard, confident that AOL wouldn't dare be seen meddling with journalists' need to tell the straight story. Marc Gunther, Fortune's media reporter, remembers a column he wrote for the January 8, 2001, issue in which he called CNN's programs and people "second rate." Several editors told him that was strong language to describe a cable news network owned by Time Warner. They asked if he would tone down the rhetoric. Gunther responded that he really thought CNN was third rate; he was giving it a break. The column ran as written.
Actually, Time Inc. had a rehearsal in 1989 for how to cover businesses that are part of the family. That's when Time Inc. hooked up with Warner Communications — merchants of movies, TV shows, recordings, books — to avert a hostile takeover by Paramount. Warner's entertainment moguls assumed they'd get a free pass from the magazines' reviewers, critics, and reporters — and in fact, Warner creations (e.g. Batman) did show up now and again on Time Inc. covers. But editors were wary of efforts to co-opt them.
Ray Cave, who'd been editor of Time since 1977, was fired when he was unable to disguise his dismay and foreboding over the pact with Warner. Deep budget cuts in the years preceding the deal already were affecting Time Inc.'s journalism, and the trend accelerated in the 1990s. Luce's company was dedicated to journalism, and he felt you could make a nickel doing it, says Cave. "But the journalistic responsibility came well ahead of the nickel." Cave is at pains not to criticize his successors who, he feels, did what they had to do to meet profit goals — Time cover stories on celebrities, movies, money, sex, leisure-time activities — often at the expense of important foreign and domestic stories. "Once you're the victim of Wall Street's quarterly demands," he says, "you have to do all kinds of things that the old Time Inc. never would have dreamed of doing. The pressure is unavoidable."
Time Inc. gets generally high marks from many of its former top executives. Marshall Loeb, editor of Fortune from 1986 to 1994 (and, later, of cjr), says he "never encountered any pressure whatsoever to deviate from the cherished church-state separation." More recently, however, Time Inc.'s Alabama-based Southern Progress Corp. mini-chain of seven titles has routinely given free editorial coverage to many of its advertisers: lifestyle products, furniture, travel, home decoration. (An October 1 Wall Street Journal headline: Fruitful Union: Wedding 'Church' and 'State' Works At Time Inc. Unit).
Henry Luce's eighty-year-old magazine company has evolved into something he wouldn't recognize — gargantuan, uncomfortable in the thrall of the seventeen-year-old AOL, whose culture is vastly different from its own. "Most people at Time Inc. think the AOL relationship is a nightmare," says Samir Husni, a professor of journalism at the University of Mississippi. "They're waiting to wake up and find that it has gone away." Says Alan Brinkley, a professor of history at Columbia who is writing a book on Luce: "The idea that you had to be acquired by a still unproven new-media company was a ludicrous miscalculation."
The related question, says Tom Wolzien, an analyst at Sanford Bernstein, is: Was it a dumb deal or a dishonest deal? Or both? Those choices exhaust the possibilities. We won't know until the government completes its investigation. As cjr goes to press, Stephen M. Case, 44, the chairman of AOL-TW, is under pressure from shareholders and members of his board to resign. And in recent months, the unthinkable has been mentioned by stock analysts: an eventual break-up of AOL-TW (revenue: $38.2 billion) into its constituent elements — films, cable, TV networks, online, music, publishing — which would have greater value singly than the colossus as it exists.
These days, Time's influence with the public and with policy makers is vastly less than in its first four decades, as sources of news and opinion have proliferated in the latter half of what Luce liked to call the American Century. (Case, in a reference to Luce, calls the 2000s, perhaps too hopefully, the Internet Century.) During its first four decades, Time often operated outside the bounds of most journalistic standards of objectivity that we honor today. Henry Luce — Yale wasp and propagandist for America's divine right to export its values — announced unrepentantly: "I am biased in favor of God, the Republican party, and free enterprise." He once told a colleague that from first page to last, "what comes out has to reflect my view and that's the way it is."
And he had strong views — on China (a fervent advocate of the corrupt Nationalist government of Chiang Kai Shek), on Roosevelt (hated him), on Willkie, Dewey, Eisenhower (strong supporter), and, until proven mistaken, on Vietnam (backed the hardliners). "Luce never pretended that any of his magazines would ever be objective," says Alan Brinkley. "On issues he cared passionately about, he would brook no deviation from the position he held."
By the time Luce died, the image of Time Inc. as a wasp redoubt and a platform for the boss's conceits was fading. Its managers began operating the company with one eye on Wall Street — which Luce never did — as soon as its shares began trading on the New York Stock Exchange in 1964. Growth, profits, and shareholder value suddenly were front and center. Sports Illustrated had arrived in 1954, although it made no profit for twelve years. Money (1972) and People (1974) were strong building blocks on the road to expansion. The biggest pothole on that road was an axle-buster called TV-Cable Week, a 1983 start-up designed to beat TV Guide at its own game with comprehensive, system-specific listings. It was a five-year, $100 million commitment. Five and a half months and $47 million later, TV-Cable Week was dead, a victim of an execrably poor business plan and Keystone Kops mismanagement.
When the founder died in 1967, Time Inc. was publishing only four titles. An aggressive schedule of start-ups in recent years (InStyle, Teen People, Real Simple) along with the purchase in 2000 of Times Mirror's magazines (Popular Science, Field & Stream, Golf Magazine) for $143 million, and the 2001 acquisition for $1.56 billion of IPC Media, Britain's largest publisher of consumer magazines, brings the grand total to 140. Doubtless more are to come as Time Inc.'s overseers — editor-in-chief Pearlstine, 60, and his putative successor, the former Fortune editor John Huey, 54, along with chairwoman Ann Moore, 52 — study the lucrative beer-and-babes category dominated by Maxim (2.6 million), and ponder a greater presence in women's and shelter magazines. Moore, a Time Inker during her entire publishing career, which began in 1979, is the only woman to have achieved such clout in a company which, in Henry Luce's lifetime, and well after, had zero women in high places — not to mention zero Jews at the top until 1968, when the legendary Henry Anatole Grunwald became editor of Time and later editor-in-chief of Time Inc.
In a significant reshuffling of responsibilities in July 2001, Pearlstine anointed Huey his second-in-command — editorial director of the division with special responsibility for all the weekly magazines as well as the five business titles: Fortune, Money, Business 2.0, FSB, and Mutual Funds. This October, Mutual Funds died, a victim of anemic advertising, and so did the two-year-old Sports Illustrated Women. Pearlstine has a contract running through 2003 and may or may not opt to remain in place. Huey is "clearly my heir apparent," Pearlstine says. "Although I don't think I get to pick my successor, that would be my recommendation."
Since Huey became editorial director, big changes have come fast among the top editors: Terry McDonnell to Sports Illustrated; Martha Nelson to People; Rick Tetzeli to Entertainment Weekly. Jim Kelly had taken over Time in January 2001.
But far more revealing than any rearranging of the furniture inside Time Inc. was an appointment in July that resounded throughout the company and signaled a shift in the balance of power between the new-media, wet-behind-the-ears AOL intruders and the traditional print-and-paper, proud and experienced old-media publishing hands who wore Luce's mantle. In a restructuring at the top, Don Logan, 58, chairman of Time Inc. (and a high executive at the division since joining Time Warner in 1992), was appointed by Richard D. Parsons, the ceo of AOL-TW (himself a holdover from Time Warner), to a newly created position: chairman of an umbrella unit, the New Media & Communications Group, which makes him czar of both AOL and Time Inc., plus a few other divisions.
Logan, a bass-fishing good ol' boy from Alabama, is widely held to be the best publishing executive in America, and one with a famous distrust for cyber-business. (Time Inc.'s Pathfinder project, a $100 million 1990s failed effort to make money on the Web, gave "new definition to the scientific term 'black hole,'" Logan said at the time.) Under his leadership, Time Inc. delivered forty-one consecutive quarters of year-over-year earnings growth. "Logan inspired a lot of creativity," says Steve Cohn, editor of Media Industry Newsletter. "Time Inc. blossomed under him and became an even greater cash cow than it was before."
Corporate history's biggest media train wreck will be studied in business schools for generations. Meanwhile, the journalists in the house that Luce built have a terrific story to cover right under their own roof.
