AOL's Pittman Sees a Synergistic Future

Author:
Updated:
Original:

New York—Halfway through an interview at Bob Pittman's Rockefeller Center office, his computer says, "Goodbye." Apparently AOL Time Warner Inc.'s co-chief operating officer doesn't have an America Online connection that stays on when he's away from the keyboard.

You might have heard that AOL Time Warner recently switched all of its employees to AOL's electronic-mail service. That's just a sliver of the synergies that Pittman is trying to put in place as the company looks to cut costs and redundancies in hopes of hitting the $11 billion in cash flow it told Wall Street it would post this year.

Before AOL's landmark merger with Time Warner Inc. last year, Time Warner divisions operated in separate silos. In seeking carriage on Time Warner Cable systems, start-up Turner Broadcasting Inc. networks like CNNfn had to wait out in the cold with the rest of the hopefuls. Pittman has knocked down those barriers. "Everybody has two responsibilities — one for their company and one for the running of the overall company," he says.

Multichannel News national editor Steve Donohue and editor in chief Marianne Paskowski met with Pittman on May 15 to get his take on that AOL synergy, and many other topics. An edited transcript follows:

MCN: How has Time Warner Cable benefited from the merger? Can you show concrete examples of how the cable division is taking advantage of this?

Pittman:
AOL is beginning to sell cable subscriptions in the Time Warner Cable franchise areas. Cost of acquisition to the company is zero. That's very positive.

When we start doing video-on-demand, subscription video-on-demand, all of that product and the expertise for it really comes out of other divisions than the cable company. It's very important to really make that a priority when we start looking at the power of multiple ISPs and tracking the avenue for data services. The data-connectivity business is about a $60 billion business.

Cable has got about $35 billion of the $60 billion on the television side. They've got about $2 billion of the $60 billion on the data side — huge upside. Cable, of all of our businesses, probably has the biggest upside potential. Cable, if they crack a couple of these things, you literally transform the earnings potential of that business which is very exciting and therefore gets a lot of attention from the company.

MCN: But to date, it's only using the online service to market cable service in AOL markets. That's all you've done so far?

Pittman:
We're selling advertising. A lot of back-room stuff is being shared. We're running from HR through corporate research stuff, so there are lots of pieces in there that are happening. What's nice is it's beginning to be a way of life. It's almost not on the list anymore … it's sort of the exception: Why wouldn't you be sharing something that already exists in the company?

MCN: Have you signed long-term contracts with Time Warner Cable's leadership team, including [CEO] Joe Collins, [senior vice president of programming] Fred Dressler and [president] Glenn Britt?

Pittman:
I don't know all of that, because it's not my area of responsibility here. I assume that the key people are here. And again, if you come from the AOL side, we don't come from a culture of contracts. We come from a culture of giving people huge incentives in the success of the company. And they are here. When you look at folks off the AOL side, we're all here because we're shareholders of the company.

MCN: Then can we presume that they're incented to stay because they're still here?

Pittman:
I hope they're here because it's the most stimulating, exciting place they could be. And we're all here, I think, for that reason. It's unusual to find a company with so many folks who you would have expected under normal conditions to have said, 'Well, that's enough for my career.' But people are here because there's just no more exciting place or time to be than right now and right here.

MCN: One thing we've noticed since AOL officially took over is that the carriage deals seem to be running more quickly than they did when Time Warner Cable was standing alone. To get though Fred Dressler, it was a long way — Oxygen being a case in point. AOL gets its merger approved and, all of a sudden, Oxygen is on. What has changed in the carriage-placement arena, if anything? Or was it your relationship with [Oxygen CEO] Gerry [Laybourne]? Was Oxygen the exception or the rule?

Pittman:
I think you'd have to talk to Joe [Collins] because my view is that the folks who run the companies run the companies. And what we've added to it is a knowledge base and a mechanism for them to function as an operating team running the company, and we come together about every two weeks as a group. We talk in between.

Everybody has two responsibilities — one for their company and one for the running of the overall company. And Joe [Collins] was on that, and I think the only thing that's probably changed, not only with Joe, but with everybody, is that now they are looking at a lot more issues than they looked at before.

MCN: So it's micro-macro, and although it's been widely reported that AOL really did negotiate this deal with Oxygen, are you saying that that's not the case?

Pittman:
Joe runs the cable company. Now I think in the Oxygen deal, it was a deal where there were a couple of pieces to it, and that increasingly is the way we do business. But what's nice is we now have a mechanism for everybody to work together and come together for those sorts of opportunities, so you don't have to pass them up. What outsiders don't want to do is … the hard work of trying to put all the pieces together inside our company. And if we're going to be good partners for people outside of this company, we have to take the responsibility of putting the pieces together for them.

MCN: So you're not going to make programming decisions for Time Warner Cable?

Pittman:
I'm not going to make programming decisions. If I do, you have permission to come hit me in the head with a board. [Laughter.]

MCN: Time Warner Cable used to emphasize that it wouldn't cut any of the Turner networks any breaks, like CNNfn or CNN/SI. Since the merger, that's changed — Time Warner Cable has announced a bigger commitment to CNN Money. Why the change in strategy?

Pittman:
I wasn't here before, so I can't speak to any of that, and I'm not sure they ever said that, because no one ever told me that.

MCN: They did.

Pittman:
They haven't told me, so I can't operate from that basis. I'll let you make your own assumptions. But I think everybody in the company understands it's one company. If we have a network worthy of us investing money in, clearly there ought to be a network we're behind throughout the entire company. And if it's not good enough to warrant support, then we ought not be doing it.

MCN: The WB said today that several of its series will be running on Turner Network Television. I wonder what the catalyst is. That could have happened before AOL came around. What did you bring to make that happen? It didn't happen before.

Pittman:
I think part of what makes it happen is the reason the companies merged. And I'm going to put words in Jerry Levin's mouth, but I think as Jerry looked at the company, Jerry had for 10 years gotten great growth out of this company by looking at each business, feeding resources to those businesses, getting strong, empowered managers to run the business. I think as Jerry looked at, 'Where do we go the next 10 years?' he said, you know, the upside of the company and the really untapped reservoir of value is to keep the businesses focused on their business, but to add an element that allows us to use the cross-company assets in some sort of logical, structured, replicable way.

I think an important part of that was when other pieces were missing was what AOL has. And, indeed, AOL is a business that cuts across almost all of the other businesses. I think it was a business that Jerry determined he couldn't build, that AOL had a very strong position, great assets.

And therefore, I think it led to the merger. The thinking you're seeing in the operations now was actually the thinking that led to the merger and one of our mandates as we began to put the companies together was to operate as one company, not as a holding company — not as a series of companies.

MCN: When asked if he was going to retire, Gerald Levin recently said, 'You will not have to carry me out of AOL Time Warner.' Has Mr. Levin told you when he plans to retire?

Pittman:
We don't talk about retirement. I think all of us are working way too hard, probably all of us would like to retire most days, real early. So we are hoping Jerry stays a long, long time.

You're looking at a bunch of senior managers here who are on the backside of their ambition curve, and I think most of us have been very fortunate in life. We're not working for money. We're working at this point because it's incredibly stimulating. We feel an obligation to the employees who have helped us achieve a great degree of the success we've had, and we enjoy each other's company. And we enjoy coming to work, and we enjoy the challenges we have, and that's nirvana if you're a manager.

MCN: So what is the succession plan?

Pittman:
I have no idea.

MCN: Clearly it's not going to be Ted Turner. Did Ted Turner not fit in this new corporate culture? We've all read
The New Yorker
, we've seen horrible things about how close to suicide he was. He was blown out [of AOL Time Warner] a year ago.

Pittman:
Well, I can't speak for Ted. I like Ted a lot. I think Ted is very valuable to this company. Ted does not play in a conventional way, he never has. That's been Ted's advantage in every business situation he's been in. I competed with Ted 20 years ago. He was probably the most fierce competitor I have ever seen in my life.

And, as a matter of fact, the first time we put the company together, Ted said, 'You know, I've always liked you, I've always known you, but I didn't want to be your friend because I don't like to be friends with competitors.' It sure is nice to be able to be friends now. And I find Ted's input very valuable to me. I do try and make a point to spend time with Ted on a regular basis and I get a lot out of it.

So again I can't speak for Ted and wouldn't begin to, and I think if you want to talk about Ted, you probably have to talk to Ted.

MCN: Are you concerned about a brain drain at the company, especially on the cable side, with the departure of some key veterans, including Turner, [former Time Warner chief financial officer] Richard Bressler, [former TBS Inc. CEO] Terry McGuirk and [former TBS Inc. president] Steve Heyer?

Pittman
:
No. Terry wanted to step back in responsibilities.

Terry stayed with the company. He just was not willing at this point in his life to give it the kind of time that it took to be the CEO, but he said, 'I'll stay, I'll stick around, I love the company,' which he did.

I think Steve had a wonderful opportunity at [The] Coca-Cola [Co.], and he decided to pursue it. And Rich has not been in the cable company, and Rich has been a great guy in the company. He's a good friend.

Out of 80,000 employees, that's pretty remarkable. The company has gone through a merger like this, with the kind of radical reshaping of how we operate the company, and we've had so few people leave.

MCN: Do you know your percentage of turnover?

Pittman:
I would guess probably turnover has been low. But part of that is because of the economy. Remember, 18 months ago, we had people who were leaving AOL who had $20 million in unvested options and didn't want to stick around and get them because they wanted to be billionaires. Times have changed.

The laws of business have returned and sanity has returned, so I think that's probably good because within the laws of sanity, there is probably no better place to work than here.

MCN: The ad market and the economy are a lot different today than in January 2000, when you predicted you would generate $11 billion in [earnings before interest, taxes, depreciation and amortization] in 2001. You've cut costs and laid off thousands of employees, but how do you know that you're not cutting into the bone, and how do you know when to stop cutting? What kind of controls do you have in place?

Pittman:
I don't view us as cutting a lot. As a matter of fact … if you look at most corporate mergers of some size, there's been remarkably little cutting of people here. The only cuts that came out of the merger are the cuts that come from the duplication of the two organizations, because what you don't want is to create some nightmarish bureaucracy that comes from having too many people competing for one job. You should make the decision about who's got the job and move on, and no organization works better. We did that. Anything else that has to do with anybody leaving the company has to do with sort of the normal course of business.

MCN: Do you need to cut more to hit the $11 billion [in EBITDA], or will you have to trim that estimate?

Pittman:
No. Look, we're committed to the $11 billion, and by the way, don't get confused and think this company is so simplistic that everything we do generates $11 billion. Everything we do to make money generates a lot more than $11 billion. Then we take some of that money and invest it in money-losing operations, but they're important to do, because they're going to be important to us five years out, 10 years out, three years out.

And so if you really want to be a continual earnings machine, you not only have to be running your business well for today, but you've also got to have some extra money to invest in projects for the future. International expansion — [even though many such projects] on the AOL side are losing money. You invest in the digital revolution: AOL Anywhere.

If we wanted to generate some money, we could cut all those out today. We wouldn't be happy in five years. So when you look at the $11 billion, what we have done is we've said the $11 billion is sacred because it's the right return for our investors. That's what we should earn. We're putting it aside.

Now we got this rest of the money. We have to spend it in a very smart, intelligent way on the projects that are important to us. Then we have to be realistic about what really is important to us, make sure we're not doing stuff because it's neat or fun, but do stuff because it's truly important to the future of the business. So we're forcing all of the people in this company to think not only about today but tomorrow, and not think about today as different from long term.

The short term is a steppingstone to the future. You get to the future by stepping every quarter on a path to lead to the future.

MCN: Let's talk about some of these steps, some of these investments and acquisitions. AOL Time Warner is a big company. There's nothing else like you. Would you even want an NBC?

Pittman:
I think we've got the right assets for us today. I can't tell you about tomorrow, but I will tell you, we have people who are looking at every plan we've got, saying 'What are the holes? What do we need to add? What do we need to grow?'

We've announced certain things we want. And our view is, it's always a make-buy decision. We also want to look at, 'What's the trend line going forward?' And there are some businesses that are big today, but if you looked at the trend line, there is no doubt where they are heading. We're a growth company. We can't afford to get into dying businesses or businesses that can't be turned into something.

MCN: So are you saying you're not that interested in NBC?

Pittman:
No, I would never make a comment about what we're interested in, what we're not interested in. And if I told you what I'm not interested in, then that'd give you a big clue about what we were interested in.

MCN: Let's talk about what you are interested in — music.

Pittman:
We are very interested in digital music. We think the economics for the record business are terrific. With AOL and the music company and cable, we have wonderful assets to deliver music, and [for] music really to be the great experience [it] does have to be broadband.

And so I'm very excited about that business. I think on its own, it's a good business. The economics are wonderful for the record companies. We have a marvelous music publishing business, which benefits through this world as well.

MCN: Do you want to compete with MTV: Music Television?

Pittman:
I don't think we want to compete with anybody. I think we're not looking at other people's assets. We're not looking at other people's businesses.

I hope what this company is, is a consumer-focused company. What we continue to look at is: Who is that consumer, what are the opportunities to serve them, are there areas that are underserved, are there areas that with our assets, we can serve them as well or better, or fill in a void?

And those are the kinds of decisions we make. We don't look at a list of everybody else's assets and say, 'Which one of those would I like to have? Do we want to go compete with them?' Take that equation, turn it upside down, and say, 'Well, what we really do is spend our time looking at consumers and say are we serving the consumer's need with our assets as well as we can.' And I'll tell you the answer is always no, because we can always do more. But I think we're doing a pretty darn good job through most of these major areas.

MCN: How would you define the Time Warner Cable broadband strategy? You've got a lot of pieces going on. You've got investments in things like Rearden [Steel Technologies] and everything else.

Pittman:
I think we do a lot of alliances with people. We partner, we buy, we make. But all those are tactical. The real strategy we're doing in terms of the broadband — you want to talk cable or AOL?

MCN: Both.

Pittman:
The vision is probably longer-term, that every home in America has a home network in it. We are moving right now in the PC business from a PC in the household to a PC for every member of the household, meaning they want to be on simultaneously. And so what we think will happen is that there will be a home network. Cable will probably be the ideal deliverer of that home network. So we are excited about the potential for — and the possibility because it exists today, the technology is here. [Time Warner Cable CEO] Joe Collins was brilliant. Over the last 10 years, he's been building an infrastructure toward this end. It's here. Now we're taking advantage of that infrastructure.

What is AOL? AOL is a life-management device. It's a service that helps you run your life. It replaces not TV. It replaces stopping at the mailbox every night, getting your mail out of the mailbox, bringing it in, putting it in stacks. These are bills I'll pay today. These bills I'll pay next month. These are bills I'm going to try and avoid. These are my college applications for the kids. Here's the summer vacation pile. Oh by the way, I have some magnets on the refrigerator. I have some Post-Its. When you get the PC, that [behavior] changes.

Now, you say, from the AOL perspective, what good is broadband? It can enable more services. It can officially allow every member of the household to be on simultaneously. It can talk to other devices going to the AOL Anywhere strategy, which is now that I love my home-management device, I don't want to have to come home and go to that room it's in to get to it. I want to be able to get to it anywhere I am, meaning handheld devices, something in the car, at work.

And that's really the explanation of all this. Why did we buy Mapquest and Moviefone, and why did we really spend so much money on Digital City? Because that's the e-mail for the wireless device. If I'm standing on the street corner, I don't want to do my e-mail. What I want to know is where am I, what movie is playing when, where's the restaurant, what's the directions? And so we bought and built the key pieces for that.

MCN: If I could drill down to some specifics.

Pittman:
Sure. You don't think I'm giving you secrets, do you?

MCN: No.

Pittman:
I don't want to give out too many specifics here.

MCN: If you market a version of AOL TV to retailers that can be connected to coaxial cable, will cable subscribers in non-Time Warner Cable markets be able to use it in place of a set-top from their local operator?

Pittman:
I don't think the AOL TV box you see today is a replacement for a set-top box. What we're putting out today is clearly a first-generation, early-adopter kind of box. We're learning a lot about what the usage is. We're very realistic that consumers adopt new products at a gradual rate, not an accelerated rate.

Sometimes you thank God for that, and sometimes you are upset about it, but that's the reality. And I've been through enough of these to know how it happens. But I think the box today really is a navigation box — and you can use it with or without cable or satellite. You can use it to help you improve the experience of watching TV, and that's really the goal of it.

MCN: What will the next box be?

Pittman:
I'm not going to tell you our secrets yet. As we learn more and more about what goes on, we will refine what the boxes are. I think you'll probably see, obviously, some of that functionality going into other boxes or shared boxes.

MCN: How are you going to convert your online subscribers to high-speed subscribers, either through a Road Runner or a broadband version of AOL?

Pittman:
My expectation is not only AOL, but every ISP will sell their own customers broadband as an add-on. Remember, it's not a conversion to broadband. It's an add-on. You're not giving up narrowband. You're not giving up 28.8 [Kbps]. You're not giving up 56K.

With AOL, we'll either sell you a complete package or you can run AOL over some other connection you have [for $9.95 per month].

And for AOL, we're sort of agnostic [with distribution on satellite, cable and DSL].

There are millions of people running AOL over somebody's broadband connection — and over half of the sessions, over half of the usage, is done to narrowband.

Why would that happen? Because no one is using one computer at one location anymore. What consumers want is not great speed in one place. What they want is the best speed and the best quality they can get wherever they are.

We offer a $21.95 [monthly] unlimited plan — or you can [pay] $9.95 [to access AOL through another ISP]. The majority of people stay with $21.95, which is interesting. It tells you that they knew they were going to use a lot of narrowband and expected to use a lot of narrowband. Otherwise they would have downgraded to $9.95 and later, maybe upgraded again to $21.95. But we've seen them hanging with it.

I think until six months ago, a year ago, most people in the industry thought broadband was a conversion, and now I think people are beginning to realize it's an add-on. It's like adding faster speed.

Related