- The Washington Times - Friday, May 29, 2009

Nearly a decade after high-flying upstart AOL bought media titan Time Warner Inc. in what turned out to be one of the most disastrous mergers in history, the two parted company Thursday, leaving both firms searching for their places in an altered media landscape.

The one-time Internet pioneer bought the media giant for $147 billion in 2001 at the peak of the dot-com boom to form AOL Time Warner. But the dot-com bubble burst a year later, leading the company to write off $99 billion, drop “AOL” from its corporate name and remove AOL co-founder Steve Case as executive chairman.

Today, the combined company has a market value of $27 billion.

As separate companies, AOL once again will become a stand-alone firm, leaving Time Warner to focus on its own movie, cable and publishing businesses.

The former trailblazer that gave many Americans their first taste of the Web has struggled to stay relevant amid the rise of broadband, recently shifting its focus to Web-based advertising. Analysts say the decision to spin off AOL, which has about 7,000 employees in New York and Sterling, Va., comes as no surprise and gives the firm flexibility to pursue its new business model more effectively.

“I don’t think AOL can ever even remotely hope to return to what it was during its heyday in the Internet bubble, and the torch has clearly been passed from AOL to Google as the Internet market leader, but what remains after the dial-up business will disappear is an advertising-driven AOL that is the fourth-largest in terms of unique visitors behind Google, Microsoft and Yahoo,” said Frederick Moran, an analyst with Benchmark Co.

AOL, which had its headquarters in Sterling before moving to New York to be closer to Madison Avenue, had about 27 million subscribers to its dial-up Internet service at its peak in 2002. But the firm struggled to keep users as consumers canceled their subscriptions in favor of high-speed connections. AOL eventually offered its e-mail and other services free of charge to attract Web traffic.

In recent years, AOL has laid off thousands of workers and acquired several companies that specialize in placing ads on the Web in an effort to rebrand itself as an online marketing firm. It also owns several content sites, including Advertising.com, Hollywood gossip hub TMZ.com and the technology blog Engadget.

“Becoming a stand-alone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options,” said Tim Armstrong, AOL’s chairman and chief executive officer. “We play in a very competitive landscape and will be using our new status to retain and attract top talent.”

Mr. Case said in a post on the social networking site Twitter.com that he was “glad” about the breakup.

“Merger could’ve been transformative,” wrote Mr. Case, who helped engineer the deal before departing the company in 2003. “But synergy didn’t happen. Didn’t integrate the businesses to drive innovation. Lots of missed opportunities.”

Two recently departed insiders, who asked that their names not be used, expressed optimism about the move Thursday.

“I’m pretty excited,” said one ex-manager who left the firm’s Sterling campus in March. “There are colleagues there that I care about.”

The move, the manager said, “gives AOL the freedom to soar or fall” on its own.

Another former insider said Mr. Armstrong -a former Google executive brought on in March - appreciates the firm’s culture. The AOL alumnus noted that Mr. Armstrong’s “first appearance before AOL employees was in Dulles, and he brought Steve [Case] and [former Vice Chairman] Ted [Leonsis]. It was like Jesus coming back.”

The observer added that Mr. Armstrong understands that AOL’s dial-up Internet access business, which has about 6 million subscribers, “still generates a ton of revenue, including the capital to fund everything else in the business.”

During a time of economic contraction, unemployed users are likely to cut a $50 monthly broadband bill in favor of $10 dial-up service, the former insider said, “especially if they’re just logging on to job hunt and check their e-mail.”

Time Warner owns 95 percent of AOL and said it will purchase the remaining 5 percent of the company - which is owned by Google - and cut the company loose by the end of the year. Shares of Time Warner closed up 56 cents at $23.56 on the New York Stock Exchange on Thursday.

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