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Old Guard Moves Up

Three months after he was named AOL Time Warner Inc.'s sole chief operating officer, Robert Pittman has thrown in the towel.

He resigned his position with the company late Thursday, replaced by a duo of executives who will split his duties.

Pittman, reportedly fed up with the intense scrutiny that he has faced as AOL Time Warner stock has plunged amid concerns about the online unit, stepped down after weeks of speculation concerning his job at the media conglomerate.

In replacing Pittman, AOL Time Warner CEO Richard Parsons has created a new operating structure, splitting the company into two divisions headed by former Home Box Office Inc. chairman Jeffrey Bewkes and Time Inc. chairman Donald Logan.

Bewkes will head the new Entertainment and Networks Group, comprised of HBO, New Line Cinema, The WB, Turner Broadcasting System Inc., Warner Bros. and Warner Music.

Logan will become chairman of the Media and Communications Group, comprising America Online Inc., Time Inc., Time Warner Cable, the AOL Time Warner Book Group and the Interactive Video unit.

"We have the best media, entertainment and communications business in the world, but our challenge — and our goal in making these changes — is to take the lessons we've learned over the past two years and use them to make the parts work together to create greater value for our shareholders," Parsons said in a statement.

"With Don, Jeff and our business heads on board, we will have a united team focused on driving new growth and developing innovative products and services."


Since ascending to the CEO spot in May, Parsons has made simplifying AOL Time Warner's structure one of his top priorities, although that mainly meant making the company's myriad partnerships and joint ventures easier to understand.

And though the new structure makes it easier to split up the company — something that some investors have called for, as the stock has plunged 70 percent since the beginning of the year — AOL Time Warner insists that was not the intent.

"This is not a splitting of the company," said AOL Time Warner spokeswoman Wendy Goldberg.

Although cleaving the company may not be in the cards just yet, AOL Time Warner has been battered by internal management turmoil since its merger was finalized in January 2001.

While AOL executives may have clearly felt that they were in charge of the merged company at the beginning, the burst of the dot-com bubble and several missteps at the Internet unit shifted the advantage to the Time Warner side of the business.

That was clearly evident in May, when Parsons was named to succeed Gerald Levin, the former CEO of the combined company, who was forced into retirement as AOL Time Warner's fortunes waned.

With Pittman's replacement by two long-time Time Warner executives, that advantage is further solidifed.

In a research report, Bear Stearns & Co. cable analyst Ray Katz called the restructuring another sign that Parsons is consolidating power within the media giant. He said it could help AOL Time Warner to land long-elusive cable carriage deals for its AOL Broadband service.

"We view the restructuring as positive, as it serves to relieve some of the uncertainty overhanging the stock in recent weeks," Katz wrote. "We believe this move, Mr. Parsons's first big strategic move since taking over in May, solidifies his control of the company and implies a focus as much on execution as on strategy.

"Indeed, we think the management changes can have a salutary impact on AOL carriage negotiations with non-affiliated cable operators."

Both Logan and Bewkes have strong track records and their appointments could help to address AOL Time Warner's morale issues and facilitate inter-divisional cooperation, Katz added.


UBS Warburg LLC media analyst Christopher Dixon, in a research report, said that he expected Bewkes to assume both jobs in a few years, when Logan is likely to retire. Logan is 58 and Bewkes is 50.

"We expect Mr. Logan to move on within the two to three years, given his seniority, and view the move as a way to give Mr. Bewkes an increased management role and additional responsibilities," Dixon said in his report. "This is particularly important as we view the AOL division as very similar to HBO where growth depends on licensing agreements with a broad array of cable MSOs.

"Thus, Mr. Bewkes' relationships with cable operators and knowledge of the entertainment business, combined with Mr. Logan's experience with subscription-based models, represents a way for AOL Time Warner to fulfill the promises articulated in their merger plans."

Bewkes joined HBO in 1979 and was named chief financial officer of the programmer in 1986. He moved steadily up the ranks — becoming president and COO of the unit in 1991 and CEO in 1995.

During his tenure at HBO, the unit has delivered 16 percent compound annual cash flow growth and secured a reputation for high-quality series such as The Sopranos
and Sex and the City.

He is being replaced at HBO by Chris Albrecht, formerly president of HBO Original Programming. Bill Nelson, formerly HBO's executive vice president in charge of finance, information and operations technology and business affairs, will become the unit's COO.

Logan is no slouch, either. After he was named Time Inc. CEO in 1994 and chairman in 1997, Logan led the magazine publisher to 41 consecutive quarters of year-over year earnings growth, averaging about 14 percent in compound annual cash flow growth.

While it may seem unusual for a magazine publisher to assume control of the Time Warner Cable unit, most analysts said it was a good fit, because both are subscription businesses.

Also under Logan's watch, Time Inc. boosted its share of domestic magazine advertising to 25 percent, it's highest level since 1989.

"The AOL business is such an incredible overhang on the entire Time Warner businesses, that anything that can be done to help improve the prospects and stem the fear surrounding the AOL business will be positive," said Goldman Sachs & Co. media and entertainment analyst Richard Greenfield.

Pittman, who became co-chief operating officer of AOL Time Warner after its $103.5 billion merger in January 2001, became sole chief operating officer after his counterpart Parsons was named CEO in May. In April, Pittman was tapped to oversee the turnaround at AOL.


Pittman was the logical choice — he had been president of AOL before the merger, and was largely responsible for its earlier success. And though Pittman made several changes at the online unit — including cutting its research and development budget — he apparently didn't work fast enough.

Adding fuel to Pittman's leanings toward leaving the company altogether was the intense scrutiny he has faced as the promise of the AOL Time Warner merger failed to materialize.

A relentless cheerleader for AOL Time Warner's convergence strategy, Pittman also refused to back down from the company's lofty revenue and cash-flow expectations — $40 billion and $11 billion, respectively, in 2001 — even in the middle of an advertising slump. When AOL Time Warner finally did revise those forecasts downward in the fall, Pittman lost credibility with investors and analysts as the top operations executive.

Adding to those problems is the added scrutiny the AOL unit faces in the aftermath of a July 18 report in The Washington Post
, which accused the online unit of questionable accounting practices.

According to the paper, AOL has conducted a series of "unconventional" transactions between 2000 and 2002 to artificially increase its revenue. According to the Post, those transactions — including shifting revenue from one division to another to boost its online business, booking the sale of ads it sold on behalf of online auction site eBay Inc. as its own and counting stock rights as advertising and commerce revenue in a deal with a Las Vegas firm — may have boosted revenue in those periods by about $270 million.

Although that is less than 2 percent of AOL Time Warner's total revenue during those years, the Post
pointed out that without that revenue boost, AOL would have fallen short of analysts' estimates for its ad revenue in three quarters in 2000 and 2001.

AOL Time Warner has steadfastly denied any wrongdoing, adding that its accounting methods comply with generally accepted accounting principles.

In a statement, AOL executive vice president for corporate communications John Buckley said that the transactions — except for one —were reviewed by independent auditors Ernst & Young at the time they were accounted for, and were given a clean bill of health.

"Moreover, since the Post
contacted AOL, Ernst & Young has confirmed in writing that the accounting and related financial statement disclosure for all of the transactions were appropriate and in accordance with generally accepted accounting principles," Buckley added. "The facts show that AOL has maintained a strict and effective set of internal controls, a point underscored by the Post's own reporting."


The Walt Disney Co. was rumored to be wooing Pittman, a seasoned executive who has been credited with the creation of MTV: Music Television, now owned by Viacom Inc.

In a statement, Pittman appeared to confirm reports that he was growing weary of the daily grind at AOL Time Warner.

"I've decided that after a new CEO is in place at AOL, I won't return to AOL Time Warner as chief operating officer," Pittman said in a statement. "Having worked so hard to build the AOL service and brand, and after then going through the merger and the last 18 months, it's time to take a break. I'm proud of what we built at AOL and believe it has a great future."

A bigger wildcard may be how other executives react to the new reporting structures. Although all division heads had previously reported to Pittman, some may not take well to the new reporting lines, according to some sources.

Already Michele James — AOL Time Warner's chief talent scout, and a Pittman ally — resigned effective Sept. 30 to start her own executive-search firm (with AOL Time Warner as a client).

Bewkes is well-liked by both AOL Time Warner executives and employees. But he assumes the COO role at a critical point for the company.

Aside from the problems at its online unit, AOL Time Warner's stock has plunged more than 70 percent since the beginning of the year and it faces concerns regarding its accounting, its heavy debt load and its seeming inability to unwind its Time Warner Entertainment partnership with AT&T Corp.

"He [Bewkes] has a great relationship with the cable operators, and he certainly knows how to run a subscription business," Greenfield said. "If a good legacy Time Warner executive is installed and it renews confidence in the abilities to turn around AOL, it will be a positive."