The Turnaround of AOL

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Case Details:

Case Code : BSTR195
Case Length : 19 Pages
Pages Period : 2001-2005
Organization : AOL, Time Warner
Pub Date : 2006
Teaching Note :Not Available
Countries : China
Themes: Corporate Turnaround
Industry : Media, Entertainment, and Gaming

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The Problems

Parsons assumed charge as the CEO in May 2002 when Time Warner was in the midst of several problems. He was at the receiving end of the shareholders' wrath since the merger of AOL and Time Warner had failed to deliver and the stock price had gone below US$ 20 per share. The credit agencies had also downgraded the company's ratings. In 2003, when e-business companies were performing well in the US, AOL's subscribers continued to leave to make use of other cheaper alternatives like low cost dial ups and broadband providers...

Accounting Irregularities

In 1995, AOL and Bertelsmann, a German Company, formed a joint venture to run AOL Europe. In March 2000, they signed a contract which specified that Bertelsmann could demand AOL buy out Bertelsmann's 49.5% interest in AOL Europe for US$ 6.75 billion. AOL had the option of paying in stock or in cash in case it bought out the 49.5% stake. In March 2001, Bertelsmann exercised this right and persuaded AOL to pay in cash. AOL agreed to pay in cash provided Bertelsmann bought advertisements valued at US$ 400 million on AOL's website. Bertelsmann agreed and AOL booked US$ 400 million in ad revenues. SEC's objection was that the AOL should have booked US$ 400 million as the cost of sales, and not as advertising revenues...

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Declining Subscriber Base

AOL had attracted several advertisers prior to 2001, after which the company decided to limit the number of online ads, in order to improve its subscribers' experience. The sales force of AOL made the marketers sign up multi-year contracts. In order to place the ads, the marketers needed to use the proprietary software of AOL called Rainman (Remote automated information manager). Rainman did not support many types of web animation. Marketers had to recreate online ad programs especially for AOL in order to display their advertisements...

Shareholders' Wrath

Carl Icahn (Icahn), a billionaire financer, took a stake in Time Warner in August 2005. Icahn with a few money management firms wrote an open letter to Time Warner shareholders, attacking the company's board members and management. In the letter, he criticized the company for not being able to migrate AOL users to broadband and being unable to compete with Google and Yahoo! effectively. He also complained that Time Warner had neglected AOL since 2000, and had started highlighting AOL as one of its key businesses only around 2005. In October 2005, Icahn accused Time Warner's managers of selling the company's assets at a low price...

The Revival Strategy

In spite of pressure from the investors to sell AOL, Parsons' stuck to his stand and held on to AOL. Parsons systematically cleaned and spruced up the company's businesses, resolved the accounting investigations issues of AOL and settled law suits. Parsons and Miller decided to improve AOL's businesses by providing a wide range of online services ranging from broadband services to online services and dial up access. Miller said, "We'd gotten behind in the market; we're putting in a business model appropriate to where the world is going..."

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