Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Brian:So like a thousand dollars put in, dominoes at its nadir, has a better return than Apple.

David:Wow. We’re in the wrong business.

Ben:I know.

Brian:Bottom fishing is a dangerous game though.

David:Yeah, yeah.

Ben:[music] Welcome back to episode 44 of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.

David:I'm David Rosenthal.

Ben:And we are your hosts. So today, back by popular demand, we’ve got Brian McCullough of the Internet History Podcast on the show for a crossover episode. So thank you for joining us and hello, Brian.

Brian:Hi, guys. Popular demand? Are you sure?

Ben:Yes.

David:Very.

Brian:This episode was one of the more popular ones of this year. Did we do the other one this year? Trust me, it’s in my top 20 for sure and I'm over 150 episodes at this point.

Ben:Wow. Sweet.

David:Well, you are in our top 5, so...

Brian:I think the melding of the format sort of like makes all three of us up our games a little bit, you know.

Ben:It does. I think because it forced a little change for us. We were talking about this before the show, but listeners, David and I were talking about how we do our research for these episodes with Brian but knowing that he’s got such a clear narrative around it, we sort of just have this spew of facts and we can sort of play the role of “Hey, wait a minute. What about...?” instead of actually structuring the narrative ourselves.

Continuing a little bit here about you guys probably want to know what the episode is about. So listeners may remember the last time we did this, in episode 33 with Overture’s acquisition by Yahoo and today we’re going back to kind of a similar time in a little bit before in 2000. We’re going to be talking about the sort of legendary, potentially the biggest flop of all time. A legend in the world of M&A, the merger of AOL and Time Warner in 2000.

David:I don’t know if “legend” is the word I would use.

Brian:Infamous.

Ben:Notorious, infamous. A cautionary tale. Maybe all of the above.

Brian:Well, let’s just skip to the end when we all say worst acquisition of all time. That’s the end of the episode. Thanks for having me here.

David:But today, we’re going to be looking at it from the AOL perspective. So, was it the worst of all time or was it brilliant? We’ll find out.

Brian:Definitely have some thoughts on that.

Ben:So change in the format where David teases the audience into actually listening to the whole episode.

David:Cue campy teaser now.

Ben:Yes. Before we get into it, listeners, I want to mention we’ve got a Slack that is over 900 strong now. So if you like discussing M&A, IPOs, major tech news that happens, come join us at Acquired.fm and join the Slack. We also love reviews so if you feel so inclined, pop open Apple Podcasts, you actually can pause this episode right now and go and rate us on Apple Podcasts and it makes a world of difference. So, thanks to those of you who have done that and encourage more to do it in the future.

And on to our sponsor. So our sponsor for this episode is Perkins Coie, the counsel to great companies. Today’s sponsor is with Jeff Beuche, the firm-wide chair of Perkins M&A practice. Jeff, what should tech entrepreneurs do in the period leading up to sale transaction to be prepared and positioned for a smooth process?

Jeff Beuche: So first, an entrepreneur needs to be honest with himself or herself about the company’s shortcomings. That could be a weakness in the business, a strong competitor, poor record keeping, maybe a deal that was cut that shouldn’t have been cut. Or some combination of those things. An M&A transaction tends to show a really bright on the company. The dents and dings will be obvious and buyers usually will raise them as issues. It’s best not to hide things or hope that they won’t be found. It’s better to think like a buyer, identify the problems, own them and be ready to discuss them and suggest solutions and mitigation steps.

Ben:Well, thanks Jeff. Listeners, I recorded that audio before even picking this episode and it's oddly prescient on this one. If you want to learn more about Perkins Coie or reach out to Jeff directly, you can click the link in the show notes or in the slack. Thanks a lot to Perkins Coie for sponsoring.

Now, without any further ado, Brian, would you like to take us into the story?

Brian:Yeah. So, AOL - Time Warner, the notorious titanic of a specially dot com era shenanigans, we want to start with AOL because as I’ve learned by doing my show, people of a certain age have often said to me “Thanks for doing episodes on AOL because I kind of never understood what they did.” Which I get because if you’re in a time when the internet is all around you, it's in the ether, then “Oh, it was just an ISP, why are they still valuable?” They only ever had 25 million subscribers at their height. So, how does that compare to having billions of users like a Facebook has?

So, let’s start with AOL and posit that AOL over the course of the 90’s was probably the best stock to buy. If you were able to buy and it’s 1992 IPO and sell New Year’s Day in the year 2000, your stock would have appreciated 80,000 percent. At its height, its market cap was about 150 billion which was worth more than General Motors and Boeing combined. It was worth more than, obviously Time Warner, Disney, all sorts of people like that.

It was estimated that more than 2000 AOL employees were on paper at least made millionaires by AOL stock. So you talk of a Facebook millionaire, even Microsoft millionaires, AOL made a lot of people on paper really rich. So AOL, yes, was an ISP.

David:Back in our day, kids, you used to have to pay for the internet.

Ben:And it wasn’t fast. And you couldn’t make a phone call.

Brian:Or you couldn’t make a phone call because you had to dial in over your landline. Cellphones existed but most people didn’t have them. At their height, AOL had 25 million subscribers. That was 2002, so after, this merger takes place. But they were accounting for at various times 60 percent of US internet traffic in the 90’s. So there were other ISPs, even indie ISPs. But in the 90’s there weren’t cable modems, there wasn’t broadband. I mean, there was but most people dialed in and AOL was the main company that people dialed in with. AOL has a long, fascinating, tortured history going back to early 80’s. Again, I have a couple episodes on AOL that –

Ben:They’ve got some serious name changes, right? I mean, they didn’t start as AOL.

Brian:Yeah. Controlled Data Corporation. There was the Source. One man’s pivoting is another man’s failing at one business and jumping into another. You can look at AOL in two ways like either it’s one of the more tenacious and brilliant entrepreneurial stories because they basically lose money for the better part of 15 years, certainly more than a decade. What they’re chasing is the idea of online but they’re so soon and so early that they have to wait for the world to catch up to them.

David:I think the other interesting thing to point out about AOL is it’s not a Silicon Valley Company. Its headquarters is in Dulles, Virginia.

Brian:Exactly. Which isn’t even New Yorker, I mean it’s DC. So, right. It's not even because AOL, as we’ll talk about, it gets into especially Madison Avenue and creating content and Time Warner obviously, but they weren’t even New York based. They were in the middle of nowhere and everybody at that time always complained about that. Like, going to Dulles was like going to Siberia or something.

So, again, we’re going to back to the ‘80s. It's not till the early ‘90s when they kind of tie themselves to Microsoft and Windows that they sort of leap to the head of the pack. There’s a whole pack here. There’s CompuServe, there’s Genie, there’s Prodigy. There’s all these.

Ben:And Compuserve, so my dad was a beta tester for Compuserve and for AOL so we just got free accounts. I remember being on Compuserve and thinking it was better. But my understanding is that it was like only sort of for the super internet savvy nerds and AOL was much better at reaching the mass market. Does that feel like sort of why AOL won there?

Brian:A hundred percent. AOL had the derogatory or pejorative name of “training wheels” for the internet. But they actually embraced that and it makes sense. I mean, I’ve said on the show like a lot of people’s first email was AOL in a time when you didn’t have email unless you were in a college or at work or something like that. But also, AOL trained people how to live online like they gave you a screen name and you went into the chatrooms and you did dirty sex chat and things like that. You could create an online identity. And this is what we should talk about, what AOL’s business was. They eventually basically made their money by allowing people on to the web, but they were also trying to curate the web and create this online experience that was like handhold people into it.

David:That's really amazing. We’re kind of making fun of AOL in a lot of ways here for being a Dulles, Virginia company. Again, nothing against Dulles, Virginia, but not where you think of as a tech hub. But they really pioneered a lot of the paradigms of the internet that are some of the most valuable companies and products today. I mean, AOL Instant Messenger (AIM) was basically messenger. AOL was a lot like Facebook before Facebook.

Brian:Can we remember to bring that up at the end because, actually, AOL is always about to run out of money, perpetually. Because what they have to do in the early ‘90s is they create this it’s called a walled garden, so they go to people like Time Warner and they say, “Hey, can you give us Sports Illustrated content?” They go to this magazine, that newspaper and say, “Hey, we’ll pay you X millions of dollars. Allow us to republish your articles and your pictures and things like that in our walled garden.” And so, there’s all sorts of times when they get saved by an investment from this company or like call Allen, invest a lot but basically tries to take them over in the early ‘90s and they poison-pill him. Again, coming back to this idea that they were either not really a smart tech company or they were these insane scrappers that they held on this idea that online could be a thing and then position themselves that when the tidal wave came, they just rode it. I’ve talked again on the podcast before about reasons why Prodigy dropped the ball, CompuServe dropped the ball, AOL picked it up and ran with it.

But essentially what you need to know is by 1996, essentially, AOL is the primary ISP but it also has this huge amount of content. So what you would do is you would dial in and you would be on AOL. You wouldn’t be on the web. AOL would give you your email, they’d feed you their headlines again, pegging the New York Times to provide headlines, that sort of thing. And then if you wanted to go to the web, then you bring up a browser or you’d go through them like it was a channel that you would go to. So it was always something that they were sort of wrestling with. Like they wanted you to stay on there in their walled garden, but then they also couldn’t help but be most people’s first introduction to the web and the internet, right? And they ride this through the ‘90s, through the –

Ben:They did eventually have a browser in AOL, right?

Brian:Yeah. That's a whole another story about how they double-crossed NetScape and signed a deal with Microsoft. Then they had, because they had bought a browser called BookLink. But the point is, is that people aren’t sophisticated in ’96, ’97, ’98. For all they know, AOL is the internet. And so, when I say that they’re sort of wrestling with this, they want to be somebody who describes it as they want to be the carnival cruise lines for an online experience, so they want to curate it for you. But then at the same time, the reality is, is that most people getting on the web and doing things like going to Yahoo or whatever, are doing it through AOL and they can’t conceptually tell the difference.

Ben:I’d love to hold on to this until tech themes later but like, over and over and over again, the only thing that I'm thinking is bundling and unbundling. Like it is incredible how the entire internet, everything that we know as sort of the open web and various different protocols and things on various different platforms are all just bundled within AOL and they were basically making all the revenue for that for a very long time before we started to unbundle it all into these separate services.

Brian:Now, there’s some also interesting things about AOL’s past which are not– AOL presented this sort of– Steve Case in his khakis in Gap ads, this sort of wholesome All-American thing. But they made most of their money by originally charging by the hour and most people were in the chat rooms doing sexy talk to each other, so in the background that's how they make their money. But also, they had a lot of things like accounting scandals where they get sued by even the attorney-general, like you’re not reporting – I can’t even remember the details, but they’re like reporting certain sales right away even though it should have been over time and things like that. So they kind of always were playing fast and loose but you can feel like, again, these are scrappers that are staying alive, staying alive with this dream of online becoming a thing until it finally is a thing. And it’s essentially ’96-’97 that it is a thing. And they wake up and they have 10 million subscribers that 60 percent of internet traffic is going through their pipes in ’98 or is it ’97, You’ve Got Mail - The Movie. Like again, we cannot underemphasize how much AOL was sort of the gateway for America embracing online and the web and the internet. They’re also on the web, they’re a portal like Yahoo is. By the year 2000, 4 out of every 5 web users were visiting an AOL property at least once a month. And they start to make real money by ’97-’98. So again –

Ben:When you say an AOL property, that’s on the web but something that's owned by AOL outside of the AOL walled garden?

Brian:You know what, I pulled that out of my notes and I don’t actually know. But that's what I'm saying, is that they’re playing both sides of the fence. And we’ll get into like how they’re starting to make real money, like they would sell you, okay, beyond our AOL walled garden side or beyond our AOL.com side, they had all this stuff to sell. Actually, we’re going to get to that right in a second.

So AOL starts to make real money in the dot com era and no one is making real money in the dot com era. So that's one of the reasons why their stock starts to go through the roof but then the other thing that Wall Street is seeing is, like, okay, this internet thing is happening and the majority of Americans are getting online via their pipes. So, what do you want to do? That’s the stock you want to be in. There’s a Henry Blodget quote where he says AOL is the blue chippiest of the internet stocks. They’re actually, you know, they’re the first internet company to be included in the S&P 500. Guess what company they replaced? Actually, there could be a million. It was Woolworths.

So, as late as 1998, they’re still under a $30 billion market cap but then like everything else in the dot com era, within 18 months that's ballooned above 150 billion.

David:We’ve talked about this era on this show before and you certainly have on your show, Brian, but I think it’s worth, again, as always, just pausing on this like as late as 1998, AOL was worth a market cap of under $30 billion.

Brian:And that was insanely expensive.

David:And that was insanely expensive. And then, 18 months later, they’re buying Time Warner and the combined company is valued over $350 billion. Like that is how crazy that moment in time was.

Brian:Well, let me tell you some more reasons why Wall Street was in love with AOL. What they’re looking at is, a lot of analysts call it like a three-legged stool or whatever. So they’re getting money from the subscriptions. Again, I think by 2000 they hit 20 million people paying $20 a month. And then, they’re a content platform. In the early days when they had to go to New York Times and say “We’ll pay you $2 million to get your headlines.” By ’97-’98, they can say to the New York Times, “You pay us. If you want to be in our walled garden, we’ve got the eyeballs, we’ve got the real estate. You pay us.” So they’re basically a content platform. That's very lucrative. But the big thing, and this is going to be key to this whole conversation, is that by ’97-’98, they’re making tons of money on advertising. Because, again, they’re basically where everybody goes, we think of people starting their day on Facebook now or whatever, so that's where your email was on AOL. By ’98-’99, that's where your buddy list was on AOL. But this whole concept of people starting their day online like AOL again sort of like trained people how to do that.

So, I just did an episode with a Yahoo guy. All of the portals in this time period make money essentially by selling ads to other dot coms. The whole dot com bubble can be thought of as like just a snake eating its own tail. If you happen to be one of the portals though, you’re the one doing the eating and if you’re one of these venture-backed startups, you’re the tail.

Ben:Which is so funny. I mean, the parallels to Facebook are just like jumping off the page, right? There was that era 3 or 4 years ago where everyone was saying that “oh yes,” Facebook discovered this magical mobile news feed ad and they’re mostly on this new format that’s to install apps and all the apps are funded by venture capitalist that are just paying money to startups to pay money to Facebook. It’s hilarious how it’s the same narrative around the company two decades later.

Brian:Let me give you some brilliant examples of that. So, here’s a dot com company called Drkoop.com. C. Everett Koop was the sergeant general of the United States. This is how crazy the dot com era is. Doctorcoop.com is a company that IPOs to make a health website. I don’t know the date of their IPO. It’s probably ’98-’99. Definitely ’99 I think. They IPO and raise $85 million for their website. A month after they debut on the stock market, Dr. Koop turns around and basically spends all that money by agreeing to pay AOL $89 million over four years to provide health content to AOL users. So, all of the money they raise on their IPO, they turn around a month later and they hand it over to AOL. Because everybody thinks that AOL is where you got to be. And so AOL in 1999 is starting to ka-ching like crazy. Like there’s a company, a long-distance phone provider called Telesave that pays $100 million and this is playing off dot coms. Like there’s a company called Preview Travel that pays $21 million to be AOL’s online travel agent. 1-800-Flowers pays $25 million to be the florist. Although I had Jim McCann on the show and he said that that worked out very well for them. But AOL can play off Barnes & Noble who pays $40 million to be the bookselling partner in the walled garden section versus Amazon that pays 19 million to be part of the AOL.com web portal. eBay ponies up $75 million to be the exclusive auction provider. And it kind of works out for everybody. Like when Dr. Koop’s deal is announced, its stock actually leaps 56 percent in a day. This is the dot com era. But everyone believes that they have to be on AOL, just like everyone believes you’ve got to advertise on Yahoo or whatever. So, AOL is in this position to just start banking money, like all of a sudden they’re turning a profit where they hadn’t for years and they’re a meaningful profit and billions and billions of dollars. The guy behind this era is Bob Pittman. I don’t know if that name rings a bell to you, guys. He was one of the original founders of MTV. He became very famous for being the hard-driving guy behind this AOL deal-making machine.

Ben:He was their COO, right?

Brian:I think so. Right. We’ll get to him later after the deal falls apart. Internally, his team of guys that would go around and shake the trees for these dot com deals were called the hunter gatherers because they “descended on the dot coms like scavengers and made them offers they couldn’t refuse.” There’s a quote where an anonymous dot com company says that it was like high pressure, boiler room type stuff. “For weeks it was ‘You’re great, you’re great, you’re great. We want to do business with you.’ And then one day, it turns out that we have to give them every last dollar we had in the bank and a 20% of our company.” Another dot commer says that AOL demanded 30% of her company “and then for good measure, they tell us ‘These are our terms. You have 24 hours to respond. And if you don’t, screw you. We’re going to go to your competitor.’”

So listen, these are crazy times, these are fat times for AOL. Again, I want to bring up this idea of culture and AOL being scrappers and doing whatever it takes to stay alive. So why did they stop when all of a sudden they’re in the catbird seat. They seem to be the nexus of this new internet economy and Bob Pittman’s army of deal makers basically drive what is essentially the thing that really makes Wall Street go nuts. So we’re going to get into this again later but everyone thinks that AOL went away because people stopped doing dialup or paying for dialup and they moved to broadband and things like that. But the thing that we’ll see actually has the deal sort of collapse and AOL stock price collapse and things like that is the fact that what made their stock appreciate so much was that they would have this insane growth in advertising. That’s where the money was coming from. That’s where the actual cashflow is coming from. Sure, it’s great to have in the background this recurring revenue of the subscription revenue but that’s not what was actually moving the needle in terms of why Wall Street loves them.

David:Yup. It was all these deals they were doing with all these dot com startups that were giving them all of their money.

Ben:Exactly.

Brian:Well, interestingly enough to transition here, because they’re doing all these deals with these dot com companies, they have sort of their ears to the ground and they can start to see when the money starts to dry up, VC money starts to dry up, IPO start to go bust. They’re the ones that know before anybody else that listen, this bubble might be bursting.

Ben:From like a sort of macroeconomic perspective, David, you may actually know more about this, like why are the VCs ceasing to invest there? What’s the signal to them to stop?

David:It's hard to say. Again, because we’re talking about such compressed time frames here. If I were to speculate, I think it's probably just that so much money had gone into the system without real returns and so you start getting to the bottom of the barrel.

Brian:Well, actually, that's it. They got great returns. Again, there’s other things I don’t have in front of me with my notes.

David:Well, paper returns.

Brian:Right, right, right. But see, for them it doesn’t matter because anything can IPO for a certain amount of time. And so once you get past the lockup period, you can take actual garbage public and it doesn’t matter. Right?

David:Yeah. I was thinking more from the limited partner perspective.

Brian:But what you said is exactly it, is that when they are taking garbage public, eventually everything is garbage and enough people have kind of gotten rich enough and fat enough that they’re like, “you know what, I'm going to sit these out.” The seventh pet startup, “I'm going to sit this one out.” My personal theory is that that was it. It's also a combination of people realizing that the returns on online advertising were not good. The click-through rates are plummeting so that’s always been such an underpinning of things. Ad rates underpinning, it’s sort of like the plankton and the sea or whatever.

David:I guess that’s a key point too and I'm going to come back to it. I'm sure that had a lot to do with it too, is these companies that had been venture funded and then even IPO’d had given all their money to AOL and Yahoo and other portals and with the expectation that that would drive huge clicks and huge revenue. And then when it doesn’t then they go bankrupt and then there’s no more money to feed into the system.

Brian:Well, it's the 1999 Super Bowl when I think there were 30 dot com companies, or maybe it was 2000. It makes more sense that it was 2000. That are paying $2 million apiece for your one Super Bowl ad and that worked out for certain companies like Hot Jobs, famously. But then others you’ve never heard of again and they blow their $2 million of the 10 million that they raised and, listen, there’s a reason why it’s called a mania. There’s a reason why after a party you have a hangover the next day because you did some crazy stuff. But that was the times.

So to come back to this, as I said, they know before anyone else because they can see this. They can see, “Well, listen. Dr. Koop is not going to raise another round.” When that deal is up in three years or whatever it is, where are we going to get another Dr. Koop, right? So as early as and I want to stop and mention there’s three great books on this. It’s unusual that there’s been these many books written about a dot com era thing. There’s Kara Swisher’s book ‘There Must Be a Pony in Here Somewhere.” There’s Fools Rush in by Nina Munk. And there’s also Stealing Time by Alec Klein. So in one of those, you can see and there’s quotes from internal memos after other later lawsuits. As early as December ’98, internal emails show that like Steve Case and Pittman and the other lieutenants are kicking around the idea that they need to start thinking about a safe lily pad to kind of land this company on. Because they’re seeing the bubble bursting. And so this is December ’98 so it's still another 18 months before the bubble actually burst. So they think about other internet companies – and we’ll get into this later – but they seriously considered eBay. But Case was generally – Sorry, go ahead.

Ben:Didn’t they actually have Meg Whitman waiting in a room or something?

Brian:Okay, I’ll tell that story.

Ben:Okay.

Brian:Steve Case was wary of doubling down on another internet company because that makes sense strategically if you think the bubble is going to burst, why do another internet company.

David:Two anchors tied to one another are just going to sink faster.

Brian:Yeah, yeah. So he says something like let’s look beyond the internet and “identify companies that have a profound impact on how people get information, communicate with others which is our core business, byproducts are entertained, etc.” So, there’s major courtships within AT&T, the pre-singular merger AT&T. Disney, they went hard at Disney but apparently Michael Eisner was a hard no. And the quote, I think this is from Swisher’s book, one of the AOL guys says “We all knew we were living on borrowed time and we had to buy something of substance by using that huge currency. We didn’t use the term ‘bubble’ but we did talk about a coming nuclear winter.” Well, one of their problems is that they also know that dialup is a limited technology that’s going to be eclipsed by broadband. Again, they’re not stupid. As much as they’re not maybe a Silicon Valley company or a huge technologist, they know that broadband is coming either through DSL which people thought would be a thing at the time, but mainly cable modems. But a lot of thinking went into, “we should get a cable company.” Or, that’s probably they were talking to AT&T. AT&T had DSL at the time.

Another quote from Kara Swisher’s book is an anonymous AOL guy says, “Cable was the driver of everything. Without it, no deal made sense.” So, Time Warner is the biggest of the media companies at this point in time. Also, they have a little thing called Time Warner Cable. So if Steve Case doesn’t want to do an internet tie-up, he wants something that has more substance. But no one is going to believe if they decide they’re going to buy an oil company or something like that. Though they could have. They have the market capped at basically by anything at that point. So what he believes as Time Warner has the content, and remember they spent a decade believing that content was the thing that would make it online become mainstream, become a thing. And so, content is key. How many times have we heard that over the decades? Time Warner has this Tiffany platinum content going back hundreds of years and by the way, they have a cable company. I think it was the third largest, maybe the second largest at the time. So, I’m going to take it aside here and tell you the story of Jerry Levin and Time Warner. Jerry Levin, the CEO of Time Warner at this point, made his bones through technology. HBO didn’t come up with the idea but he was the guy behind the strategy of “let’s deliver this pay channel via satellite TV.” He makes his name, rises up through the ranks via the incredible success of HBO. And Jerry Levin believed in technology because of that. In fact, over the several decades at the company, he continued to try to pioneer technological advances, believing that there is untold new ways in the future that technology is going to be able to deliver content and media and things like that. They invest in the full service network in Orlando which was sort of an attempt before the web took off to sort of do what they called 500 channels and shopping with your remote through your TV and things like that. It was at the time before they bought Warner, spent about a billion dollars on that. Also, when the web comes around, there is a site called Pathfinder that they throw several hundred million dollars after. I have a lovely episode on my podcast about Pathfinder because it's gone down the memory hole but it deserves to be remembered for all the things that it pioneered in terms of trying to deliver media on the web. But it also lost them a ton of money.

Around this time, corporate America, there is a watch word, everyone needs an internet strategy. Disney does the Go Network. There was NBCI. There was all these initiatives that if you're a media company, you're trying anything you can do. Barry Diller tries to buy Lycos or was it Altavista, I can’t remember. Everyone thinks that you're going to be Amazon, you’ve got to come up with a way to either embrace the internet and the web or combat it or something. So you have Jerry Levin who’s always believed in technology that it's going to change content and media. Time Warner has failed time and time again to come up with an internet strategy.

So in 1999 when the People’s Republic of China is having its 50thanniversary and all of the politicians and business leaders and specifically Davos in Beijing for that period of time. Everyone is in Beijing celebrating the 50thanniversary of the People’s Republic of China. Steve Case starts to seriously court Jerry Levin. Jerry Levin thinks, “this is great.” It’s going to prove him right that if he can marry the greatest media company in the world to what everyone believes is the greatest internet company, his vision of technology changing media will come true; this is going to be his legacy.

In the various books it’s a complex courtship. This is where I believe the eBay thing comes in. My theory is that they kept talking to eBay because they were using it as a stocking horse. Like actually, I’m going to open up the Kara Swisher book here. The week before, and it might even be the day before, they actually announced the merger, the deal with Time Warner. Meg Whitman and their Goldman Sachs people are at AOL headquarters and they’re in one conference room, this is the main conference room, trying to work out a deal so that AOL is going to buy eBay. In what’s called the Malibu Room on the opposite end of the floor is Time Warner and their lawyers and they’re working on the deal that’s eventually going to go through. So it’s a comical thing, and this is quoting Swisher, “Executives are shuffling in and out, alternatively apologizing to and ignoring Whitman and her team who are sitting there cooling their heels wondering what.” They’re not quite sure what’s going on. Is this just the way AOL works? They’re famously flakey and like aggressive at various times, like sort of passive-aggressive almost. And so, spending day there where nothing really gets done and lawyers are running out of the room and disappearing and where are they going? They don’t really know. They don’t know that Time Warner is in the other room. So at the end of the day, Whitman and the team is leaving. She goes into Bob Pittman’s office to say goodbye and she says, “You’ve got a lot going on here, it seems.” Of course, she had no idea. I think it’s the next day that they announce the Time Warner thing.

Now, this is definitely an aside. What if they had done the eBay deal? Because eBay survived the dot com bust better than everybody.

Ben:Huh.

David:Well, and in large part too because of PayPal, which of course came later.

Brian:And then that’s the counterfactual if would AOL have been smart to have allowed the PayPal acquisition. But if you look at eBay stock, it goes down some but then it reaches its height. It surpasses its dot come bubble height in 2003-2004. It’s like the only stock that does. Like in a time period when Amazon is down to like $5, because eBay’s business basically never dipped, so in retrospect, which we’ll get into, buying eBay was the way to go. They should have gone with it.

David:I’m going to save this. I want to come back in tech themes. This is my tech theme here but this is, well, I’m going to say much more on this later. Suffice to say that eBay was the much better business for the internet certainly than Time Warner.

Brian:Well, believe it or not, guys, I am going to wrap this up. Let’s do it. I promised 30 minutes, I’m way beyond that at this point. The deal is announced January 10, 2000. It's the merger of $164 billion AOL with $83 billion Time Warner. It announces a merger but the reality is that AOL shareholders controlled 56 percent of the merged company and Time Warner shareholders 44 percent, so it's an acquisition in all but name. I actually remember very vividly this happening and in my memory I forgot to look this up. Like Jerry Levin and Steve Case are on Charlie Rose that night, like they were everywhere.

David:Charlie Rose. That’s great.

Brian:Yeah. Steve Case vowed that one day, AOL-Time Warner would have $100 billion in revenue. It would be the world’s first trillion dollar market cap company. There’s a quote from Roger McNamee the venture capitalist who says, “Let’s be clear. This is the single most transformative event I’ve ever seen in my career.” Kara Swisher has a quote from her book where she says, “In one major move the two companies had seemingly addressed both of the their weaknesses and intensified their strengths. I won’t deny that I really believed that as did many others, many of whom now pretend they never did.” I mean, this is January of 2000. This is the height of the bubble. What’s also happening around this time, the Microsoft antitrust trial has come to an end. It looks like Microsoft is about to be broken up. Who looks like it’s the new king of the technology hill? It’s AOL of all people. What happens is, so the deal is announced in January of 2000. Four days later, the Dow Jones Industrial Average peaks at a level that it would not return to for more than six years. On March 10, 2000, the NASDAQ peaks at a level that it would not reach again until March of 2015, losing 80% of its value at its low. The bubble burst. And we’ll get into culturally why the acquisition was a disaster. The merger was a disaster. But again, the reality of it is not that people stopped doing dialup. Actually until 2002, the dialup subscriptions were still growing. It peaked at 26.7 million. The thing that kills this deal is that as soon as it happens, all of those deals that AOL did with the dot com companies disappear, evaporate. I’m not just saying that the three-year deal runs out. I’m saying that the companies are bankrupt and are not going to be sending you any more checks. So essentially, that insane growth in advertising that had so excited Wall Street, at some point Wall Street was estimating that AOL by 2003 would have more advertising revenue than in the ABC or a CBS in television. Like they’re thinking this is it, this is the next big thing. Goes away almost from the moment that the deal happens. Culturally, I don’t know how interesting this is but those AOL cowboys move in, they try to tell the Time Warner guys “Okay, we’re going to run this like a tech company now.” It’s like the host body rejecting an organ. Time Warner was always notorious for having these warring fiefdoms of “I control magazines. You control cable. You control book publishing.”

Ben:And not as similar from AOL. I mean, AOL had the internal fiefdom culture too. You mix two of those together, that can’t go well.

Brian:Well, and then with AOL coming in as the conquering heroes and being like we know this new media game better than you yahoos.” But like literally --

Ben:You yahoos. No pun intended.

Brian:True. There’s practical things about culture clashes. In one of the books, like Sports Illustrated just refuses to play ball. Like we’re not going to give our content to you, we're running our own. In fact, with Sports Illustrated famously never really gave much to the web anyway. Or think of there’s a story about like Warner Studios after the merger refuses to let AOL take over the Harry Potter website and the online promotion. The Harry Potter movies are just getting going so that’s why Warner Studios -- So AOL says to them, “Okay, let’s take this over.” Warner Studios says no. And the thing that AOL wanted the most to save their skin was Time Warner’s cable division. Time Warner had Roadrunner famously, which is another thing. Like they couldn’t even get Warner to give them, license them the Roadrunner cartoon thing. That’s the in-fighting at Time Warner. So when AOL says, “Okay, listen, let’s brand AOL into your expanding cable internet service.” Time Warner Cable says, “Get bent.” Right? So even though they’re the acquiring company, essentially, the entrenched power brokers at Time Warner just tells these guys to screw off and basically waits them out until the disaster of the merger becomes evident and get kicked out.

Ben:And if you think about like the power dynamics generated by the revenue, like I think AOL’s total revenue in 2000 right before the merger was like 9.5 billion or somewhere in that neighborhood. Time Warner had a much more narrow price-to-earnings ratio where of that, what were they valued at? Like 150 million or something.

Brian:160 billion, yeah.

Ben:Yeah. Sorry, 160 billion. Like they had real material revenue such that had to be like a 3x or something. Not like a ridiculous multiple like AOL.

David:Ben, I know what article you found because I found that one too. I think that was adjusted for inflation. But it’s even worse. AOL had less than 5 billion in revenue and Time Warner--

Brian:Right. It was that small.

David:And Time Warner had over 25 billion. So over 5 times as much. And AOL’s “revenue” as we’ve talked about was the snake eating its tail.

Ben:As you can see how you're like a Time Warner mid-level exec and you still feel like you have all the power in that organization.

Brian:Or you should by right. Think of this strategically. So, AOL thinks well, we’ll have a cable company and then that will solve our problem with the transition to broadband. But then if you're Comcast, why do you want to play ball with AOL now? Like if AOL had been independent, they were trying very hard to do things like go to Adelphia Cable or Comcast and say like, let’s co-brand AOL and we’ll take a certain percentage of the monthly fees. We’ll value-add to this. But once they’re with Time Warner, then why would any other broadband player play ball with them, right? So in a way, strategically, that never made sense. But then like we’ve been saying, essentially the money just dries up not again because of the dial-up subscriptions are drying up, but it's all of that ad money, it's all of that when they could charge the New York Times to be on their screens and things like that. It just evaporates in the nuclear winter of the dot com bubble bursting. And so, just a year, the one year anniversary of the merger being announced, the combined companies are only worth $147 billion. At the time of the announcement, AOL was worth $160 billion. So essentially, the combined companies a year later are worth less than AOL was at the time of the announcement.

David:Yeah. And I think if they continued to go down from there, they go down below 100 billion, even I think below 50 billion for the combined companies.

Brian:I had a bunch of stats on that too. The only thing that’s relevant I think is, it's because of the AOL side of the equation is delivering no profits and the revenues are shrinking and so Wall Street--

David:And they stole 55 percent of the company.

Brian:Exactly. So the write-downs. $54 billion write-down, the company has to announce in 2002 which was the largest ever at that time. It might still be the largest ever, I don't know. 55.5 billion in 2003. The overall loss for 2002, this says it's 99 billion. So I don't know if that’s like a fiscal year versus calendar year thing. So basically, AOL, everything valuable about that company is completely an illusion and Wall Street notices. So, it’s announced, what is it, January of 2000. By December of 2001, Jerry Levin steps down. The AOL people are still thinking that they’re in charge at this point so they want to take over the CEO-ship of AOL, the control of AOL, specifically and actually that’s where Bob Pittman really was the guy that thought he was going to take it because he wasn’t feeling like Steve Case would step down at some point. But no, as we know, it went to Dick Parsons. And so Bob Pittman is out by July of 2002. Steve Case finally leaves in May 2003. September 18, 2003, Time Warner officially drops AOL from its name. The combined company was called AOL-Time Warner officially but just three years later, Time Warner basically wants to pretend like AOL never happened.

Ben:At this point they still own the asset, like they’re not saying all in one fell swoop, “oh, we're going to spin it out.” Like they still own the company. They’re just not doing anything.

Brian:Well, you always hear those numbers now and again about how millions of people are still paying every month for AOL dialup.

Ben:Oh yeah, I actually got the number. As of Verizon’s bid in May 2015, they’re still making $606.5 million in dialup revenue. I looked up some and it really actually hasn’t shrunk much today. They’re really actually maintaining that.

Brian:Well, you know, there’s other assets and remember they bought Netscape? Only to --

David:A little company called Netscape.

Brian:There’s a reason why Kara Swisher’s book is called ‘There’s a Pony in Here Somewhere’. If there’s a mountain of s*** this big, there’s got to be a pony somewhere. They tried, man.

David:It was a little pony.

Brian:Well, actually it was a huge one and I’m glad you reminded me of this. I made a note. AOL Instant Messenger. At its height I think has over 100 million users. So like 2003-2004, people have a buddy list. It’s your social graph. For the research I’ve done on Facebook, basically they wrote Facebook. They didn’t talk to each other. They sat across tables from each other. They’re on AIM, chatting at each other. There’s quotes that I found like people in charge of AIM and things like that are like, “Yeah, we had social networking.”

David:And again, AIM came from ICQ and which I think AOL acquired ICQ?

Brian:It didn’t actually come from ICQ. ICQ was another thing. No one knows why they bought it. AIM - it’s an interesting story - was an internal thing that AOL didn’t want to do, but like people thought it was cool.

Ben:Why are messaging platforms always internal things? Slack, Discord, AIM that are like not actually going to be a product and then shocked, like we should be less shocked by now that messaging platforms make good spinout clients.

Brian:And AOL should have known because they’re the ones that -- well, I didn’t say this before but the reason they beat Prodigy is because they let people chat. Prodigy tried to “don’t do sexy stuff”. So AOL became --

David:People want to do the sexy stuff.

Brian:Just let people talk. The number one thing, if you have a technology product, a new technology paradigm, the thing that will be the company, the first successful company is the one that just lets people talk to each other. I guarantee you, the first billion dollar software platform or whatever company coming from VR is just the one that allows people to talk to each other in VR the best.

Ben:Because there are real solid bets on that, yeah.

Brian:With the iPhone, what are the things that came through. Things like WhatsApp and things like that, yes. Any paradigm in technology allowing people to talk to each other is the safest first bet.

Ben:I didn’t know that number, the 100 million number for AIM, but it makes sense. Like I had formative, formative, like growing up experiences where I had social -- like the first experience socializing with people. At least people online and also actually meaningful relationships. Even when you like went to the same high school or middle school, like we’d chat on AIM until like 2 in the morning and you get to know people and care about what’s in your profile and you care about Away messages. Like that was before Facebook wall posts. You have all these things where like it's social status, it communicates your personality. The number of people on your buddy list and the way you have it sorted is like representation of strong and we socialtize. Like that was an essential fabric of life.

Brian:Well, you know, I would even say that same thing from the business perspective. My three startups were mostly in the 1999 to 2005 era. So before even Skype becomes a thing, like that’s how we did business, Skype-ing people all the time. If you know their Instant Messenger screen name, I’m going to talk to Owen Malek next week, but like he was famous for that. If you wanted to get on Gigaom, we were talking earlier about promoting startups and things like that, like if you knew Owen Malek’s instant messenger and I think Michael Errington was the same way, like that’s how you --

Ben:His was Skype, I think. I remember him being a huge… yeah.

Brian:Right. Business was done over that. Again, it's the social graph. It was your Rolodex, it was how you kept up with people. Yeah, it was everything. So I need to do an episode on that. I got to track down some AIM guys and have them basically--

David:Totally. It’s incredible. We joked about it earlier but like it was Facebook, WhatsApp, WeChat. All of this. Snapchat. Instagram. Well, not Instagram. Photos weren’t as big a part of it. But like all of the most important.

Brian:Oh, you could trade files. I don’t know if you remember that.

David:You could trade music.

Ben:It would fail all the time. It was one of the things that it was like yeah, I’d give it a shot but we’ll see if it actually happens.

David:For all the lots of people, ourselves included, make fun of these non-technologist cowboys in Virginia. Like they invented the internet, to borrow an Al Gore phrase.

Ben:It's a sad thing to watch really because Facebook was their opportunity to squander. It’s as you sort of study network effects and how people build defensibility around their business, there is some fascinating stories about I think it was ICQ trying to reverse engineer the AIM protocol so you can chat AIM people from the ICQ client and these basically engineering wars going back and forth of how could they keep tweaking the protocol to keep the other guys out and keep their network effect to themselves.

Brian:There was a whole Cold War between AOL and Microsoft because you had MSN chat, you had Yahoo chat.

Ben:Oh, that’s what it was.

Brian:Yeah, that’s what it was.

Ben:MSN Messenger.

Brian:Right. As soon as MSN Messenger would crack the code, AOL would change it.

David:And you saw these local network effect dynamics taking place, just like there is today. MSN Messenger and Live was the dominant network in a bunch of countries and AIM was the dominant network in the US. It’s just like iMessage and Facebook Messenger here versus WhatsApp in Europe.

Brian:Well, listen. Remember, Steve Jobs famously told us that they were going to opensource FaceTime.

Ben:FaceTime protocol.

Brian:Yeah, I haven’t seen that happen.

Ben:I think that’s actually less of a business decision and more of an engineering decision. I think as the lore goes, the team that built FaceTime was sitting in their row and they heard it for the first time when he announced it onstage and they all looked at each other like, “What?”

Brian:I remember that too, yeah. Well, alright. I’m sorry I droned on so much. But I will hand the keys back to you, guys.

David:Where do we even pick up?

Ben:I know. Well, David, do you want to talk anything at all? Any more acquisition history and facts or should we go into the acquisition category? And I can kind of frame that up a little bit.

David:The one thing I want to add, nothing more on the history and facts of this itself, but it’s just such a fitting quota to this whole story is history repeating itself again and look where we are today and AOL is owned by Verizon, AOL spun out of Time Warner in 2009. It was valued at just over $3 billion versus the astronomic heights of nearly 10 years before that.

Brian:And that’s mostly because they had all this ad tech that they’ve bought over the years.

David:Yup. So they get acquired by Verizon and then on the Time Warner side, the deal hasn’t been approved by the government yet but they are in the process of getting acquired by AT&T. So there were all these jokes about the worst merger of all time and this tech internet company AOL merging with an old media company. And here we are in 2017 and both of them are owned by phone companies. Really, really hard to imagine.

Ben:Well, for acquisition category, why don’t we actually take a stab from both directions. So let’s say first because it actually was AOL taking over Time Warner, what kind of acquisition was that for AOL? Our standard categories are people, technology, product, business line, asset or other. Brian, if I may be so bold as to voice what I think you would say, this is actually an “other” because it's not necessarily acquiring, if anything, it’s maybe acquiring a business line but it’s like acquiring stability and liquidity. It seems to be what you're implying. Like applying an exit strategy.

Brian:See, here’s what I would say. The rationale is that they’re buying the business line or the technology. It’s murky to me what the category is. But they want the cable company so that they can transition into broadband. That’s their rationale. What are they really buying? The assets. They’re essentially trying to say, “Listen, if our stock is ephemeral, we need to convert it into something that will last forever.” Time Magazine has been around since the ‘20s. Warner Brothers has been around since the ‘20s. Like it’s the asset of content is king that they were really in their heart going after.

Ben:Yeah. Well put. Man, and as a little aside, like if you are at the negotiating table there and you’re AOL, how do you keep a straight face through all this and really represent what you're in this for and what Time Warner is getting.

Brian:We can get into speculating on that.

Ben:Alright, I’ll save it. So then let’s take a stab from the other side.

Brian:Well, actually, before you do, David, do you agree with that? What’s your take on it?

David:Well, I think I would classify it as… I think you guys are totally right. To me, I would classify it as an “other” because I’m trying to wreck my brain here about any other deal we’ve covered on this show where the rationale for it has literally zero to do with the business. There is nothing going on here except it’s not an asset that’s valuable to AOL as a business. Certainly not technology. It’s not people. Business line, sure, but like it’s just tons of business lines there essentially buying a conglomerate. The only reason they’re doing it is to just sort of save their own net worth, personal net worth.

Brian:This might be a crazy analogy but the analogy that springs to mind is you know how like Dubai and all the golf countries, they know that oil is going to run out someday so they’re trying to turn into tourist destinations. So that has nothing to do with energy or natural resource but they’re like, “yeah, we know.” We got to do something that sustainable, you know.

David:Yeah, exactly. And I think that’s what’s going on here.

Ben:It's like Snapchat today if they were to decide to go buy land in Manhattan.

Brian:Right. Or an oil company.

David:Which famously Zynga did when they bought their headquarters in San Francisco right in the heart of SoMa. It’s a huge building right across the street from AirBnb. It’s by far the most valuable part of Zynga.

Brian:Well, the most valuable part of New York Times is their building. Or which, did they sell that already? I don't know.

David:They sold it and they leased it back, yeah.

Brian:Got you. Okay. So let’s do do the reverse. So you guys go first then I’ll go last. So what is Time Warner thinking it's doing?

Ben:So in my head, I’m wondering if they’re buying technology or they think they’re buying technology or it’s really buying distribution that like, say, they’ve somehow missed out on the internet and they need this way to distribute their content and it's much better to actually own it than to partner. And by buying AOL or by getting bought by AOL, then suddenly AOL has all these dialup customers, they’re in all these homes and they have a brand-new channel to get their content to them. I think if I was going to try and rationalize it from Time Warner’s side, that’s what I would go with.

David:I think there’s just some amazing quotes, doing the research here from all the principles involved and from media and observers at the time. But I think it’s kind of like Kara Swisher, you know, as you quoted, Brian, from her book, she’s the one who’s honest about this like, “Yeah, at the time people were riding high on something,” and they thought that this made sense. Jerry Levin, the CEO of Time Warner and then CEO of the combined company, he has this quote from when the deal gets announced. I think he said this to maybe there’s a big Washington Post article. I think it was in this. It might have been written by Kara.

Brian:Yeah, she was with them at the time.

David:Yeah. He says, “This new world of valuations in the internet economy is something I accept.” I mean, he’s basically saying like this company that’s buying us, like kind of has no business, I don’t understand the business, but like there’s the new normal. You know, that’s how people talked back then.

Brian:Absolutely.

David:So I think it’s just like, I don’t want to be too disparaging of them because really, as Kara said, like everybody believed it then. But like they drank the Kool-Aid. They thought that there was a new reality there.

Brian:Jerry Levin bought the Kool-Aid. Which is why I’m going to make the argument that bizarrely enough for people, because that’s what he thinks. He thinks he’s coming to the end of his career, this is going to be my legacy. I was the guy that was smart enough to hitch this company to the thoroughbreds that are going to take it into the 21stCentury, right? And so, it's not people because he thinks that there these brilliant businessmen. It’s just that they have cracked the code of something that we old media people haven’t been able to figure out and we’ve been trying to do it for 10 years. So it’s people in that sense.

David:And there’s such a great quote from Bob Pittman from AOL who they’re totally like the pushers, like just, you know, feeding more supply into these guys via mainline. He’s quoted in the press at the time saying that -- I think it might be from the same article. “The slow-moving Time Warner would now…” -- this is the author of the article writing -- “would now take off at ‘internet speed’ accelerated by AOL.” And then Bob Pittman comes in with a quote, “All you need to do is put a catalyst to Time Warner and in a short period you can alter the growth rate. The growth rate will be like an internet company.” This is like a --

Brian:It's alchemy. Alchemy via buzzwords essentially.

Ben:Here, David. Pass some of that over here.

David:Totally. This is like the Beatles period when they went and lived in India and started doing their heavy drugs.

Ben:It does feel like literally nothing in that sense is grounded in reality. And you can understand in broad strokes how you look at a tech company and you look at the way that it grows. But like zero of that was connected to the intrinsic value and why tech companies get the multiples they do and why they have the growth rates they do and like any discussion of zero marginal cost, it's like, well, catalyst.

Brian:Can I make a point here? In my research of the dot com, the bubble generally, what you have to understand is everyone was saying “Okay, this is a bubble, this is a bubble, this is a bubble, this is a bubble…” from ’97 on, and kept being proven wrong. In my book, like there’s a thing where there’s quotes from bears on Wall Street or whatever, eventually everyone just capitulates because you've been wrong for so long. When you're like, there’s no way Yahoo is a $10 billion company and there’s no way they’re a 30. There’s no way there’s a 50. When they’re over $100 billion at some point you just got to be like, “well, s***.” And you know what, there’s all sorts of theory about bubbles and things like that, that that’s when the bubbles burst. When you finally slay the last bear, when people’s careers have been destroyed because they’ve been Cassandras for so long and it’s like, listen, I’ve been listening to you and I missed out on like a 500 percent upside.

Ben:So I guess I’m buying bitcoin at 4600.

David:I was just thinking this whole time, this new or this will maybe transition to What Would Have Happened Otherwise, I would have loved to have had a conversation with Steve Jobs during this period and have been like, “Dude, what’s your take on this?” I can only imagine what he would have said.

Brian:Yeah, I don't know. I have thoughts on that in the sense that because what happened in history is that they waited till everything exploded, there’s ashes on the ground and they sort of rise up in a place where no one thought: hardware. Or no one thought anything was going to be, everyone was going to be on the web.

David:But Steve is laying the groundwork for that all through this period. The next acquisition is at the end of 1996.

Brian:And then they have that sort of that hub, the digital hub strategy.

David:Digital hub, yup, with the iMac.

Brian:So they kind of do ride with the iMac.

David:It's when this is happening.

Brian:Yeah, they do kind of position themselves as “we’re the best computer maker for this new web era.”

David:Well, we had a few counterfactuals throughout history and facts, what would have happened otherwise. But maybe a word on like what would have happened had these companies stayed independent.

Ben:Yeah. So the one thing that I really want to explore here, I think we could talk about AOL but I think my based assumption there is that it goes to zero or close. But the thing I’m curious about is, is Time Warner potentially, do they end up in a way better spot today in 2017 if they hadn’t gone through this? Or did this have some kind of positive effect on them that we really haven’t talked about.

Brian:They gained some DNA maybe or some thinking. Yeah, I don't know. Again, my most recent episode was with a Yahoo guy, you know, Yahoo surviving the dot com bust. Like they had the same issue of all of their dot com advertisers going away, so where are they going to get their money from and they basically Holloywoodized themselves, but they successfully turned the business around. So it’s almost like that idea of if you do have to struggle, you’re forced into creativity to find ways. So I’m not saying that AOL would have succeeded in anything. But maybe if they’re desperate, they do take a look at the one thing that’s actually still growing AIM and trying to figure out. It’s sort of like if you’ve got the parachute, then you just kind of enjoy the ride down and you're not hustling.

Ben:Well, I think we covered the counterfactuals there. I don’t have anything else for what would have happened otherwise.

David:Should we move on to tech themes?

Ben:Yeah, let’s do it. There’s a few that we’ve talked about but one that we haven’t talked about yet and that AOL is completely notorious for, is a lot of their rise and especially in branding and in brand recognition and then in distribution is really like one of the earliest internet growth hacks and that’s distributing the CDs. It’s doing something that other people aren’t to get noticed and to get distribution because the point I want to make here is, there’s a trick and then the earliest people make out like bandits and then everybody realizes what’s going on and then it becomes the normal thing and then there’s basically a CPM raise to the bottom and you're competing against everybody else in sort of a commodity, highly efficient marketplace. Like, if you're buying Facebook ads now and it’s not in any of the new formats, you're not jumping on whatever the new flashy thing is, like you can basically, depending on your category, understand what your cost of customer acquisition is going to be. And if you're AOL and you do a very brilliant marketing move of putting these CDs at the checkout where no digital company and really no company is doing their distribution,  like it’s in movie theaters, it’s in blockbusters, like all these unconventional places and you're giving away something, the benefit of AOL is 100 hours or 1000 hours for free, like there’s so much that they can give away for free because it’s the internet and it’s software and it’s reduced marginal cost relative to hard goods that it’s shocking to people. And for the first time, they’re like, “Oh my god, this seems like a crazy deal and no one has ever tried to reach me at this point before.” So to me, it's like a lot of times companies succeed because of the initial basically distribution or hack or I guess growth hack but really like figuring out how to get in front of people where no one else is getting in front of them.

David:I love that image of like the, you know, Virginia suburbs, AOL and 80s and 90s guys being the original growth hackers.

Brian:Mm-hmm. Well, hustlers. That’s what I always say.

David: Yeah. I mean, they’re definitely hustlers.

Brian:David, you want to do a tech theme?

David:Yeah. So mine, I alluded to this a little earlier but I think this episode for me is a great counterfactual illustration to -- I’ve been thinking a lot about this recently. What really is like the power of the internet, like this merger is getting everything wrong about the internet. What I mean by that is like the internet connects people. Brian, you were talking about AIM and letting people talk to one another and like how do you build value and create platforms on the internet like as we’ve learned over the last 20-30 years, like you let people talk to one another, you let people connect with one another. And AOL, instead of doubling down on that side of what they were doing, they doubled down and they bought a media company. The thing about a media company is it’s a manufacturing-based analogy. Like you're not manufacturing physical goods but you're manufacturing media, like you're making movies, you're writing journalism, you're making music. That stuff, you got to pay and make and sell. You can build great businesses doing that, of course, like Time Warner is a great business of not to knock it, but like that’s not the internet. What works on the internet and why the promise, the dream of the 90s was what has been realized now which is Facebook, Google, YouTube, Airbnb, Uber, Twitch, Amazon. Amazon originally wasn’t this but now is this. They don’t make stuff. Like they connect people.

Ben:Facebook is a bundle of content and they don’t pay for any of it.

Brian:That’s exactly what I was going to say. So what actually succeeded in the next decade, it was Facebook and Google who essentially make money off of everybody else’s content by doing nothing. Well, I mean, they sell the ads. They sell the ads against it and they’re the platform that people find it. Essentially, where do I find my Sports Illustrated article or my whatever in my Facebook feed or I do a Google search for something and some evergreen article from somebody’s website. But right, so AOL is going after the content because they think, well, that’s the evergreen thing. That’s the actual value.

David:Right. But they’re getting in a worst business by doing that.

Brian:And the value of that content has been completely undermined because of what the Facebooks and the Googles did. Now, thinking about that, why is everyone getting into content? Why is Apple going to buy James Bond?

David:Yeah, I don’t understand it, honestly.

Brian:So either we’re not smart enough to know how the worm has turned or people are making similar mistakes or what, because we’re now entering an era where Twitter and NFL Games on… like, what is it? Is content valuable or isn’t it?

David:I don't know. I guess the only thing that I’m not smart enough to opine, although I think back to our episode on BAMTech, which was really fun to dig into, these companies, the Apples, the Amazons, the Facebooks, they’re a little bit playing a different game now that they’re so big. They are so big they have so much money and I think a little bit they’re playing defense versus offense. That’s something we’ve talked about on the show. Like, defense in that like they want to keep people, they need to keep people on their properties. That’s how the merry-go-round keeps spinning and by going out and buying these super expensive manufactured content, I think the hope is that that will attract and keep people on the platform. That will attract people or retain people on the platform and then they’ll stick around for all the stuff they’re not making which is making the wheel-ground. But if they move to a paradigm where they’re paying for all the content on their platforms like that’s a worst business.  

Ben:I think there’s like a tick-tock thing here where first, everybody is free and open about their content being aggregated because, I mean, if you just look at what Disney was doing for the longest time, they’re like, “well, we create content and it needs to be viewed everywhere because we’re horizontal.” So then they spend 5 to 10 years executing that strategy and then suddenly the world starts to change and people start locking up their content vertically integrating and then you're like, “well, okay, now we need to change our whole strategy” and own every dollar that comes from serving our content. It's the aggregators that lose out in that world where the content starts getting locked up and so when you see an Apple or a Netflix or any of these, Netflix so much more so because they started as a pure aggregator. You need to make your own stuff because if everything is living in silos you got to have a good silo.

Brian:The history repeating itself lesson is that Yahoo, this is going back to our previous episode we did together, Yahoo and the portals wanted to keep everybody on their pages. Google found a way to make money by being like “No, leave our page. That’s fine. We’ll still make money off you.” So the question actually is, is that a dead paradigm? Is the open web a dead paradigm? Because if it is, then it’s all walled gardens all the way down from here on out.

David:It's turtles all the way down.

Brian:Turtles all the way down or is that sort of freedom of digital makes everything a commodity something that always comes back and rears its head.

Ben:No. I mean, high quality content is very expensive to make and very valuable. It’s only gotten even more magnified in this world where everybody is talking about the same thing at the same time.

Brian:They’ve been saying content is king since the ‘90s, my friend.

David:Yeah. Well, but I think it is like the promise of the internet though. I don't know, maybe we are talking back into a world where content is the most valuable. But what Facebook and Google and others proved is like before them, content was king but it’s not king anymore. Like being the platform is king. That’s not the same as distribution. Like it was always content is better than being the cable company, the downpipe, right? But being the platform where you control the user experience and funnel, you control attention, that’s better than making the content.

Ben:So it’s the newsfeed versus the, you know, I’m thinking about it like rather than me having the choice in my RSS reader of choosing from any of the feeds I subscribe to Facebook slams something down my throat and I say like, “Yup, I’ll read that.” So if you're having an RSS feed --

David:Because then you’d get all your feed from Facebook.

Ben:Yeah.

Brian:I don't know. Sharp listeners, we might have all argued both sides of this.

David:We might have, yeah.

Ben:But David, I’ll give you credit for that point. I’ve never thought about that before, that distribution is if you're going to make a line and say content or distribution, there’s something sort of different in being one of these platforms that dictates where your attention goes.

David:I’ll use another analogy before I give up the ghost here. Airbnb. The analogy would be like it would be great to be joie de vivre or a boutique, really high-end hotel chain, like you do really well, you make money. But like it’s way better to be Airbnb because then you don’t have to make the hotels, you don’t have to build them, you don’t have to run them. But you can access everybody and you can open up all this new supply that didn’t exist in the marketplace before. To me, that’s the dream of the internet, going and buying. You know, if Airbnb were to go and buy the rights to list Fairmont or Ritz Carlton hotels on their platform because it’s super premium, super exclusive content that seems odd.

Brian:So again, I’m confused that we’re arguing that content is…

David:Well, I’m arguing that content is not king. That’s what I’m…

Brian:Okay, got you. Yeah, I don't know. You guys are still in this game. I’m not.

Ben:I withdraw formally.

David:All right, this is great. This is our first like -- not first, but in a long time real debate on Acquired.

Ben:Wait, Brian. Do you mean because you're an author and a podcaster now…

Brian:I’m an author now. I’m moving on to being a historian author. Yeah, exactly. No more stars for me.

Ben:Then I just withdraw from this specific argument.

David:All right.

Ben:All right. So moving on to grading, the funniest part about this whole thing is since AOL is actually the acquirer, like what I thought I was going to grade, I came into this thinking like, well, this would be a fun first F. But for AOL, I mean, it’s like an A-, right?

Brian:That’s the question. Okay? And anyone that has access to a Bloomberg terminal, like I do not, I don't know that anyone’s done the math on that. So if you're an AOL shareholder and you have 10 shares before the acquisition, before the merger, what is the value of that and then what is the value save of the day that they remove AOL from the AOL-Time Warner name. Now, it’s got to be less. We know what, right? But how much less? Then if you compare that to like the counterfactual of if they had never combined, would AOL have gone to zero? So is it actually a success? There are lots of people. You read these books, you get the quotes from the Time Warner insiders, they absolutely believed this was money laundering. They absolutely believed that they got held up. The AOL cowboys come in with their hugely valuable stock, they laundered it into this actually valuable Time Warner stock and they got away with the heist, essentially. That’s the view of a lot of Time Warner people. But I actually don’t know the math on that and if someone can do it, like so even if that ten shares of AOL, even if it only goes down by 60 percent, that’s better than going down 99 percent, right? So, is it actually a success?

David:Yeah. Well, I mean, I think so. On the one sense you could look at, without doing the math on share prices and holdings, if AOL was worth whatever it was, 200-ish billion before the merger, and then ultimately got spun out of Time Warner at a value of 3 billion and got acquired by Verizon for 4.4 billion in 2015 or whatever it was. Okay, so that’s like a huge loss in value.

Brian:But you still had your Time Warner shares.

David:Right. But instead, you got shares in AOL-Time Warner and then after the spinoff you kept your Time Warner shares and Time Warner just got acquired for or is in the process of getting acquired for about 85 billion dollars, I think.

Brian:That’s the math you got to do, yeah.

David:So you now have joint about 90 billion dollars versus 5. That seems good if you were an AOL shareholder. I mean, of course you should have just sold at the top and put your money into Amazon or Domino’s Pizza.

Brian:Or Priceline, Domino’s Pizza, yeah.

Ben:That’s right. I was going to say the only way this could be better for AOL is if they actually bought a growth company like eBay.

Brian:Yeah. That could have been a win. But then, like we said, listen, the cowboys come into eBay, tell them how to run things, would they have been smart enough to buy PayPal. PayPal was the real valuable business there. It's got to be an F, guys. There’s a reason that people call it the worst merger of all time because it destroys, well…

David:So much value. Well, it destroys a ton of value for Time Warner, for sure.

Brian:It destroys $100 billion worth of value in the end.

David:Yeah.

Brian:But the problem is, was that all from AOL?

David:It feels crappy to consider giving them an A just because like the AOL management team and shareholders save their own personal wealth essentially.

Ben:Well, but isn’t that what we grade on? Was this a good thing that for the shareholders of the acquirer?

David:This is good. Shareholders, or is it a good thing for the business. Terrible for the business, good for the shareholders. What do we do?

Brian:It's better for the acquiring shareholders than it could have been. It’s bad for all of the shareholders involved in the end. Because essentially, AOL is a sinking ship that just grabbed another ship and brought it down with it.

David:And didn’t sink as far because of it.

Ben:Slower, yeah.

Brian:You don’t reach the bottom but you're still underwater. There’s got to be 30 Harvard Business School case studies that are telling us that it has to be an F. If this is the first F, if you're ever going to give an F to something in this show.

Ben:There’s also got to be some nice case studies in some sort of like business epistemological thought. I don’t even know if that’s the right word that I’m trying to think of. But basically around that question David just asked. Is it the shareholders or is it the business? And David, is there a difference?

David:Well, corporate behavior of the past, 50 years would imply no. But I think if you look back farther in history than that, there absolutely is a difference.

Brian:If you can’t save the patient, you know, like -- but like if the enterprise itself dies, so keeping the enterprise itself alive even in some sort of mutated form is valuable.

David:I guess.

Brian:Because if the patient is dead, they’re dead.

David:Well, it’s sort of like, I think what we're coming to here and we have been for the whole episode is like exactly what you said, Brian. Like they were drowning and they grabbed a life vest and that kept them from drowning. On the other hand, it didn’t get them to shore. They didn’t catch a boat. They grabbed like a piece of driftwood. I think I’m ready to put forth a grade. I think I give the acquisition a C for AOL shareholders because of that. Like yeah, you did keep the business alive You preserved shareholder value relative to the alternative. But relative to what our two best acquisitions of all time on this show that we’ve rated thus far, NeXT and Instagram, like those are businesses that, to use Bob Pittman’s drug pusher-like analogy, accelerated their company, their acquirers at internet speed. Like there was no acceleration happening here. There was just buoyancy.

Brian:I’m going to do F because if there has never been an F on this show, you're never going to get a better chance. No one is going to begrudge you giving this the F.

Ben:Like we kind of set a bookend, set the scale.

Brian:Listen. Yeah, the scale doesn’t have any meaning unless there’s a top and a bottom.

David:Well, if it were Time Warner acquiring AOL, absolutely F. No question about it.

Brian:I do have sort of a logical reason for it which is that, again, it's sort of what we said about what happens in the next decade. Like, being in the magazine business, being in the television business, being even in the movie business was not actually the evergreen thing. They didn’t grab something that turned out to be the thing that, look, movie attendance goes down, television watching goes down, magazines are basically on life support, newspapers are essentially dead. So this idea that they jumped into media that would always be valuable was not right and they were a part of the disruptive force that made that happen. So this plunges back into this argument about the value of content and things like that. But I think it's a bad thing because in the end, I would view it as two doomed businesses. Or not doomed. Let’s say extremely challenged businesses. So embracing each other and so a successful “get out of jail” by AOL would have been a better company, an eBay or something. But would have been staying independent, struggling. What’s the one thing we’ve got? It’s AIM. So the failure is two companies that were going down embracing each other. So it’s bad to me because they clung on to the wrong lily pad. How many mixed metaphors can I do?

David:Love it, love it.

Ben:Well, I was trying to think what would my F be. I think an A is a business is dying and acquirer is something and then can become the most valuable business of all time, so that’s Apple. I’m sorry, an A+. Then an F would be a company is the best business of all time and acquirer is something and that acquisition manages to sink it to zero.

Brian:Bankrupt them. You're right, you're right.

Ben:Yeah. And so, with our scale it’s almost sort of logarithmic toward the top because we often are like, well, we gave Instagram an A, so this thing has to be like a B+. And like, there’s very successful acquisitions that we don’t give A’s. I think like I’ve given and we may have to go back and revise at some point, but I’ve given YouTube a C because like I was worried about the opportunity cost of focusing on that for Google when it was a breakeven business. So to me, while I don't know if I could go F because AOL didn’t completely crater their own business by making this acquisition, I don’t think I --

David:But Time Warner did.

Ben:Time Warner did but they are the acquiree. I mean, I would have to go like D or D- because I think had buying Time Warner destroyed AOL, then it’s an F. But it’s certainly worse than a C for me. And way, way worse. So I’m going to go with D- and I hope to one day find something on Acquired where something went from like a Fortune 10 to destroying themselves. I don't know. But if we ever have an F, that’s what it would be.

Brian:Like some company that buys something that causes cancer for $10 billion. Which actually, I shouldn’t joke about that. That’s probably happened or something. Well, all I want to do is as long as this show goes on, I’m the one that first gave an F. Let’s put that in the record.

David:Great. You're forever, you know, you can put in your trophy case the original --

Ben:We’ll change the Twitter bio.

David:Yeah. The original F. Carve Outs?

Ben:Carve Outs, quick, yeah.  So mine is a book that I’m almost done listening to on audiobook and I’m going to be really bummed when it’s over because it’s really nice to have a dose of this kind of reminder in my life every day on my commute, and that is, Give and Take by Adam Grant. It’s really making the rounds right now so I’m sure a lot of listeners have already heard of it or had people tell them they should read it. It’s so awesome. It’s research-backed descriptions of the behaviors of givers, takers and matchers in our lives and what the results are of those personality types, and a litany of examples of givers and what they’ve done and how they’ve succeeded in their careers. The super interesting thing that pops out from the book is if you look at sort of a spectrum of people’s success in their careers, takers, if you look at a span from 1 to 5 where 1 is not succeeding at all and 5 is succeeding fantastically, takers occupy 2 and 4, matchers occupy 3, and givers occupy 1 and 5. So it’s this interesting dissection of just by being a “give first” person, it doesn’t guarantee that you're going to end up on top or bottom and it tries to sort of tease apart what are the traits of givers that can make you someone that ends up ahead in the long run just because you truly care about people and you're truly someone that looks out for the interest of others and it’s interesting to understand something that I never had a mental structure for before. And it’s also like a good little kick to be a better person and it's nice to have that voice every day. And the narrator sounds like Craig Federighi, so if you like watching Apple Keynotes, you’ll like listening to this guy’s voice.

David:My carve out which is appropriate for this episode with Brian and the Internet History Podcast and has been a deeply historical episode, another book, a great one that I’m also a little over halfway through reading and can’t wait to finish called Season of the Witch and…

Brian:I have that on my Kindle. I haven’t read it yet.

David:You’ll love it. It’s the dark history of the dark side of the counterculture in San Francisco and what happened to San Francisco in the 60s and in particular in the 70s. The Manson Murders, the Zodiac Killer, the zebra killings. Everything that was really the not-often-told. We remember the 60s as like peace and love and it’s the 50thanniversary of the Summer of Love in the city this summer. What gets celebrated is the happy, the psychedelics but there was a true, true dark side and it's very, very fascinating to read about. And really shaped the city and again like we’ve talked about on this podcast too, it was the tech movement in Silicon Valley that really came out of the next period in history in this area and it was shaped by the dark side as well.

Brian:Is the tech angle in the book?

David:Not thus far. I don't know because I haven't gotten to the end yet. So I’m curious to see. But I’ve also started reading another book called What The Door Mouse Said which you've probably read.

Brian:Yeah.

David:Which is about the tech angle in the 60s, in the counterculture.

Brian:I just watched for the first time recently the Zodiac movie, David Fincher’s Zodiac. I had always heard it was a good movie but I tend to avoid serial killer movies. But that really is a good movie. I was going to do a book anyway so I’m not going to buck this trend. Claude Shannon, people might know from the book The Information but also basically the guy that invented information theory, Alan Turing knew the dude, like he shows up in the intersections of all sorts of things with computing and the internet and things like that. I think it's the first full comprehensive biography of him. It’s called A Mind at Play: How Claude Shannon Invented the Information Age, the authors are Rob Goodman and Jimmy Soni. I have not read it at all but it is the top of my list to read and so I think since that’s my sort of gig, is the history of technology and things like that, I’m eager to learn about the minds that shaped information technology and Claude Shannon. If you've read the information, you should know about him, basically formulating the theory behind essentially coding and how logic goes into programming and things like that and taking it from the philosophical into the practical. So yeah, I haven’t read it yet so I can’t say that it’s great but I want to know more about Claude Shannon and you should too probably.

Ben:Well, that’s it for our show. One thing I forget to mention earlier that might be interesting to listeners is we spend a couple of episodes asking you guys to fill out a survey and we posted the results on Acquired.fm/audience. So if you’re interested, we’ve got some interesting stats on there. Two-thirds of our audience is based in the US. Twenty-four percent of you are engineers, 26 percent of you are currently or have started a startup and there’s loads of other good information on there. So if you're curious about basically Acquired’s listenership, check out Acquired.fm/audience.

David:And one more bonus/super carve out for the end of the episode is of course the Internet History Podcast. As we have told you guys many times on this show, Ben and I are both huge fans, Brian, of your work. It’s awesome and this has been so much I think even more fun than last time having you on the show.

Brian:I think we got to know each other like I totally was so geeked to do this because I was like, okay, I think we’re good together. So I knew the rhythms and I was like, “Oh, this is going to be great.”

David:The peanut butter and jelly of tech history podcasts.

Brian:Well, thank you and since I’m going to just basically post this on my site completely unedited, I promoted it last time. I got feedback, a bunch of you listened and subscribed and you can hear that these guys are smart and they come at it from a different angle than I do and it’s fantastic. Acquired.fm, right?

David:Acquired.fm on the internet. AOL or otherwise.

Brian:Yeah.

Ben:AOL keyword Acquired.

Brian:I was going to say they used to have keywords. You could buy keywords. Like literally if you wanted books, you didn’t have to -- it wasn’t Google Adwords or Adsense, it was literally you would type books into the AOL search bar and they would give you not web pages but just what they had in their system in terms of books. You could buy that keyword. I think I did it once actually.

Ben:Well, guys, that’s it. If you aren’t subscribed and want to hear more, you can subscribe from your favorite podcast client to Acquired or the Internet History podcast and if you feel so inclined, we would love a review on iTunes. Have a great day!

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