To the surprise of surely no one, Time Warner said it plans to spin off AOL later this year in a move that will unwind a merger that seemed doomed from the start and foretold the broader reversal of internet company fortunes in the soon-to-follow dot-com bust.

Time Warner said its board had approved the initiative, signaled for months, in a way which would ensure that it would be tax-free to shareholders, which had been a major sticking point. It plans to purchase the 5% of the company Google owns before the separation. The deal still requires regulatory approval.

The tie-up announced on Jan. 10, 2000 was something of a crescendo in the hot internet market of the 1990's, unveiled with all the throbbing-music stagecraft of the release of a rock band's tour dates. There was new media wunderkind Steve Case, uncharacteristically wearing a tie, and old media tycoon Jerry Levin, uncharacteristically sporting an open collar. If only everyone had seen what was wrong with that picture at the time.

Billed as a "merger of equals" the tie-up was more a tale of the minnow swallowing the shark, with AOL shareholders actually owning 55% of the new company. The all-stock deal made Case, who had built up AOL from a few hundred thousand customers to more than 30 million in 6 years or so, seem even more the internet genius. Case became chairman of the behemoth, and Time Warner's Levin remained CEO.

AOL Time Warner was instantly the largest media company in the world, with a market cap of $350 billion. Shares in the two companies surged in the immediate afterglow of the news, but when reality set in the value of the company began a steady decline. While it seemed brilliant on paper the marriage of a major content company — with interests in film, TV, telecommunications and publishing — with the hot internet company of the day simply never worked out.

AOL's supremacy was based on its dial-up business, which broadband had already begun to erode, and a walled-garden approach online content that was already becoming stale, so the supposed synergies were non-existent. Then Google came along and ate everyone's advertising-business lunch on the open web. But even before the tectonic changes in the industry the handwriting was on the wall: AOL Time Warner reported a $99 billion loss in 2002 — at the time, the largest ever by a US company — and in 2003 dropped "AOL" from the corporate name.

In March former Google executive Tim Armstrong signed on to run the AOL division, now clearly with the understanding that he'd get the chance to breathe life into a new, stand-alone company. Armstrong was an early star Google employee and headed up US ad sales during its frenetic expansion. As Wired's Fred Vogelstein put it at the time, Armstrong seems especially well suited to turn AOL around, noting that under a stifling Time Warner tent AOL ceased to be the innovator Google had become.

"But unlike Google, which is an innovation machine, AOL has become a place where good ideas go to die. You don’t innovate as an AOL executive anymore, you make grandiose claims about a vision and wait for the next restructuring that frees you from any accountability.

"Fixing this poisonous culture will no doubt be Armstrong’s first order of business, and if AOL was a stand alone company I’d think he had a good shot at making it happen."

Time Warner to Separate AOL Near Year End [Reuters]

Photo: Tim Armstrong

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