Typically, the news of a potential $400 million asset sale by a Fortune 500 company would be relegated to a brief in the New York Times "Business" section. But on Thursday, the Times splashed word that AOL Time Warner is putting its book publishing unit up for sale across the front page as a significant scoop.
You can attribute the prominent play mostly to the Times'disproportionate focus on any business news that involves "media." But in this case, there's a valid claim to be made that AOL Time Warner's sale of its publishing properties is an important symbolic event. What does it symbolize? First, the beginning of a yard sale held to help pay down a potentially crippling $26 billion debt—a sale likely to include many more valuable assets, such as possibly the Atlanta Braves and AOL Time Warner's stakes in Court TV and its cable systems. But second, and perhaps more important, the sale stands as further evidence of the failure of synergy—that process of alchemy through which one-time visionaries claimed they could combine magazines, cable, network television, and the Internet and produce both value-added, profitable infotainment products and ever-higher stock prices.
Synergy has not failed at AOL Time Warner for the reasons usually cited, which range from bureaucratic infighting to a fundamental failure of vision on the part of the AOL Time Warner merger's architects. The failure has more to do with the nature of publishing than with any particular failure of the editors and executives. Media conglomerates are not vertical enterprises, in which resources created at one unit are automatically upstreamed into other units for processing.
AOL Time Warner's publishing units are typical in this regard. They've hardly been a font of synergy—not with AOL and not with other units of Time Warner. Writers at Fortune and other AOL Time Warner publications, in fact, are more like the free agents that play for the Atlanta Braves than the old movie stars once captive to Warner Bros. There is no sense in the industry—and rightly so—that the fruits of research you may conduct while on the company payroll should be published in book form by another unit of the company. Besides, picky book editors frequently aren't interested in the book projects that writers at their sister TV or magazine units are pitching.
And so Sein Language,the best-selling book by Jerry Seinfeld—whose show was produced by Warner Bros.—was published by Bantam. More recently, Fortune's Bethany McLean, one of the early journalistic skeptics on Enron, sold her take on Enron, to be co-authored with Fortune Editor Joe Nocera, to ... Penguin Putnam. Walter Isaacson, the class president at Time Inc. for nearly two decades, publishes with Simon & Schuster. AOL Time Warner's movie unit, Warner Bros., has made oodles mining synergy out of the Harry Potter book series, which is published by Scholastic Inc.
There's another reason for the failure of synergy. At AOL Time Warner, and elsewhere, publishing is essentially a manufacturing business living under the umbrella of an entertainment company. Publishers buy the raw material—the content—have their editors process it, make books, and then sell them into a distribution channel, much the same as Mobil produces oil or General Motors makes cars.
One reason for having different businesses under a single corporate parent—this is the unsexy side of synergy—is that they can share costs of advertising, back-office operations, benefit costs, or the acquisition of raw supplies. All of General Electric's units, for example, benefit from the highly visible corporate ad campaigns that GE runs. But it's difficult for AOL Time Warner's publishing unit to share functions with, say, the magazine units, or with CNN, or with TBS, or with the Atlanta Hawks, or with the cable systems. Regardless of where it resides, a publishing unit must have its own finance staff, back office, sales force, warehouse chain, and publicity staffers. And because AOL's publishing unit is small, its presence doesn't meaningfully add to the parent company's ability to gain economies of scale.
AOL Time Warner's publishing unit, which includes the imprints Little, Brown and Warner Books, is actually a pretty good business. Little, Brown does serious nonfiction and fiction, although it's not one of the largest players. Warner, which is somewhat more downscale, is a force in mass-market paperbacks and self-help. According to the Wall Street Journal, the publishing operations had sales of $400 million in 2002, up 10 percent from 2001. Its earnings before interest, taxes, depreciation, and amortization, or EBITDA—a metric that still matters to acquisition pros if not investors—was "more than $40 million." That's particularly impressive given that sales of trade books have been stagnant for the past two years.
If AOL was really serious about slashing its debt and ridding itself of units that aren't growing, it would keep the books unit and jettison the AOL unit instead. After all, the publishing operation's sales and profits are on the rise while those of the formerly independent AOL are cratering. And while Little, Brown and Warner Books are hardly liabilities, it's likely that the AOL unit alone is responsible for about $9 billion of the company's debt—about one-third of the total. There might not be many natural buyers for the now-tarnished Internet operation. But the company could spin AOL off to existing shareholders—along with its debt—as an independent entity.
In putting its publishing houses on the block, AOL is behaving like a library selling volumes from its basement to raise funds for a renovation—while leaving the moldering collections on the upper floors untouched. It is their weight that could cause the whole edifice to come crashing down.
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