AOL slims down—the wrong way.

Commentary about business and finance.
Jan. 24 2003 5:03 PM

Used Book Sale

AOL slims down—the wrong way.

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.

Advertisement

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.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Weigel
Sept. 17 2014 8:15 AM Ted Cruz Will Not Join a Protest of "The Death of Klinghoffer" After All
  Business
Moneybox
Sept. 16 2014 4:16 PM The iPhone 6 Marks a Fresh Chance for Wireless Carriers to Kill Your Unlimited Data
  Life
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 17 2014 9:03 AM My Father Was James Brown. I Watched Him Beat My Mother. And Then I Found Myself With Someone Like Dad.
  Technology
Future Tense
Sept. 17 2014 8:27 AM Only Science Fiction Can Save Us! What sci-fi gets wrong about income inequality.
  Health & Science
Bad Astronomy
Sept. 17 2014 7:30 AM Ring Around the Rainbow
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.