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The Big Fix

Suddenly, the turn-of-the-millennium lust for media-world consolidation seems absurd (just ask AOL Time Warner and Vivendi shareholders). Is it already time for AT&T-style breakups?

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The corporate struggles at Vivendi and AOL Time Warner -- near-riots at one, and a fraught battle for power at the other -- could begin the end of the age of consolidation.

Now, the illogic of massive media conglomeration is a lot easier to enter into than to back out of. For the latter to happen, virtually every element of the business matrix -- management, bankers, shareholders, analysts, press -- has to admit it was wrong. Not just wrong, but stupid -- duped.

Still, while the conditions for such a reformation are rare, they aren't unheard of. The technology business has gone through such a period of abject self-criticism. What happens -- through the combination of falling markets, harsh press, public confessions, and a fall guy or two -- is that an environment is created wherein absurdity becomes a reasonable explanation for what's gone wrong.

"Oh, that was absurd," some businessperson with little appreciation of absurdity will suddenly say about a heretofore wildly admired deal or decision or financial turn of events. Absurdity becomes an acceptable cover. Everybody can think, Some mass delusion forced me to take leave of my senses, but now I'm back.

Reality is back. And we are ready to do the obvious thing -- which is to break up AOL Time Warner, and Vivendi, and . . . well, let's stick with those two for now.

Of course, first the absurdity must become so great -- the emperor so naked -- that legions of professionals trained to ignore the big joke must confess that it is just too funny and ridiculous and obvious not to laugh about.

I live on the Upper East Side, on the margins of the neighborhood where the great moguls live. You've got Barry Diller and the former Mrs. Redstone at the Carlyle Hotel (and Mr. Redstone nearby); you've got Mort Zuckerman on Fifth; you've got Michael Bloomberg on East 79th Street; and, all around the East Side, the bankers and lawyers who do the media deals. And now you have Jean-Marie Messier, who's moved into the neighborhood, into a $17.5 million Park Avenue apartment that his company bought for him.

Let us assume that every CEO is engaged in an act of self-aggrandizement -- but, equally, that a big part of a CEO's job is to subordinate his desire to be transformed. To keep a lid on it.

The necessity to sublimate the need for affirmation and glamour is even more acute if you are in the entertainment business -- because just by going into the entertainment business, you announce your weaknesses. Many would-be moguls have stumbled here -- letting on, even flaunting, just how much they were willing to pay (or overpay) to satisfy their personal vanity. Most recently, Edgar Bronfman Jr.

But the Messier transparency is even more crystalline. His mission has been to transform his core company, Compagnie Générale des Eaux, the reliably profitable French water and sewer utility, into a global entertainment-and-media concern, a business of fathomless risk and customarily low reward. What's more, clearly intoxicated by the myth of American culture (nobody is as susceptible to the comic-book aspects of America as much as a foreigner), he's tried to transform himself from a French businessman and former government bureaucrat into an American media magnate -- financier, cultural icon, Machiavellian power broker, new-new-thing visionary. This transformation has so far cost his shareholders $100 billion. He is, in the parlance of investment bankers, a deal junkie -- the characteristic of this addiction being that any transaction, smart or dumb, satisfies the craving to be something newer, better, bigger, greater.

At any rate, not long ago, as I was walking on Madison Avenue in my mogul neighborhood with Steven, my 10-year-old, who was shopping for an ice-cream cone, we saw a figure who prompted Steven, not unjaded in the ways of his neighbors' personal excesses, to exclaim, "Look at that guy!"

There was, languorously moving up Madison Avenue, a small man, with a coat cast capelike over his shoulders, and the most pleased-with-himself expression I believe I have ever seen on an adult, whom I recognized to be Jean-Marie Messier (I quite doubt anyone else recognized him). He occupied a wide swath of the sidewalk, with a strut to the left and then a strut to the right, nodding and smiling, or rather bestowing blessings, on passersby (who gave him wide and incredulous berth). He seemed to see himself as some combination of religious figure and maestro -- his idea, I suppose, of an American mogul. (Not something, of course, you could see yourself as if what you are is a CEO of a water and sewer company.) I do not think he would have considered spontaneous applause to be out of order.

And there is AOL Time Warner's Jerry Levin. He has been busy trying to declare the underlying moral mission of his CEO-ship before leaving, on May 16, the staggering mess he created.

It is worth repeating that Levin made what is now universally regarded as the worst deal ever made in corporate history: He mistook AOL for being worth some $50 billion more than it was.

Levin's idea was to transform himself not through the flattery and glitz of the entertainment business (indeed, Levin, somewhat more advanced than Messier, has long recognized that the entertainment business is a terrible one) but by leaving media and joining, even ruling, the new technology-mandarin class. He would be Mr. Wizard.

As it happened, virtually every prediction he made with regard to technology has been wrong. The inevitability of convergence, the speed of broadband, the cleverness of synergy, the niftiness of set-top boxes, all turned out to be bull -- a Brooklyn Bridge sold by technologists to people who knew nothing about technology -- and to have cost AOL Time Warner 75 percent of its value (so far).

Levin, who at $147.6 million was the second-highest-paid CEO in America in 2001 (he received $152.6 million in 2000, and he'll be making $1 million a year in advisory fees after he retires this month), has taken to excoriating executives and investors who would focus on profit and growth, and proselytizing for the moral obligations of modern media conglomerates. "Some shareholders and analysts think the sole purpose of a corporation is maximizing profits for them," said Levin in a farewell speech.

It is not just that Messier and Levin are incompetent, but that they are alone. Caught out. Revealed. No one wants to stand near them and risk being part of the joke. Therefore, invariably, the opposite of what they are, and of the strategies they've risen on, comes into vogue. And what they've done must be undone.

While Vivendi and AOL Time Warner will, I think, make breakup a popular, even culturally with-it idea, it is actually, I believe, AT&T, a company whose present core business is its own dissolution, that provides the model, and the intellectual wherewithal, for the breakup of technology-entertainment-communications conglomerates to come.

In AT&T, you have a vivid illustration of the absurdity principle. As with Messier and Levin, in AT&T's chairman, C. Michael Armstrong, you have a quintessential empty suit who decided he was going to make himself over -- be cool, get great press -- by putting his company and himself at the center of the revolution in media and technology, even though he knew nothing about any of those things. Armstrong, like Messier and Levin after him, promptly got taken to the cleaners -- most notably by John Malone (who's made a career of taking people who don't know enough to the cleaners).

The John Malone of the present situation is surely Barry Diller, who, in fact, has long modeled himself after Malone. They are among America's cruelest and least sentimental dealmakers.

The scenario is a pitiless one. Messier, like Edgar Bronfman, his hapless predecessor, has made Diller wealthy enough (for a vast premium, Messier bought back the assets Bronfman had sold to Diller, making Diller possibly the richest man in Hollywood) to achieve his career dream: controlling a major media company. Diller (hired by Messier) runs not only the American company that will invariably be spun off from the French one but also runs his own company, USA Interactive. And because he's the dual CEO, USA Interactive will no doubt be the logical (perhaps the only logical) buyer of the spinoff.

AT&T also provides a model for AOL/TW (there is now talk at AOL/TW, as there was similar talk at AT&T, of a public offering of its cable business -- restructuring always seems like a suddenly marvelous idea when everything is in chaos). But there is another breakup too lovely not to invoke at AOL Time Warner.

The AOL mess has happened before to the house that Luce built. All but faded from corporate memory is the name Temple-Eastex, a paper mill that, in a former chapter of corporate absurdity, Time Inc. bought in the seventies -- though, arguably, the paper mill had bought Time Inc. Forest products became a third of the Time Inc. business, and the Grum family, from Diboll, Texas, among Time's largest shareholders. This hilarious combination was undone not too many years later in a deal that led Clifford J. Grum, who, in effect, was given his company back, to remark (apocryphally or not) that he felt like a whore -- he sold what he was selling but got to keep it, too. Steve Case and Bob Pittman might, uncharacteristically, get to be similarly droll.

It is not just that Vivendi and AOL Time Warner are the result of executive hubris and inept business strategies, but, on a much more profound basis, their ridiculousness might strike the first big blow for a new sort of localism and anti-corporate imperialism.

The French, after all, in the protests at the Vivendi shareholders meeting, are making the case for a French corporation -- why should French shareholders support a CEO's American ambitions? Might this run counter not only to shareholder interests but to national interests, too? (The Americans are still in the pre-colonial-revolt stage of enjoying the largesse -- Hollywood has, of course, seen foreigners come and go before.)

Similarly, it is the New York side of AOL Time Warner, the steadily profitable old-world side of the company, that is rising up more and more against the outside interlopers (Bob Pittman has been sent back to Dulles, Virginia). In a sense, Time Warner is as much a New York company -- factions and fiefdoms, competing interests, dominated by no single figure -- as Vivendi used to be a purely French company. It is not only that the ambition of AOL to take over Time Warner has been discredited by the fact that the AOL side of the company turned out to be worthless -- rather, anyone might have had trouble governing Time Warner. It's a New York thing.

By the logic of science and poetry, things fall apart. That, of course, is the opposite of the corporate view, where logic calls for relentless aggregation. But, reductio ad absurdum, I'm betting on science and poetry.

E-mail: michael@burnrate.com


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