AOL Plans Return of Content Unit

Realignment to Add Program Development

by Rajiv Chandrasekaran

Saturday, February 7, 1998

America Online Inc. is expected to integrate its Internet programming division back under its flagship online service, a move that indicates AOL wants to develop interactive content more with its own money than outside capital, sources familiar with the strategy change said yesterday.

Dulles-based AOL also will announce as early as Monday that Robert W. Pittman, president of the division that runs the online service, will become the company's chief operating officer and will oversee the content development operations, the sources said. Pittman, a former cable television and real estate executive who joined AOL in late 1996, has long been viewed as the company's second-in-command, under chief executive Steve Case.

In late 1996, a financially struggling AOL split itself up into three divisions: the online service, the content development division and the network access provider. The company sold the network access division, ANS Communications Inc., to WorldCom Inc. in a three-way deal with H&R Block Inc., owner of the CompuServe Inc. online service, that netted AOL $175 million in cash and the subscribers of CompuServe.

The content development division, called AOL Studios and with headquarters in Vienna, was separated out to line up outside investors to fund its online programming. The division, which was intended to be self-supporting, creates interactive content that appears both on AOL's proprietary service and the broader World Wide Web.

Initial efforts to lure outside investors were not as successful as the company had hoped, analysts said. At the same time, AOL found itself flush with cash from the WorldCom deal and a recent $300 million debt offering. "They now have the money to pay for content," said Ulric Weil, an analyst with Friedman, Billings Ramsey & Co. in Arlington.

As the company focuses more on the online service, content development also has become more important. "AOL has moved very successfully from a connectivity-based business to a content and commerce-based business," said Jonathan Cohen, an analyst with UBS Securities Inc. "It's only natural that they invest more in content."

An AOL spokesman would not comment on the reorganization plans, which were first reported in yesterday's editions of the New York Times and the Wall Street Journal.

The reorganization is not expected to lead to any significant layoffs, the sources said. As part of the revamping, Ted Leonsis, an AOL executive who once ran the online service and has been heading the studios division, is expected to report to Pittman instead of Case.

AOL's shares, which this week reached an all-time high of $101.75, rose 50 cents yesterday to $98.50. Last February, the stock hit a low of $33.

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