By Landon Thomas Jr.

January 13, 2002 | 7:00 p.m

Two years after AOL's Steve Case beguiled Time Warner's Jerry

Levin with a thrilling vision that new-era growth would propel the merged company far into the next decade, Richard Parsons, the C.E.O.-designate for AOL Time Warner, formerly declared the dream dead. It happened on Jan. 7, in a State of AOL Time Warner conference call. "We expect revenue and EBITDA [industry parlance for 'cash flow'] growth for the first quarter to be essentially flat ," Mr. Parsons said, putting extra emphasis on the last word. "Last year, we made certain economic assumptions and ran right into a major recession," he continued. "As a result, we got no credit for our achievements because of the high expectations that we ourselves created. Going forward, our assumptions about the economy will be more conservative. It simply is not prudent to forecast the economy in a volatile world." Bob Pittman, now the chief operating officer–designate for AOL Time Warner, was sitting right next to Mr. Parsons during the call, and he might well have cringed. For it was he and his fellow AOL alumnus, chief financial officer J. Michael Kelly, who throughout 2000 and most of 2001 had peddled a slick 30 percent growth message to an all-too-gullible Wall Street community. AOL Time Warner was different, Mr. Pittman smoothly assured investors as Internet and technology companies keeled over left and right. They had 140 million–oddsubscribers-andthegreat growth engine itself in Dulles, Va., was still sucking in $23.90 apiece per month from 50 percent of logged-on America. Wall Street, though, caught on fast. A recession was a recession, and AOL Time Warner, the biggest media company in America, couldn't be immune. On the sell side, analysts downgraded their numbers. Merrill Lynch's influential cable analyst, Jessica Reif Cohen, started the trend on Oct. 17 when she revised her rating on the company to neutral from buy-to the barely suppressed ire of Mr. Kelly and Mr. Pittman. Even the queen of cheerleaders, Morgan Stanley's Mary Meeker, took down her numbers last week; she maintained her strong buy rating, of course, but raised some blunt questions about the sustainability of the AOL growth model. The stock, at $32 and change, was an underperformer-far off its pre-merger high of $91, and the province of short sellers far and wide. So yes, the mood on the conference call was dour. Indeed, Mr. Parsons, Mr. Levin and the newly appointed C.F.O., Wayne Pace, seemed eager to get on with it and put up as gloomy a picture as possible. First off, they would take a $60 billion charge to earnings in the first quarter, reflecting the difference in the price that AOL paid for Time Warner in January of 2000 and the sharply reduced value of its assets now. They would also pay close to $7 billion in cash to Bertelsmann in order to buy out their former partner's stake in AOL Europe-which, it was disclosed, was losing $600 million a year. And to top it all off, the forecast for revenue growth for the year would be a snail-like 5 to 8 percent. All of this dire news was delivered by C.E.O.-designate Mr. Parsons and his doleful new C.F.O., Mr. Pace-both of whom are Time Warner men. Mr. Parsons, a longtime Gerald Levin ally, has been a Time Warner board member since 1991, and Mr. Pace is a former finance man for Turner Broadcasting Systems. The deep rumble of Mr. Parson's boardroom baritone set an appropriate tone for the evening. Yes, here was a man who knew how to present the hard facts of life. A protégé of Nelson Rockefeller, a member of Sanford I. Weill's Citigroup board and President Bush's favorite media guy-he co-chaired the President's Commission to Strengthen Social Security-the 6-foot-4 Mr. Parson more than fills up a corner office with his gravitas. Even his choice of words seemed apt for the moment: " Going forward, we will be more conservative …. It simply is not prudent " (a word few AOL executives have been heard to utter). Blunt and reassuring, the tenor of Mr. Parson's remarks were in sharp contrast to Mr. Pittman's; the only AOL representative on the phone call, Mr. Pittman devoted most of his time to spinning reasons as to why AOL Time Warner didn't hit its numbers. "The advertising recession was the drag on our company's earnings for 2001," he said. "If we had had just half of the advertising that we had in the year 2000, we would have easily hit our original guidance of 30 percent EBITDA growth for 2001." No doubt about it: Bob Pittman is a man who is used to hitting his numbers, and one senses that he still can't believe he missed them. But here's the thing: to plead if only is disingenuous to a fault. He and his team were dishing out their forecasts as the advertising recession built up before them like a massive tidal wave. As AOL's chief operating and market executive, it was his job to see it coming and adjust his forecasts accordingly-something he and his growth-obsessed AOL gang did not (and perhaps could not) do. Following Mr. Levin's surprise resignation, there was some speculation that Mr. Parson's tenure at the helm would be a short one, and that Mr. Pittman-now in charge of all the operating units-would shortly replace him, finally concluding AOL's takeover of Time Warner. But the opposite now seems to be the case. AOL's core dial-up Internet business has matured, while the small pockets of growth to be found within the company are coming from Time Warner units like the high-speed Internet services at Road Runner and the success of movies like Harry Potter and the Sorcerer's Stone and Lord of the Rings , which between them have taken in a half-billion dollars domestically so far. In fact, the two major pieces of bad accounting news this week hark directly back to AOL and its bygone glory days. The $60 billion charge recognizes the fact that the AOL stock used to buy Time Warner was ludicrously overvalued. And the contractual agreement to pay billions to Bertelsmann for full control of an entity that bleeds a half-billion a year in losses follows as well from a deal struck by AOL during the peak days of Internet fever. In fact, there were many who felt that Mr. Levin's resignation-particularly in view of the $60 billion charge-was his way of saying Yes, I was seduced by those snake-oil salesmen from Dulles. Steve Case put one over on me: AOL stock was never worth 90 bucks, 70 bucks or even 50 bucks . Indeed, a recent report by Morgan Stanley attaches a fair value of only 38 dollars to the stock. But all the same, Mr. Levin got the last laugh: While Mr. Case remains ceremonial chairman, it will be Jerry's man, Mr. Parsons, running the company. In Dick Parsons, he has appointed a C.E.O. in perfect chime with dour economic times. A realist and an accommodator who's as comfortable at a Lincoln Center opening as he is lobbying regulators in Washington, a personal friend of a popular President as well as of powerful Federal Communications Commission chairman Michael Powell, Mr. Parsons is perfectly positioned to lead AOL Time Warner to the next stage. "I am 100 percent committed to the strategic vision that drove Steve Case and Jerry Levin to fashion the merger of AOL Time Warner in the first instance," Mr. Parsons stated Monday. Fair enough-but it was never his deal to begin with, and what the conference call this week brought into sharp relief is that the deal itself was a drastically mispriced one. Those who fashioned it-Mr. Levin and Mr. Case-are now in retreat; those who hyped it-Mr. Pittman and his crowd-are still breaking a sweat. But it's the man who inherited it, with realism and cold assessment-Dick Parsons-who, for the time being, owns the AOL Time Warner stage. And it would be genuinely surprising if he exits it anytime soon..