Analysis: A sign of the times: humiliation for the new media hero who defeated an old giant

As Steve Case departs from the company he helped create, Wall Street reflects on a disastrous marriage with the internet generation

Steve Case, the founder of America Online, stunned the world by announcing his intention to buy Time Warner. That was three years ago. He was the very embodiment of the all-conquering new media. But today he stands for deflated fortunes and unvarnished humiliation.

Mr Case is stepping down as chairman of AOL Time Warner. His resignation late on Sunday was a surprise to no one, after months of disgust on Wall Street with his performance at the head of the huge corporation he created. But it is a significant moment. The humbling of the internet warriors is now complete.

Mr Case's story is one of monstrous hubris and a rapid fall from grace. Nothing about the merger, which was completed in January 2001, had gone according to plan. Indeed, the man left in charge of AOL Time Warner, Richard Parsons, is widely expected to use Mr Case's departure to drop the AOL initials from the company name. He may even sell the AOL unit and return Time Warner to what it was.

Timing, good and bad, also played a part in the tale. When Mr Case, 44, revealed his intention to buy Time Warner, the internet boom was at its peak; AOL's sky-high valuation gave it the paper wealth to make the $156bn (£97bn) offer. Never mind Time Warner's revenues were four times those of AOL.

It was a daring move, to put it mildly. Many players in the old media universe that Time Warner epitomised were privately appalled. Yet, it seemed almost inevitable as well. AOL had for years held investors in its thrall as its stock price had scaled higher and higher. There was no turning back the new technology tide and the merged AOL Time Warner would rule.

By withdrawing, Mr Case – who will remain on the board and co-chair the company's strategy committee – is acknowledging what Wall Street and many of his co-directors have known for many months. The marriage has proved disastrous.

Just look at the merged company's stock performance. In May 2001, the company was worth $260bn (£162bn). Now it stands at about $66.5bn (£41bn). AOL Time Warner's stock has plunged 54 per cent in the past 12 months alone.

He was not forced out. But he saw the writing on the wall. Several other high-profile members of the AOL Time Warner board have been noisily campaigning for his removal since last summer, among them Ted Turner, the founder of CNN. To stay on, Mr Case faced a bruising battle in the run-up to the shareholders' annual general meeting in May.

"Some shareholders continue to focus their disappointment with the company's post-merger performance on me personally," he said in a statement. "I recognise a lot of people have bet on this company and are disappointed by the results. But it's never over until it's over ... In the long run I really do believe we will be able to capitalise on the promise."

He said he reached his decision over Christmas. A spokeswoman for Mr Case said: "He was aware that there had been some swirl about whether he should stay a few months ago. He knew that while it had died down, there was a possibility it could come up again as we headed toward the shareholder meeting in May. Frankly, he wanted the company to be able to move forward without being distracted."

The merger did provide a boon, at least, for the original shareholders in AOL who otherwise would have undergone the same kind of pain most other internet investors suffered when the hi-tech bubble burst in 2000 and 2001.

And Mr Case is still an extremely wealthy man. At current prices, his common AOL stock should be worth about $171m (£107m). In recent years, he has repeatedly cashed in stock options. In 2001, just after the completion of the merger, he exercised options worth $127m (£79m).

While his place in history is assured, Mr Case steps down with the cloud of the merger's failure clinging to him. But he leaves reluctantly. "This decision was personally very difficult for me, as I would love to serve as chairman of this great company for many years to come," he said. "As an architect of the merger I have felt it was important that I stay the course as chairman and help get things on track."

Mr Case is a persuasive personality and was long the most enthusiastic advocate of the internet. He made a compelling case for the marriage with Time Warner and sold it to the chief executive of Time Warner, Jerry Levin, who became the new company's chief executive.

The two men pedalled a vision whereby Time Warner would become infused by the new media savvy of AOL. And AOL, which had introduced most Americans to e-mail and instant messaging, would be the engine of the new group's growth. Instead, AOL became an albatross, dragging the company down. By the end of 2001, Mr Case and Mr Levin were forced to concede that their forecasts had been grossly awry and Wall Street punished the stock royally.

Rumours of sour relations between AOL and Time Warner personalities persisted. The promise of advertising synergy between the partners never materialised.

The unraveling of the marriage began quickly, first with the resignation of Mr Levin in December 2001. He departed last May to be replaced by Mr Parsons. Then last summer Robert Pittman, the former president of America Online, also resigned, setting the stage for a reshuffle of senior executives that saw old Time Warner hands taking over most of the leadership positions.

With Mr Case's demise, the influence of AOL executives on the merged company's day-to-day management will be almost gone. "Case's departure is the final step in new media's loss of control over Time Warner," Dylan Brooks, a senior analyst for Jupiter Research, said yesterday.

Mr Case is not the first giant of the internet boom to crash-land. Others who showed similar bravado only to fall include Jean-Marie Messier, the former chairman of Vivendi Universal, and Thomas Middelhoff from Bertlesmann.

Mr Case made several mistakes, not least his decision to take a hands-off approach to managing the new company in the first months after the merger. His near-invisible profile triggered rumours on Wall Street. Some sympathised with him, as he found himself distracted in those early months with the serious illness of his older brother, investment banker Dan Case, who died in June last year.

But more recent attempts to involve himself seemed only to annoy senior executives, who complained that he was meddling too much.

But to take too much away from Mr Case would be a mistake. He was 26 when he first recognised the power of the internet and founded the company that would become America Online.

Mr Case, who grew up in Hawaii before moving to North Virginia, can be said to have introduced most of us to the internet, to e-mail and to instant messaging.

And while AOL's revenues have been falling for two years, it still remains three times the size of its nearest rival in the internet portal business, Microsoft's MSN service.

Changing times

January 2001

Steve Case, chairman, said: "This is the first time a major internet company has merged with a major media company and the possibilities are endless."

Ted Turner, vice-chairman of the new company, said: "I have not been so excited since I first had sex 42 years ago. There is a possibility for some friction but I don't think that is going to happen."

Paul Richards, media analyst, said: "The betting is the large American and European media and internet companies will see themselves at a disadvantage if they don't follow suit."

January 2003

Steve Case: "Some shareholders focus their disappointment with the company's post-merger performance on me."

Phil Larkins, market strategist: "It's been a black hole."

Bill Nygren and Kevin Grant, managers of the Oakmark Fund: "At the current price, the market appears to value the world's largest internet service provider at less than zero. That works for us."