(FORTUNE Magazine) – In the 18 months since America Online and Time Warner agreed to merge, you've read a lot--maybe too much--about the triumph of new media, the subsequent bursting of the Internet bubble, the looming culture clashes between AOL's techies and Time Warner's show-biz crew, and the grand unified theories of the media universe espoused by AOL Time Warner's designated visionaries, Steve Case and Gerald Levin. This is all of great interest to the chattering classes who toil in media empires, as are layoffs at CNN and FORTUNE publisher Time Inc., escalating tensions between AOL and Microsoft, and gossip about the post-merger political jockeying at the top of the company.

Lost in all the chatter are three facts that matter. No. 1: Jerry Levin, the CEO in name, turns out to be the CEO in fact, even though this has mostly been an AOL takeover of Time Warner. (For more on this, see the accompanying box "Where's Steve?") No. 2: Much of Time Warner, the old-media portion of this deal, looks, well, old. Levin expects every division to grow and is squeezing hard, reorganizing where necessary and looking at big acquisitions. But TV, cable programming, and publishing are getting whacked by the weak ad market; making Hollywood movies remains an unpredictable, low-margin business; and the future of music has never been more uncertain. Which leads to No. 3: The pressure to hit Levin's superambitious growth targets (we'll get to those in a minute) falls squarely on AOL, the big online unit that is the media behemoth's "crown jewel," according to Levin. By the end of this fiscal year, it should be the biggest producer of both revenues and profits for the company. To simplify just a little: As AOL goes, so goes AOL Time Warner.

Which is why our story takes us not to the corporate headquarters in New York City or the movie lots of L.A., but to Dulles, Va., where construction crews are as busy as ever erecting new buildings on AOL's sprawling suburban campus. The latest addition? A day-care center to serve kids of the 3,700 people who work here. Business is booming. In the first half of the year, AOL raised prices 9% and added more than three million members, passing the 30 million mark. Somehow, despite the ad recession, advertising and e-commerce revenues grew by an eye-popping 37% in the first quarter. (For a skeptical take on that, check out "Do AOL's Ads Add Up?") Not one of the senior executives, an experienced and close-knit group, has quit since the merger closed, a remarkable fact given that most of the top people here are so rich they need never work again.

Take Barry Schuler, a 47-year-old father of four. He has a beautiful Virginia home, a vineyard in Napa Valley, an 83-foot yacht, and his own charitable foundation. (He, AOL Time Warner co-chief operating officer Bob Pittman, and their wives recently donated $30 million to the Corcoran Gallery in Washington, D.C.) He's also the big man on the Dulles campus as CEO of the AOL division.

You may not have heard as much about Schuler as you have about Pittman. Schuler lacks his predecessor's charisma and also his experience working in big corporations. He joined AOL six years ago when the company acquired his Silicon Valley startup, Medior, a multimedia design firm. But now this self-styled geek has perhaps the key assignment in the corporation: transforming the online division into the engine of growth that will make the world's biggest media merger a success.

What worries him might surprise you. (Hint: It's not Microsoft. If you want to know where things stand on that front, see the box "AOL vs. Microsoft--Now It's War.") His biggest concern is that AOL, which has succeeded by being very good at one thing--providing an easy-to-use online service to millions of Americans who couldn't care less about fancy technology--must evolve into something new. Its core business is maturing. It has to become as vital to broadband users as it has been to dial-up customers. Overseas, it has to put years of losses behind it and start winning millions of new accounts. It has to roll out new platforms and services. And it must rejuvenate its culture, which has become a bit too bureaucratic for Schuler. "The thing that worries me," he recently told 80 AOLers at an executive retreat, "is that we're at our best when we're in a crisis. We can't wait for that."

He doesn't have to wait. His bosses, with the full cooperation of Wall Street, have handed him just such a crisis. Despite a slowing economy, CEO Levin is still promising to hit the very aggressive growth targets that AOL Time Warner promised the Street last year. Levin met expectations in the first quarter, when revenues were up 9% and Ebitda (earnings before interest, taxes, depreciation, and amortization) increased 20%. Wall Street applauded; while the stock had fallen from $74 to $35 in 2000, it's been back above $50 in recent weeks. But Levin's tougher targets lie ahead: He has promised 30% Ebitda growth in 2001, and 25% annually thereafter, on revenue gains of 12% to 15%. All of which is supposed to come from a $40-billion-a-year giant struggling with an ad recession, a grab bag of maturing businesses, and competition from other global media players like Viacom and News Corp.

How's that for a crisis, Mr. Schuler? So what's your plan?

On a warm June afternoon in leafy Great Falls, Va., the discreetly ritzy Beltway 'burb, Barry Schuler stands in his sunlit home office overlooking the backyard pool and clicks his laptop until a Dinah Washington song fills the air. Few neighbors can do that, we'd bet; Schuler's surely the first kid on the block with wireless broadband access on all three floors of his house and the ability to retrieve about 5,000 songs digitally stored on a server in the basement. There's not a CD in sight.

"What digitizing does," Schuler explains, "is provide you with instant access to any song. You can make your own play list, do anything you want, anywhere in the house." Wireless connections mean that Schuler, his wife, Tracy, and their kids can turn on a computer anywhere at home and have immediate, fast access to the Net, all at the same time. (Not likely, by the way, since his youngest daughter is 3 months old.) To demonstrate, Schuler calls up a Web page linked to a remote-control camera that keeps an eye on his other home, a spectacular Japanese-contemporary structure being built beside his 30-acre vineyard in Napa, Calif. He's still waiting for his first taste of the "ultrapremium cabernet."

Last stop on the tour is a makeshift photo studio, without darkroom. None is needed, because Schuler takes his photographs with a digital Hasselblad that offers 16 megapixels of resolution, resulting in gorgeous detail and vivid color. They, too, are stored on the server, and can be sorted and displayed anywhere.

Today these are pleasures only available to a rich geek. But Schuler expects them--or some semblance thereof--to be affordable for the masses very soon, within the next couple of years. If he's right, it's both a huge challenge and an opportunity for AOL. The challenge is for AOL to become as preeminent in a world of high-speed access as it is in the current online world, where most of its subscribers sign on by phone. The opportunity, in terms of revenues, could be substantial. As shopping, listening to music, making phone calls, and even watching movies become easier online, AOL could be perfectly positioned to take a cut of more and more e-commerce.

AOL's most valuable competitive edge is that its 30 million subscribers are increasingly loyal. The typical AOL subscriber spends 70 minutes a day online, five times as much as five years ago. Having access to that mass audience for that long means Schuler can figure out what they do online and what they'd like to do in the future. What they want next, he says, is broadband. "We've taken them from e-mail to e-commerce, to trading online and information on demand, and all the things that they're doing," he explains. "That big audience is depending on us to take them on the ride."

To get them there, Schuler is linking up with the other division of AOL Time Warner most likely to deliver big growth--its cable systems. "You will see fundamentally that [CEO of Time Warner Cable] Joe Collins' business and my business are headed together." The plan is for Time Warner Cable to use its trucks and technicians to install the high-tech gear needed for high-speed access and even home networking, while AOL will deliver the broadband content. Eventually Schuler would also like to see those kinds of partnerships with other cable or telephony providers. "We have to get with the cable guys," he says, "and figure out, how do we turbocharge broadband?"

The thing is, the other cable guys aren't known for sharing, and they have their own broadband plans. While Excite@Home, the ambitious broadband venture led by AT&T, has been a disappointment, cable operators have been selling lots of high-speed access on their own and may figure they don't need AOL's help. Some 5.3 million people pay a monthly fee of around $40 for cable modem service, and another 2.4 million pay a similar amount to get high-speed DSL service from phone companies. AOL already has a significant presence here: Of those 7.7 million bandwidth addicts, two million pay an additional $9.95 a month to get AOL Plus, the company's broadband version of its service.

But with AOL, the telcos, and the cable guys all wanting to deal directly with the broadband customer, there will be a lot of wrangling. "Open access is coming, but it's very complicated," says Stephen Burke, president of Comcast Cable, the nation's third-biggest cable operator. "If we work with AOL, who owns the customer? Who does the billing? Who shares in the ad revenue? Who shares e-commerce?" The answers to these questions will help determine AOL's leadership (will the viewer's opening screen feature AOL, the cable operator, or both?) and just how big a revenue boost AOL gets from broadband.

Broadband has become an imperative for AOL because the narrowband market is approaching saturation, at least in the U.S. Most Americans who want to get online have signed on; the rest are low income, elderly, or simply uninterested. While AOL wants them too--the company has begun to market to customers without credit cards, for example, by allowing people to pay for AOL on the phone bill--these latecomers won't be as valuable as today's more upscale subscribers.

That is why AOL's other big growth opportunity lies overseas. Even in the most developed foreign markets--Germany, Britain, France, Brazil, and Japan--people have been slower to sign on to the Internet than in the U.S., so adoption rates and usage are still surging. "We're sitting on a rising tide," says Michael Lynton, president of AOL International. "Now is the moment to get customers." With offerings in eight languages available in 16 countries, AOL is the only company that sells Internet access on a global basis. More than 40% of AOL's new subscribers in the first quarter came from outside the U.S.

For now, AOL is losing gobs of money in these countries. It doesn't have to report how much, because most AOL units outside the U.S. are joint ventures financed largely by partners, which keeps losses off AOL Time Warner's books. But Schuler and Lynton, sounding like swaggering dot-commers circa 1999, say losing money is part of the plan. They expect to see a replay of the saga AOL wrote in the U.S., when it piled up hundreds of millions of dollars of losses building brand and infrastructure until it prevailed over competitors like Microsoft, AT&T, and a host of free services. They're willing to bet heavily again because they think AOL's secret sauce will satisfy consumer tastes everywhere.

"It's not dissimilar to McDonald's or Coke," says Lynton, 41, a former Disney and Pearson executive who traveled 372,186 miles last year (not including trips in the corporate twin-engine prop plane) hawking AOL. "People want the blue triangle, AOL. The consumer interface that's popular here is exactly the one that works best in Europe and Brazil and Australia and Japan." Furthermore, he argues, "the business becomes an economy-of-scale business" as AOL leverages the technology, infrastructure, skills, and knowledge it developed in the U.S.

AOL has made impressive headway in Europe. With more than one million members, AOL UK is the No. 1 pay-subscription service in Britain; usage surged to nearly an hour a day after the country went to flat-rate pricing last year. It's No. 2 in France, with one million subscribers, behind France Telecom's Wanadoo, and a distant No. 2 in Germany, with two million customers to Deutsche Telekom's T-Online's seven million. There too, though, its usage levels are well ahead of the telcos', and advertising and e-commerce revenues are kicking in. One sign that AOL believes in the business: It is expected to spend between $6 billion and $8 billion to acquire the 50% of AOL Europe that it doesn't now own from its joint-venture partner, Bertelsmann. With a better debt-to-equity ratio than the old Time Warner, the merged company is positioned to do deals like this and to contemplate other big acquisitions in the year ahead.

AOL isn't doing as well in Japan or Latin America, where its newer offerings have been hampered by missteps. (In a much publicized snafu in Brazil, a few hundred AOL disks were accidentally shipped with samba music instead of software.) In 20 months AOL Latin America, which is owned by AOL, the Cisneros Group, Banco Itau of Brazil, and public shareholders, has signed up more than 750,000 subscribers, most of them in Brazil. But it faces an uphill battle against UOL, Brazil's dominant ISP. The only overseas unit to report its finances, AOL Latin America brought in just $12.8 million in revenues during the first quarter, losing $85 million in the process. In Japan, AOL restructured its joint venture to take on a new partner, NTT DoCoMo, with hopes of riding the popularity of DoCoMo's wireless I-mode service. For now it's not even among the top five ISPs, which include Fujitsu and Sony.

Given all this, AOL has a long way to go internationally, say analysts like Dan Stevenson of Jupiter Media Metrix in London. Still, Stevenson says, "I'm positive about their chances in Europe," citing AOL's strengths in marketing, content, and branding. "They don't talk about America Online anymore," he says. "It's AOL, like how Kentucky Fried Chicken became KFC."

Whatever their potential, neither the global nor the broadband push will pay off soon. To drive earnings today--since AOL has already hiked its rates and cut overhead--Schuler and his team must squeeze more money out of advertising and e-commerce. Merrill Lynch expects AOL to generate $3.2 billion from those areas this year, an increase of 36% over 2000.

Hitting that number won't be easy. The days when dot-com startups needed an AOL deal to go public are over; so is the era when AOL could sell against fear by telling nervous old-economy CEOs that "if you don't get on the Internet train, your company is going to blow up," as Schuler puts it. Still, while Internet advertising is slumping, media buyers remain interested in the opportunity it offers them to interact with consumers. "If through a partnership with AOL my clients can better understand consumers' interests and passions, there's a lot of value there," says Jack Klues, CEO of Starcom MediaVest Group, a top media-buying firm. What's more, e-commerce is still growing. The Boston Consulting Group reports that online retailing revenue in the U.S. increased by 66% last year, and AOL reported that its members spent a record $6.7 billion shopping online in the first three months of 2001.

Myer Berlow, AOL's president of worldwide interactive marketing, has done more than his part to fuel that growth. This year the 51-year-old Berlow has bought more than 100 items from eBay, including historical memorabilia, vintage sneakers, cowboy boots, and--get this--a 1969 Mercedes. eBay is one of a handful of important new-economy partners for AOL, including Amazon, Homestore, Travelocity, and Monster.com. AOL expects all five to grow as smaller dot-coms collapse and wants to ride their growth via multiyear deals where they either pay up-front or share revenues with AOL. "There's no other company that can deliver those people to me," says Jeff Taylor, CEO of Monster, the No. 1 online careers site. "It's our most productive partnership." Monster.com has a four-year, $100 million deal with AOL.

Now Berlow wants to take partnerships to the next level, intertwining a marketer's business even more deeply with all of AOL Time Warner. A toy company, for instance, might be persuaded to license a character from Warner's Harry Potter movie, develop a TV show for the Cartoon Network, and sponsor the kids' channel on AOL, all as part of the same negotiation.

An AOL-Citigroup partnership developed by the top executives of both firms demonstrates Berlow's concept. The deal includes a media buy: Citigroup pays AOL to promote Citibank banking, mortgages, loans, and credit cards; Salomon Smith Barney brokerage; and Travelers Insurance. What's different is that the two companies have joined forces to develop and market an e-payment product called AOL Quick Cash on AOL and C2It on the Internet; it's a way to buy things online, and send money to friends or relatives, by deducting payments from one credit card, debit card, or bank account and immediately crediting another. Users typically pay a 1% service fee. "Our hope is that with their knowledge of interactive marketing and their ability to put us in the right places, we can become a standard for AOL and for a large part of the Internet audience," says Citigroup vice chairman Deryck Maughan. AOL will share revenues from QuickCash, based on usage. Down the road, the two companies will look at how to bring Time Warner assets into the deal as well.

That is yet another way in which Schuler has to reinvent his division: He must integrate with the rest of AOL Time Warner. Some of AOL's most ambitious initiatives draw upon Time Warner properties. There's the much touted AOL Anywhere strategy, which extends the service--and now, content like CNN headlines--to cell phones, Palm Pilots, and wireless e-mail devices like AOL Messenger, an AOL-branded version of the BlackBerry. There's MusicNet, a fledgling joint venture with Warner Music, BMG, EMI, and Real Networks that will sell online subscriptions to a music library. There's AOL TV, which, while off to a clunky start, is viewed inside the company as a step toward the convergence of the Internet and television, which would make possible, for example, HBO's The Sopranos on demand. (Of course, AOL TV might also want to deliver ESPN on demand, even though that comes from Disney and could bump up against the ambitions of Time Inc.'s Sports Illustrated.)

As if that weren't enough, Levin's added another little item to Schuler's to-do list. While the Time Warner CEO can hope that a blockbuster performance by an upcoming movie or TV show could provide a one-time boost to the bottom line, long term he's counting on AOL to be a key part of his effort to transform Time Warner's old-media businesses. That's a tall order. It means using AOL to drive down the cost of acquiring new subscribers for Time Inc. magazines like FORTUNE. It means opening a new Warner Bros. movie without having to spend the vast sums required to purchase TV ads on Survivor or Friends. It means coming up with an efficient companywide Web strategy and, not incidentally, getting all 90,000 Time Warner employees on the same e-mail system. And it means developing "companywide verticals," content-and-advertising partnerships that cross all AOL Time Warner properties to target particular audiences like sports fans or women. An example would be the long-running effort to make something of the struggling CNNfn financial-news cable network, which this time involves marshaling the resources of AOL's Personal Finance channel and Money magazine.

If all that sounds familiar, it should. It's about synergy, a term media giants love to throw around but struggle to practice, in part because they're filled with strong-willed, creative executives who want to run their own shows. (One reason CNNfn is struggling is that, even today, it's not carried by many of Time Warner's cable systems.) Will that change at AOL Time Warner? Perhaps, because it wasn't just AOL that took over Time Warner earlier this year. It was Jerry Levin, who needed help getting control of his own company. Now he's using AOL guys like Pittman and Schuler as his shock troops. Their track record at AOL has been superb. But nothing has prepared them for the job that lies ahead.

REPORTER ASSOCIATE Ann Harrington

FEEDBACK:mgunther@fortunemail.com