IP Democracy: Time Warner's New Strategy: Content Trumps Conduit

In his first call to discuss quarterly earnings results (PDF here), newly installed Time Warner CEO Jeff Bewkes hinted at a strategy to cut costs and shed capital-intensive assets that would make the media giant almost solely a pure content play, a not-surprising move from an executive who cut his teeth at cable network HBO. (Editorial note: By far and away today's call was the most interesting strategic discussion that Time Warner has had in years.)

First, Bewkes announced a plan to split apart AOL's access or dial-up business from its network or content activities. "We're working on separating AOL’s access and audience business so we can run them independently. This should significantly increase AOL's business options going forward," he said.

Translation: Time Warner plans to sell off the archaic monthly dial-up subscription business that propelled AOL to prominence during the 1990s. Bewkes didn't say this outright, however. When pressed to explain what he meant by "separating" the AOL businesses, he offered only generalities. "We're trying to position the different pieces of AOL, particularly in the high growth parts, so that we're poised to succeed."

Bewkes' reluctance to say definitively that AOL's access business is on the sales block is kind of curious. It's possible that he's waiting for bidders to step up to the plate, rather than shopping the unit around, thereby gaining a higher price for the diminishing returns dial-up business.

It's also possible that he doesn't want to spook investors with a blunt statement. The access business is still responsible for over half of AOL's revenues and probably for more than half of its net income, even if it is cost-intensive and yields little in the way of new product creation.

Still, AOL's subscription business has no future and continues to shrink on a daily basis. AOL lost 740,000 subscribers during Q4 07, ending the year with well under 10 million customers, a level not seen since the mid-1990s.

Bewkes also hinted that Time Warner is developing a strategy to reduce its 84% ownership stake in Time Warner Cable. Time Warner Cable was spun off as a separately traded entity following a complex buyout deal involving bankrupt cable operator Adelphia. Bewkes said that the company's plans for Time Warner Cable, which he noted is a capital-intensive business, would become clearer this quarter.

On top of possibly jettisoning these costly conduit businesses, Bewkes said that Time Warner is on an overall cost-cutting mission and plans to trim corporate spending by 15%, which would "reduce the corporate run rate by $50 million this year."

New Line Cinema, Time Warner's art film division, may also come in for a very bad haircut, or even decapitation, this year. Noting that it doesn't make sense to have two separate movie companies (Warner Brothers is the mainstay of Time Warner's film division), Bewkes said "We're reviewing how to operate New Line more efficiently and we're expecting to take actions here really soon."

Even once it gets rid of AOL's legacy access business, the online unit will still be a problem child for Time Warner. Even though AOL is growing its advertising revenues, it is doing so at a relatively slow rate. During Q4 07, ad revenues at AOL increased by $80 million sequentially to $620 million. But, this growth was down from the $87 million bump-up in ad revenues AOL experienced during Q4 06.

Don't look for any big near-term improvement in AOL's advertising revenues either. Time Warner is banking on AOL's Q1 08 ad revenues to stay flat or even decline due to a combination of accounting changes and loss of ad business from one particular client.

In the meantime, the prospect of a merger between Microsoft and Yahoo! doesn't seem to bother Bewkes, who thinks that a rising Internet tide will lift all boats, including, hopefully, AOL's leaky vessel. "It does underscore the value of Internet properties with large audiences. It does have a benenficial lift to the value of our eyeballs and inventory because there will be more vibrant competitors for search."

Addendum: I almost forgot one other interesting thing Bewkes said. He thinks all TV programs from Time Warner's networks should be made available on-demand, both on the TV set and on the Internet. "For some time I've had the strong belief that all linear supported networks should make their content on demand and on television sets, not only on broadband. We think this should cement the long term prospects of this business."

Posted by Cynthia Brumfield on February 6, 2008 11:40 AM to IP Democracy