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."
Time Warner Cable issued its Q4 07 earnings report this morning (PDF here) showing the usual continued healthy gains in revenue and cash flow alongside the usual continued loss in basic cable subscribers. Revenues for the nation's second largest cable company rose 12% year-over-year to $4.1 billion, while cash flow (OIBDA) jumped 19% to $1.56 billion.
But, Time Warner lost 57,000 basic cable customers during the quarter, more than twice the number lost during Q4 06, but down by a third from the 83,000 core video customers lost during Q3 07. By quarter's end, Time Warner had 13.25 million basic cable customers, keeping the company, however precariously, from slipping below the 50% penetration of homes passed threshold.
During the company's earnings call, CEO Glenn Britt reiterated what the company has said in the past. Most (75%) of the customers lost were of the low-paying variety, typically those who purchased only the "basic-basic" service tier, which costs around $12 to $13 per month.
COO Landel Hobbs said that the two problematic divisions, Los Angeles and Dallas, which Time Warner only recently acquired in a system swap and which accounted for most of the losses, have been quickly rehabilitated. "We've turned the corner" in those two markets, Hobbs said, which should slow down losses for 2008. Churn was down across the board, Hobbs said, with all products showing fewer defections during the quarter.
Time Warner continued to post gains in every other product category, albeit at slower growth rates than it has experienced in the past. The company added 162,000 net new digital customers during the quarter (in comparison to 245,000 during the year-ago quarter), wrapping up 2007 with eight million digital subscribers, reflecting 61% of all basic subscribers.
Time Warner Cable added 208,000 net new high-speed customers (down from the 246,000 net new high-speed customers gained in Q4 06), ending 2007 with 7.6 million high-speed subscribers, representing 29% of homes capable of buying the service. One particularly attractive new option for TWC is its Turbo Plus broadband service, a 15 Mbps/download offering aimed at countering Verizon's FiOS service.
Despite the fact that Turbo Plus costs $10 more per month than the standard high-speed service, Time Warner Cable added 229,000 net new Turbo Plus customers during 2007. The product was launched in October 2007. "Demand for Turbo has far exceeded our expectations," Britt said. "There is a real and substantial market for premium speed tiers."
The unambiguous bright spot for Time Warner Cable is its digital voice product. During the quarter, the company added 285,000 net new digital voice customers, about one-third more than it added during the year-ago quarter. In fact, Time Warner has posted accelerating gains in digital voice for every quarter since 3Q 06. By year-end Time Warner counted 2.9 million voice customers representing 12% of homes passed.
During the earnings call, Hobbs said that Time Warner's program to move to a switched-digital architecture, which increases cable system capacity by vast amounts, will help the company counter satellite rival DirecTV's big advantage in offering greater numbers of high-definition channels. "Switching works and it will allow us to launch relevant HD content," he said, noting that Time Warner has deals to add 53 HD channels and deals to add 20 more HD channels in markets where switched digital is being deployed. That's on top of the 25 HD regional channels that Time Warner offers today.
Time Warner still seems to be searching for a mobile voice and video strategy. When asked whether the operator plans to add wireless service to compete with the telcos' quadruple-play bundle, Britt confirmed, again, that Time Warner's test of just such a service with Sprint was something of a bust. "To date we've seen less than incredible demand for that (the co-branded Sprint Pivot Service.)"
Posted by Cynthia Brumfield at 9:50 AM | Print | Comments (0)
Blogs We Read
