Time Warner Nets $1 Billion Profit, Unveils Free AOL Plans

Media giant Time Warner reported a second quarter profit of US$1 billion and said it would attempt to foster advertising revenue growth in its AOL division by offering free services that have long been available only to subscribers.

Time Warner said its results were buoyed by a combination of growth factors, including a rise in online advertising revenue and more subscribers to high-speed Internet access through its cable division.

Revenue rose just 1 percent year-over-year to $10.7 billion, but profit came in at $1 billion compared to a net loss in last year’s second quarter of $409 million. That period included one-time payouts to settle shareholder lawsuits dating to the dot-com heyday.

Time Warner owns HBO, CNN, Time magazine and a slew of other print and electronic media properties and interest in several cable providers, which provided the bulk of its growth in the quarter. Time Warner shares were up 2.5 percent in midday trading Wednesday to $16.66.

The big news from the report, however, was the decision to throw open the doors to AOL. Time Warner had already adopted the strategy in part, putting more of AOL’s once walled-in kingdom onto the Web, but had held back some services for members only. Now, virtually all of AOL will be open to the public.

Big Changes

The strategy is a recognition that AOL’s numerous previous efforts to remain relevant in the broadband world were not working, with users reluctant to pay an extra fee on top of their monthly access bill as in AOL’s “Bring your own access plan.”

“We’ve listened to our customers, and many of them want to keep using these AOL products when they migrate to broadband — but not pay extra for them,” said Time Warner President and COO Jeff Bewkes. “This is the next logical step for AOL to capitalize further on the explosive rise in broadband usage and online advertising. With its robust and rapidly expanding advertising operation, we expect to put AOL back on a growth path.”

AOL CEO Jonathan Miller said the move would enable AOL to “maintain and deepen our relationship” with the millions of members who migrate from AOL-provided dial-up services to broadband access. AOL said it would offer users who have left over the past two years to reclaim old AOL e-mail addresses for free as well. The company also said while it would continue to offer dial-up services, it would no longer invest heavily to market them.

Among the now-free services are AOL’s integrated software; communications features, including AOL e-mail, instant messaging, a local phone number with unlimited incoming calls, and social networking applications, as well as safety and security features, such as parental controls.

Overall, revenue at AOL dropped 2 percent to $2 billion, thanks mainly to an 11 percent decline in subscription revenue, as about 976,000 more users left the service, which now has fewer than 18 million subscribers. Advertising revenue from AOL was up more than 40 percent over a year ago.

Another Attempt

AOL may rue not acting on the new strategy sooner, since it has shed several million users over the past three years, users that represent valuable traffic and potential advertising revenue today.

The Web service turned portal was seen reacting too slowly to the broadband trend, clinging to its dial-up approach even as high-speed adoption reached critical mass.

Today, the move remains a potentially risky one for AOL, because it is surrendering certain revenue streams from subscribers to its services in favor of potential revenue from advertising, Goldman Sachs analyst Anthony Noto said in a research note.

“We see this is more a risk than an opportunity,” he said.

In recent weeks, Time Warner had lashed out at reports that its AOL transition would cost it millions if not a billion dollars in profits, saying it would lay out a roadmap for a transformation that would not cost it significant revenue or profits.

AOL is “joining the Yahoo and Google model” and may be able to avoid falling into the red because of the savings it will find from not pushing its dial-up services, said search engine expert John Battelle. AOL has spent millions over the years to mail jewel-cased versions of its software to potential customers. With that effort on the shelf, “hundreds of millions of dollars in marketing costs will instead fall to the bottom line,” he said. “That can’t hurt.”

AOL is positioned to become a force in the portal world, rivaling Yahoo, MSN and Google, which clearly has its own vision of itself as more of a portal than a pure search engine, declared Charlene Li, an analyst with Forrester Research.

Its strengths in e-mail and community-based services such as instant messaging and blogging could make it a formidable force if harnessed correctly, she added. Its recent partnership with Google should only serve to boost its advertising revenue over time.

“Whether they moved too late or not, AOL has the basic ingredients to be a strong player in the portal space,” Li said. “And with online advertising continuing strong growth, that should be good news for AOL and its parent company.”