Time Warner Turns Cable Unit Loose, Nurtures Lagging AOL

Media giant Time Warner plans to sell off its remaining 84 percent stake in its recently spun-off cable company. The company unveiled the strategy as it posted weaker profit and its AOL Web portal grew modestly in advertising revenue.

Time Warner’s net profit for the first quarter was US$771 million, or 21 cents per share, down 36 percent from the $1.2 billion, or 31 cents a share, posted in the same quarter a year ago. Analysts had been calling for earnings of 23 cents.

Revenue was up about 2 percent to $11.42 billion, with the Time Warner Cable unit helping to drive the top line growth.

A ‘Complete Structural Separation’

Time Warner will fully spin off that unit, deciding that a “complete structural separation” is in the best interest of shareholders of both Time Warner and the cable business.

Though profit was down, CEO Jeff Bewkes said the quarter was solid enough to enable the company to reaffirm its outlook for all of 2008, a comforting move to investors worried that its heavy reliance on advertising revenue would make it vulnerable to an economic slowdown.

“The underlying operating strength at our cable, networks and filmed entertainment businesses gave us the confidence to reaffirm our full-year business outlook,” Bewkes commented.

Time Warner shares were down 1.3 percent in afternoon trading Wednesday to $15.07.

Slow Progress at AOL

A formal agreement will be hashed out with Time Warner Cable in coming days, noted Bewkes, who said the decision to cut ties came about as part of a complete structural and strategic review of Time Warner’s business. Bewkes took the the helm at the parent company in January.

Time Warner’s AOL Web division showed modest gains in advertising revenue, although not enough to overcome the continued losses in its legacy business of providing Internet access.

The AOL unit saw a 23 percent drop in revenue to $1.1 billion. Subscription revenue fell 38 percent while advertising revenue was up just 1 percent.

AOL saw 647,000 more paid subscribers flee during the quarter, leaving it with about 8.7 million paying customers.

That business has long been written off as a dying one for AOL amid the rise of broadband access options. The company has aggressively shifted to become a free-to-all Web portal supported by advertising in response, spending close to a billion dollars on a series of ad-related acquisitions that led to the creation of online ad wing known as “Platform-A.”

Acquisition Integration

“There is still work being done to integrate those recent purchases,” Forrester Research analyst Charlene Li told the E-Commerce Times. “Even when that work is done, AOL faces a tough competitive landscape.” Google delivers search advertising for AOL, which has focused on display advertising, the same growth area that Yahoo hopes to capitalize on.

While AOL earns more profits on the same advertising when it appears on one of its sites, most of its ad growth in the first quarter came in the form of ads placed on third-party sites. “We were not satisfied with the performance of display advertising on our owned-and-operated network,” Bewkes said. “We didn’t integrate Platform-A fast enough, and that led to sales-channel conflict.”

AOL has tried to re-energize its Web properties, most recently announcing in March it will buy social networking player Bebo in an $850 million deal. AOL has some strong core properties, including its instant messenger and its Web mail products, which do especially well among the young demographic favored by some advertisers, Li noted.

Movies and More

Although the overall outlook remains in place, Bewkes did acknowledge that the economic slowdown was impacting parts of Time Warner’s business, including the publishing arm, known as “Time Inc.” However, the CEO said online advertising revenue from that arm is growing at a rate that could enable it to offset print losses over time.

In movies and TV production, profits fell 16 percent despite a 4 percent gain in revenues due to the $116 million in restructuring charges incurred as New Line Cinema was folded into Warner Bros. Without the charges, profits would have risen 19 percent.

Revenue at TW’s cable networks, including HBO and CNN, rose 10 percent, while profit was up 2 percent in the quarter.

While there have been fewer calls lately for the AOL Web business to be spun off, Sanford C. Bernstein analyst Charles Di Bona said a merger with Yahoo still can’t be ruled out.

“There are places where those two businesses could become a strong presence online,” Di Bona told the E-Commerce Times, citing the display advertising arena as one example. A merger could also create cost savings of tens of millions of dollars, and a strong content distribution platform for Time Warner — should it decide to hold an ownership stake in the merged company, he added.

Bewkes did not directly address possible tie-ups between AOL and Yahoo, but did urge analysts to look at the subscription ISP and advertising endeavors separately, suggesting the upward trend of the ad business points to the portal’s future.