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TIME WARNER DENIES AOL/CABLE SPIN-OFF

Says It Has No Plans to Combine Units for Later IPO

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NEW YORK (Adage.com) -- Time Warner today denied published reports it may combine its Internet service America Online with its cable operations and offer the units as one separate company for initial public offering later this year.
Time Warner Cable provides AOL with a major missing component.
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“We’re not considering spinning off AOL or combining it with our cable company,” said a Time Warner representative. “The company is supportive of the AOL strategy to monetize its significant Web presence.

The published reports come on the heels of AOL’s launching a strategy to offer most of its content for free on the Web and rely more on an advertiser-supported model, than a subscriber model.

Why it could work: Synergy
But the two divisions present more synergy than has been previously thought, and a combination of the two makes sense strategically for both the cable division and for AOL.

“The divisions working together will help AOL and also potentially help Time Warner [because the partnership gives them both] a little more to offer,” said David Hallerman, senior analyst at online market research firm eMarketer. “The two units have aspects that go hand in hand -- in the near term, access and in the long term, content.”

Plus, Time Warner CEO Richard Parsons has been vocal about his desire to create two publicly traded companies: Time Warner Cable and a content-focused Time Warner. He has said in recent weeks that AOL is not for sale, but that he would at some point consider an IPO if he thought it would help better position AOL as an Internet competitor.

Subscribers down, ad revenue up
As for the synergy between the two divisions, a combined offering would solve AOL’s subscriber-loss problem as it disassembles the walled garden. AOL revenue declined 3% in the first quarter of 2005 to $2.1 billion. Subscription revenue declined 8%, while advertising revenue climbed 45% in that quarter.

AOL has been steadily losing subscribers, with some 2.3 million dropping off from the year-ago quarter. As of March 31, the AOL service totaled 22 million members. “Subscription dollars made up 83% of their revenue [$1.77 billion] -- they can’t afford to just scuttle subscribers,” Mr. Hallerman said.

In announcing the new portal strategy during a press meeting earlier this week Kevin Conroy, executive vice president and chief operating officer of AOL Media Networks, said, “Every strong company has many revenue streams. We feel like we’re going to manage the decline of members.”

One way AOL is managing the subscriber losses is by offering broadband connections in tests through its Time Warner Road Runner division in Washington and Chicago.

Time Warner's broadband service
“In addition to a competitive price for broadband, this can help stem the loss of subscribers,” Mr. Hallerman said. “Time Warner Cable is the cable provider for AOL’s broadband services in whatever market it has availability so that’s one reason Time Warner would want to link the two together.”

The newest report flies in the face of the spin-off’s original wisdom -- that creating a publicly traded Time Warner Cable would help it distance itself from value losses and regulatory issues that followed the AOL merger. But AOL may be looking more like an asset to the cable division these days.

Road Runner has been offering free AOL service to customers who subscribe to its Internet service, giving them a premium, while delivering new eyeballs to AOL. And though Time Warner Cable noted in its first-quarter 2005 earnings that it had gained 26,000 basic users, reversing recent negative trends, it is still only No. 2 in the competitive cable space behind Comcast.

Broadband users expect content
Another reason a combined offering makes sense is content. Broadband, which is now used by 59% of active online users nationwide, according to Nielsen/NetRatings, is the key to the future of the Internet because consumers increasingly expect content like TV clips, music videos and original programming, with video ads accompanying this content. Content, provided by Time Warner cable divisions like HBO, will likely supply much of AOL’s offerings under the new open-Web strategy.

In first quarter, Time Warner’s revenue grew 3%, fueled by higher growth at its cable, publishing and networks divisions. Time Warner Cable revenues grew 10% to $2.2 billion, reflecting a 10% increase in subscription revenues and a 9% rise in ad revenues.

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