It's Official: Time Warner to Spin Off Cable

Bewkes Sees More Value as Separate Companies

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NEW YORK (AdAge.com) -- AOL struggled, cable networks thrived and magazine publishing found itself affected by the economic downturn, said Time Warner CEO Jeffrey Bewkes, reporting the company's first-quarter earnings. And, as promised three months ago, the company made a decision on the future of Time Warner Cable -- and it will be on its own.
Jeff Bewkes
Jeff Bewkes Credit: AP

Time Warner, which owns an 84% stake in Time Warner Cable, is completely separating its cable operator assets from the rest of the company and is close to finalizing the terms of that move. Mr. Bewkes said he's still optimistic on the future of the cable business but "we just believe the two entities would be more valuable if separated rather than kept in the current structure."

The company's first-quarter earnings were largely in line with expectations. Net income totaled $771 million, or 21 cents a share, down 36%, from $1.2 billion, or 31 cents per diluted common share, for the year-earlier period. Revenue climbed 2% over the same period in 2007 to $11.4 billion, led by increases at the cable, networks and filmed entertainment segments.

Jarring change
At AOL, revenue dropped 23% to $1.1 billion. Much of that was the result of a 38% decrease in subscription revenue, a result of AOL moving from its subscription-based internet-access model to a free, ad-supported content model. But also troubling was the fact that ad revenue grew only 1%. (According to eMarketer estimates, online ad revenue is set to grow 22.7% in 2008.)

Display advertising on AOL's owned-and-operated network (AOL sites) declined 19%. Global search revenue grew 4% year over year. "We are not satisfied with the performance of display advertising on our owned-and-operated inventory," Mr. Bewkes said, adding that it was due "primarily to our own execution challenges, in particular we didn't integrate our Platform A acquisitions fast enough, and that created a sales channel conflict."

Platform A is the umbrella name given to the swath of ad network AOL has acquired, including Tacoda, Quigo and its earlier acquisition Advertising.com. That conflict meant the sales forces of the ad networks AOL had acquired throughout 2007 were selling against AOL's own sales force.

Coordinated sales force
In the first quarter, AOL integrated its sales forces into a single team and put in place a common incentive structure to get the sales organizations to work together more.

Three months ago, Mr. Bewkes also said he would separate AOL's internet access business from its ad-supported portal and ad network business; he didn't offer any more details on the terms of that but said they would come to light throughout the quarter.

The cable networks division, which includes TNT, TBS, CNN and HBO, continues to be a bright spot for Time Warner: revenue was up 10% as subscription revenues increased 10% and ad revenue grew 13%, as the networks sold more ad units, had solid audience growth and were able to command higher cost-per-thousand ad rates. Mr. Bewkes also emphasized that Turner's upfront (for TBS and TNT) is this year being held the same week as the broadcast upfront.

"That's not a coincidence," he said. "We believe Turner is positioned better than ever to challenge the broadcast networks."

Magazines hold steady
Publishing is the company's only division being affected by the economic downturn, said Mr. Bewkes. Revenue was relatively flat and ad revenue was down 1%, mostly due to the closures of Life and Business 2.0 magazines. When those were factored out, ad revenue actually rose modestly as online ad revenue growth more than offset declines in print ad revenue. The online growth was led by People.com and CNNMoney.com.

"As we continue to take our entire magazine portfolio and move it into digital, we think that the growth rates in that business can be quite healthy and can overcome what may be the kind of flatness in print over time," he said.
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