TIME WARNER READIES $500 MILLION DEFENSE FUND

To Cover Legal Fees in Ongoing SEC and Justice Dept. Ad Probes

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NEW YORK (AdAge.com) -- Time Warner is setting aside $500 million for legal fees related to the government's ongoing investigations of its advertising deals and accounting methods. The company also announced
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it intends to restate its accounting related to its interest in AOL Europe prior to 2002.

Federal probes
As part of a third-quarter earnings call with analysts yesterday, Time Warner Chairman-CEO Dick Parsons said the move reflects "the fact that the investigations have progressed sufficiently to give the company some visibility into the costs required ultimately to resolve the investigations. ... The investigations are not yet concluded and we are not able to predict what the precise outcome will be, or when they will come."

Both the Securities and Exchange Commission and the Department of Justice have been investigating advertising arrangements and accounting methods at AOL prior to 2002. Much of the government's investigations have revolved around allegations that AOL improperly booked nearly $400 million in ad revenue as part of a deal to acquire a stake in AOL Europe from German media company Bertelsmann.

AOL subscriber decline
Separately, Time Warner's results this quarter revealed good and bad news on the advertising front. At America Online, advertising revenues were up 44%, or $79 million, in part because of its acquisition of Advertising.com. While subscriber numbers continued to decline at America Online (down 646,000 subscribers, to 22.7 million), online advertising revenues were boosted by 70%, or $30 million, due to domestic paid search.

Advertising grew 12% at Turner Networks, which include cable properties CNN, TBS and TNT, though the WB, a broadcast network, suffered a 3% decline in advertising revenues because of poor ratings. While the cable networks' brought in double-digit growth, a Merrill Lynch research note indicated that performance was not as strong as at rival Viacom, where cable TV ad revenues were up 15%. The note, issued by media analyst Jessica Reif Cohen, said that "growth from advertising across segments appears more tepid than Time Warner's peers."

Video on demand
At Time Warner Cable, the company said more than 40% of digital customers used on-demand features at least once in August and on average customers used some form of video-on-demand services 24 times a month. The most popular products were HBO On-demand and MYMC, an on-demand music channel put together from AOL music programs that was launched earlier this year. "Subscription VOD customers grew to $1.4 million," said Don Logan, chairman of Time Warner's media and communications group.

Overall revenues for the quarter were up 5% over the same period to $10 billion, while operating income was $1.1 billion, a decline of 20%.

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