Time Warner to Offer AOL for Free

Online Unit's Fate Will Rely on Ad Revenue

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NEW YORK (AdAge.com) -- Following weeks of speculation, Time Warner today announced it will offer AOL's e-mail and web services for free, placing the ailing unit's fate squarely on advertising revenue. Time Warner posted a second-quarter profit of $1 billion, or 24 cents per share, thanks to a strong online ad market as well as added digital-phone and broadband customers.
President and COO Jeff Bewkes: 'With its robust and rapidly expanding advertising operation, we expect to put AOL back on a growth path.'
President and COO Jeff Bewkes: 'With its robust and rapidly expanding advertising operation, we expect to put AOL back on a growth path.' Credit: AP

Accordingly, Time Warner said it will cease marketing its withering dial-up service -- a move that could save AOL more than $1 billion in marketing and operational costs, Credit Suisse analyst William Drewry estimated in a July 24 note.

AOL revenue falls
AOL revenue fell 2% to $2 billion because of an 11% drop in subscription revenue, ending the period with 17.7 million U.S. subscribers. In March, AOL reported 18.6 million subscribers, down from 21.7 million the year before and more than 26 million in 2002.

The loss of subscription revenue from AOL's roughly 18 million subscribers could cut AOL's yearly revenue by $2 billion and earnings by $250 million, Merrill Lynch media analyst Jessica Reif Cohen said last month. (A drop of $2 billion in revenue would represent about a quarter of AOL's total sales of $8.2 billion in 2005.)

AOL's second-quarter ad revenues rose 40% year-over-year to $322 million. Jeff Bewkes, president and chief operating officer of Time Warner, said a greater emphasis will now be placed on AOL's search engine and social networking.

'Next logical step'
"This is the next logical step for AOL to capitalize further on the explosive rise in broadband usage and online advertising," Mr. Bewkes said. "With its robust and rapidly expanding advertising operation, we expect to put AOL back on a growth path."

The one disappointment for Time Warner in the quarter was print division Time Inc., chairman and chief executive Richard Parsons said in the call. Mr. Parsons said the publishing unit's results were "once again less robust than we had expected," although "not meaningful enough to cause significant concern."

Time Warner, along with Comcast, completed the acquisition of Adelphia Communications' assets on Monday for an estimated $17 billion, adding 3.3 million subscribers. The cable networks' revenue grew 9%, partly because of the consolidation of Court TV. Ad revenue was up 8%, led by 11% growth at Turner Networks.

Upfront downplayed
The company downplayed the importance of the upfront and predicted Turner Networks would end up "at the high end of the cable upfront performance," promising to announce how it was doing "shortly."

"I think everyone in the television business, whether in the cable networks or the broadcast networks, is increasingly coming to the point of not thinking that the upfront from year-to-year tells you the story of where the actual year is," Mr. Bewkes said. "Everyone is now managing their inventories as they always did but ... with more intent towards the opportunities in scatter."

Time Warner Cable grew revenues 15%, thanks to an increase in high-speed-data, digital-phone and digital-video subscribers.

Cable customers
Executives said 11% of its customers subscribe to triple-play bundles of video, phone and high-speed-data services. Digital-subscriber penetration at the end of the quarter was 53% for basic subscribers, and DVR penetration hit 37% of digital subscribers.

Much of the earnings call focused on the recent closing of the Adelphia/Comcast deal. As part of the acquisition, Time Warner increases its presence in Los Angeles, and Comcast sheds its stake in Time Warner Cable.

"Our focus is now on integrating the newly acquired systems," Mr. Parsons said.
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