Time Warner's Bewkes to Break AOL in Two

Move Opens Up 'Strategic Options' for Access, Audience Units

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NEW YORK (AdAge.com) -- AOL's future is getting a bit clearer as Time Warner addressed the division today during its fourth-quarter-earnings call. CEO Jeff Bewkes -- in his first outing in that role on an earnings call since taking the helm from Richard Parsons in January -- talked of breaking the company into two businesses.
Jeff Bewkes
Jeff Bewkes Credit: Timothy Greenfield-Sanders

"We need to complete AOL's business-model transition and are working on separating AOL's access and audiences business so we can run them independently," he said. "This should significantly increase AOL's strategic options for each of these main business sectors."

Any moves that make sense
Mr. Bewkes didn't clarify what those "strategic options" were exactly, but a spinoff or sale of part of or all of the AOL business has been bandied about for years. "Of course, we are, as we always are, open to any strategic move that makes sense," he said.

Two years ago AOL announced it would shed its subscription internet-access-based business model in favor of offering free, ad-supported service, which Time Warner is calling AOL's "audience business." The ad-supported side of AOL has aggressively added ad network assets under the moniker Platform A -- to the tune of investing $900 million in 2007. Already in 2008, it has bought widget company Goowy and, yesterday, a European-based affiliate-ad network, Buy.at, which will live in AOL's Ad.com division and soon be expanded to the U.S.

Mr. Bewkes said the separation is under way and will take several more months but emphasized that it is a priority. Microsoft's proposed deal to buy Yahoo "does underscore the value of internet audiences with large audiences," Mr. Bewkes said. "It does have a beneficial lift to our eyeballs and inventory. ... And it just verifies the importance of moving to the kind of display and third-party-monetization platform that we've built."

Danger of complacency
Mr. Bewkes also alluded to yesterday's report in Ad Age that one of his first moves would be a significant round of layoffs in the corporate division. "The danger of prior success for us is complacency," Mr. Bewkes said. "And to set the right tone we're starting here at corporate where we are implementing immediately an initial round of cost reductions of over 15% thereby reducing our run rate at corporate by more than $50 million a year."

During fourth quarter, Time Warner's net income dropped to $1.03 billion, or 28 cents a share, from $1.75 billion, or 44 cents a share a year earlier.

Mr. Bewkes addressed other potential cuts, noting that thanks to recent trends, such as fewer movie releases and an increased importance in overseas revenue, he would take action to reduce infrastructure costs at its New Line Cinema studio, possibly consolidating it with Warner Bros. Time Warner is also evaluating whether to reduce its stake in Time Warner Cable and will make a decision by its first-quarter earnings report, at the end of April.

More revolution needed
Revenue at Time Warner's networks division increased 1% to $2.7 billion in fourth quarter; ad revenue was up 13% to $877 million. Mr. Bewkes was bullish about digital distribution: "We and others in the industry need to be a bit more revolutionary than evolutionary in this area. All linear ad-supported networks should make their programming available on demand and on TV sets, not just on broadband. We'll be aggressive in putting our own networks on demand. ... We think it will cement the long-term prospects of these businesses."

At AOL, revenue dropped almost 32% to $1.25 billion from $1.84 billion for the year-prior period, as it continued to lose subscription revenue. Ad revenue was up 10% to $620 million. In 2007, AOL reduced its operating expenses by $1.3 billion, said John Martin, chief financial officer. "This year ... we continue to expect AOL to maintain its overall profitability at considerable scale." He also said he expects ad revenue to improve beginning in second quarter. AOL's premium pricing has started to "go back up" said Mr. Martin. But he said it is continuing to see pricing pressure on non-premium inventory as demand is shifting over to the ad networks.

Google action unclear
Management also emphasized that AOL is now working to increase page views on its owned-and-operated network of websites. Mr. Bewkes touted "the vast majority" of AOL subscribers who have switched to free services have maintained their usage and that the portal has stabilized page views.

Google owns 5% of AOL and has what's called a registration right that's up this summer. That means Google can decide it would like to cash out and AOL has the opportunity to buy back that stake at fair market value. One analyst asked Time Warner management whether there was any sense that Google might want to do that.

"It's not clear at all that they would necessarily want to act on it," said Mr. Bewkes. "It's fine if they were to act on it. So we probably shouldn't predict or discuss any ongoing talks. Google's a fairly close business partner of ours; we talk to them all the time. We just can't say much about it at this time. I don't think you should look at it as any area of concern."
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