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Time Warner's rocky marriage to AOL is coming to an end

COMPANY TOWN

By ending its alliance with the Internet company, the media conglomerate can now focus on its movie, TV and publishing units. The move is applauded by industry analysts.

May 29, 2009|Joe Flint and David Sarno

Citing irreconcilable differences, Time Warner Inc. said it was legally separating from its much younger spouse, America Online. The marriage, which was announced to great fanfare in January 2000, had been on the rocks practically from Day One -- doomed from the get-go by lofty expectations of a new power couple that could dominate the media landscape for generations to come.

Now a much smaller -- and less ambitious -- Time Warner will set about to rebuild itself as a content-only company while its spouse is spun off into a publicly traded Internet company. In an e-mail to Time Warner employees, Chief Executive Jeffrey Bewkes said that "with your continued support, I'm confident we have a bright future."

That future is likely to resemble that of a more constrained CBS or General Electric Co.'s NBC Universal than an expansive Walt Disney Co. or News Corp.

Aside from splitting from AOL, Time Warner earlier this year got out of the distribution business when it spun off its cable systems. Its biggest units now are Turner Broadcasting System Inc., the cable programming giant that operates CNN, TNT, TBS and Cartoon Network; pay cable channel HBO; and the Warner Bros. movie studio.

The new Time Warner was applauded by analysts.

"Spinning off AOL streamlines the remaining company both strategically and from a valuation point of view," said Laura Martin of Soleil Securities.

Bewkes' next decision will be what to do with Time Inc., the once-powerful publishing arm that houses Time, People, Sports Illustrated and several other magazines that are struggling with the rest of the print industry to remain viable in the digital age.

Speaking at the company's annual shareholder meeting Thursday at its New York headquarters, Bewkes said key priorities for the new Time Warner included making more investments abroad and running its remaining businesses more efficiently.

Cable networks would seem to be one area where Time Warner would logically look to become bigger. But cable programming is a mature industry with few opportunities for bargains. Moreover, a big acquisition would also be dilutive to Time Warner's earnings, something that shareholders wouldn't welcome.

Instead, people close to the company expect it to continue to pare down debt. Even though Time Warner socked away more than $9 billion from the cable spinoff and has paid off $7 billion in debt this year, it still has $10.4 billion in net debt on its books. That may squelch any appetite for big deals.

Bewkes also didn't rule out buying back shares to boost its stock price. Credit Suisse analyst Spencer Wang noted in a report that Time Warner's buyback program, which was suspended in early 2008, still has $2.2 billion remaining under its authorization.

Nine years ago, when AOL technically acquired Time Warner, the media world was markedly different. AOL was peerless among Internet providers in those days when users relied on telephone lines to connect to online services.

But within only a couple of years, Internet users began opting for faster broadband connections, eroding AOL's primary business. Faced with a decline in paying subscribers, the company scrambled to reinvent itself as a free, ad-supported portal.

That formula has enjoyed limited success. AOL attracted 107 million unique visitors in April, according to comScore, enough to rank it fourth among the nation's most-trafficked sites. But AOL's numbers are well behind leaders Google Inc., Yahoo Inc. and Microsoft Corp. And AOL's advertising revenue plunged 20% in the first quarter, a substantially sharper drop than those seen by its competitors.

AOL executives hope that emerging from under the wing of a corporate parent may give the Internet company the flexibility it needs to claw its way out of fourth place.

AOL chief Tim Armstrong, who arrived from Google Inc. in March to replace ousted television veteran Randy Falco, said that becoming a stand-alone company would help the New York company get back to its core business.

"Although we have a tremendous amount of work to do, we have a global brand, a committed team of people and a passion for the future of the Web," Armstrong said in a statement Thursday.

David Hallerman, an analyst at research firm eMarketer, said the spinoff was less significant for AOL than has been the recent recruitment of top Google executives. In addition to Armstrong, AOL brought in Jeff Levick, a former Google vice president, to run AOL's ad business.

"One of the key reasons why Google has been such a power in online advertising is their use of data," Hallerman said.

Smart analysis of consumer behavior allows marketers to better target advertising, he explained, and to command higher rates for it. Time Warner, which owns 95% of AOL, said it expected to buy back the remaining 5% from Google, which acquired the stake in a search advertising deal in 2005.

The search giant paid $1 billion for its share in AOL, but recently wrote down the investment by $726 million and said it intended to sell back the shares to Time Warner or put them on the open market.

The obituaries of the AOL-Time Warner marriage were written years ago, making Thursday's news anti-climatic. Still, within the company there remains plenty of anger at the merger that sunk the company's value and left executives who spent their careers at the company with worthless stock options. Time Warner's headquarters in Manhattan's Columbus Circle has become a symbol of the failed marriage even though construction on it started when Time Warner was still an eligible bachelor.

Fittingly enough, the next big piece of content to come out of the new content-centric Time Warner is the Warner Bros. release "The Hangover."

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joe.flint@latimes.com

david.sarno@latimes.com

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