AOL being split in two

Times Staff Writer

Time Warner Inc. said Wednesday that it was splitting AOL into two parts in a move analysts predicted would pave the way for a sale of the slumping Internet-access business that made the online pioneer famous.

Chief Executive Jeffrey Bewkes, in his first conference call with analysts since succeeding Richard Parsons as CEO in December, said the company was optimistic about AOL’s faster-growing content and advertising sales business.

He said the company also would consider a move long advocated by some on Wall Street: spinning off to shareholders its 84% ownership stake in Time Warner Cable.

Bewkes said he still liked the cable business and considered it undervalued but believed that it wasn’t a great fit with the rest of the company because of its capital requirements and other characteristics. He said a decision would be announced by late April, after negotiations between the independent boards of Time Warner and the cable company.

Citing the danger of “complacency,” Bewkes promised to keep a sharp eye on costs. He set the tone by announcing the immediate elimination of 100 jobs at headquarters, a 15% reduction that would contribute to a savings of $50 million a year. He said other parts of the conglomerate would feel the pinch as well, naming New Line Cinema as one target for “near-term cost cuts.”


“With the recent trend toward fewer movie releases across the industry and the greater importance of overseas revenues, there’s an obvious question about whether it still makes sense for us to have two completely separate studio infrastructures,” Bewkes said, referring to New Line and the much larger Warner Bros. studio.

“We’re reviewing how to operate New Line more efficiently, and we expect to take action fairly soon,” he added.

More broadly, Bewkes said one of his top goals would be to push more rapidly into digital distribution of Time Warner’s news and entertainment. Bewkes, 55, laid out his plans during a conference call with analysts and news media following the announcement of Time Warner’s fourth-quarter and full-year 2007 earnings.

Investors, who have seen Time Warner shares lose more than one-quarter of their value in the last year, seemed to react warmly to Bewkes’ plans. On a day when the major stock indexes fell, shares of Time Warner gained 31 cents, or 2%, to $15.71.

Besides AOL and the movie studios, Time Warner is the corporate parent of CNN and the Turner Broadcasting family of cable TV channels and the Time Inc. magazine publishing group. The company said it expected 2008 profit growth to be in the range of 7% to 9%, down from 17% last year but in line with Wall Street’s expectations.

Time Warner reported fourth-quarter net income of $1 billion, or 28 cents a share, down 41% from the year-earlier figure of $1.8 billion, or 43 cents. Not counting one-time gains from asset sales, profit in the 2006 fourth quarter was 22 cents a share.

Fourth-quarter revenue rose 2% to $12.6 billion, with movies and cable TV programming leading the way.

Bewkes said the decision to split AOL in two had nothing to do with Microsoft Corp.'s $44.6-billion offer Friday for rival Yahoo Inc. He said the move was already underway when Microsoft unveiled its surprise, and unwelcome, bid.

The AOL separation could lead to a sale of the access business, said Sally Cohen, analyst for Cambridge, Mass.-based Forrester Research, noting that AOL earlier sold off such businesses in Germany and Britain.

A challenge for Time Warner, she said, would be finding a buyer.

The unit might fit best with another nationwide access provider such as EarthLink Inc., but it is unclear whether such a company could afford it. Selling the business piecemeal to regional Internet-access firms would risk annoying subscribers and perhaps causing them to cancel the service, Cohen said.

Despite Bewkes’ high hopes for AOL’s Web portal and online-ad business, its recent results have been lackluster.

AOL logged 10% growth in online ad sales in the fourth quarter -- slower than the industry as a whole -- and was unlikely to show much improvement until spring, Time Warner executives said.