All Eyes on Time Warner, AOL as Profits Fall

AOL's to-do list

With profits down 36 percent, media conglomerate Time Warner (NYSE: TWX) affirmed its widely anticipated plans to spin off its cable unit — even though the group’s performance helped buoy the rest of the company.

Time Warner, whose media holdings include Time magazine, HBO, Warner Bros. and AOL, reported net income of $771 million, or 21 cents per share, well off from the $1.2 billion or 31 cents a share reported in the same quarter last year.

Wall Street had expected earnings of 23 cents per share on $11.39 billion in revenue, according to Thomson Reuters.

Ironically, it was Time Warner Cable that propelled the company to a 2 percent lift in revenue over the same period the previous year, banking $11.4 billion, just slightly ahead of consensus.

The cable division, which includes the company’s broadband ISP business, made up for the losses posted by the filmed entertainment unit and AOL, whose Q1 revenue was $1.13 billion, down from $1.46 billion in the year-earlier period.

Nevertheless, CEO Jeffrey Bewkes has been under pressure to jettison Time Warner’s 84 percent stake in the cable unit and initiate a stock buyback.

“We’ve decided that a complete structural separation of Time Warner Cable, under the right circumstances, is in the best interests of both companies’ shareholders,” Bewkes said in a statement. “We’re working hard on an agreement with Time Warner Cable, which we expect to finalize soon.”

At $1.9 billion, Time Warner’s 1Q operating income was down 23 percent from the same period last year, when the company enjoyed a lift from the sale of AOL’s ISP business in Germany.

Time Warner shares were down 15 cents in early trading.

All eyes on AOL

During Time Warner’s earnings call this morning, Bewkes also reaffirmed his turnaround strategy for the company’s closely watched AOL unit, following continued declining revenues for the group.

In the first quarter, AOL’s subscription revenues were down 38 percent, offset in part by a modest 1 percent increase in advertising revenues. AOL counted 8.7 million dial-up subscribers as of March 31, down 647,000 from the previous quarter and 3.8 million from the year-earlier period.

Bewkes had previously announced plans to separate AOL’s waning dial-up business from its ad-supported media properties to convert the Internet pioneer into a fully advertising-based media and content Web portal.

During this morning’s call, he said financial arrangements needed to enact that split would be in place by the end of the second quarter.

Next page: Platform A and Bebo

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Thus far, the thorough rewiring into a full-fledged media play seems to have netted an increase in traffic to the company’s media properties.

Citing ComScore figures, Time Warner said AOL’s sites have 110 million unique U.S. visitors, with users logging 159 average monthly page views, up markedly from previous months.

AOL also has been building out its advertising division, Platform A, through a long string of acquisitions. As a result of those efforts, Platform A now has the widest reach of any online ad network.

Most recently, AOL purchased the social networking site Bebo for $850 million, promising ambitious monetization opportunities from targeting ads to members of the community.

With increased traffic to the unit’s vertical content sites and an expanding third-party ad network, executives said they were pleased with AOL’s progress in turning itself around — with one notable exception, Platform A.

Despite the central role AOL’s integrated ad division is expected to play, executives said problems with the unit stymied sales.

“We were not satisfied with the display advertising on our owned and operated inventory,” Bewkes said, adding that the failure came in the slowness of syncing up AOL’s inventory with the sales operations within Platform A.

The problem stemmed from the fact that Tacoda, Quigo and the other AOL companies that comprise Platform A each had their own sales forces.

However, Bewkes added that he believes the Platform A “dislocation is behind us,” with its companies’ sales forces now integrated.

Just the same, AOL expects its advertising revenue to continue its proportional shift away from its core properties toward the third-party network. In the first quarter, the third-party network accounted for $188 million of AOL’s total ad revenue of $552 million.

In addition to the high stakes facing Time Warner in its AOL turnaround, industry watchers are closely observing the revamping effort for another reason.

The overhauled AOL is seen as one of the moving parts in the potential industry realignment that could emerge in response to Microsoft’s unsolicited proposal to buy Yahoo.

For several weeks, Time Warner has been rumored to be in talks with Yahoo (NASDAQ: YHOO) for a complex deal that could see it folding AOL into the Web portal giant.

Meanwhile, other major online media players have been marshaling their own forces in response to proposed Yahoo acquisition, which Microsoft CEO Steve Ballmer has said could turn hostile as early as this week.

In the interim, Google (NASDAQ: GOOG) has begun exploring a search advertising deal with Yahoo, while News Corp. (NYSE: NWS) Chairman and CEO Rupert Murdoch has admitted to mulling a joint effort with Microsoft to buy Yahoo.

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