Time Warner (NYSE: TWX) said today that it plans to split AOL’s content and advertising business from its dial-up ISP unit by the beginning of next year, as it reported second-quarter profits slightly better than analysts expected.
The planned split of Time Warner’s Internet unit comes as part of a broader evolution in the media conglomerate that includes unloading its stake in Time Warner Cable, CEO Jeff Bewkes said this morning.
“As we continue to reshape Time Warner, we’ll increasingly focus on our goal to create and manage high-quality branded content across multiple platforms around the world, at the highest returns possible for our stockholders,” Bewkes said in a statement.
During a conference call with financial analysts, Bewkes also suggested that Time Warner is ready to deal one of the separating AOL assets.
“We have the necessary flexibility to do something strategic with either of these businesses today,” he said.
The fate of AOL has been grist for the rumor mill set in motion by Microsoft’s (NASDAQ: MSFT) failed bid to buy Yahoo (NASDAQ: YHOO). Time Warner has reportedly been in talks with both companies about a possible deal to spin off the content and advertising side of AOL.
ISP EarthLink (NASDAQ: ELNK) also has expressed an interest in acquiring the dial-up business, according to reports. Asked about alternative scenarios, Bewkes cautioned analysts not to look at a sale of AOL’s subscription business as a foregone conclusion.
“We’re just going to do it objectively as a business question,” he said, explaining that Time Warner would evaluate whether it could squeeze more value from continuing to run the unit in-house or selling it off.
Time Warner earnings, AOL revenues dip
Citing the “challenging economic environment,” Time Warner reported earnings per share of 22 cents for the quarter, for a net income of $792 million, off from 28 cents in the same period the previous year, for a net income of $1.1 billion.
Excluding one-time items that affected the year-to-year quarterly comparison, Time Warner’s profits were 24 cents per share, 1 cent ahead of analysts polled by Thomson Reuters.
Propelled by increases in the company’s film, cable and network television units, Time Warner’s total quarterly revenue rose 5 percent over the same period in 2007 to $11.6 billion.
AOL’s total revenue dropped 16 percent to $1.1 billion, which Time Warner attributed to a 29 percent cut in the subscription business. That dip was offset slightly by a 2 percent increase in advertising revenue.
AOL lost 604,000 dial-up subscribers in the quarter, ending the period with 8.1 million, down 2.8 million from the same period in 2007.
Within the advertising segment, AOL saw an increase in third-party ad sales — a recent focus for the company — and revenue from paid search, while display advertising on AOL-owned Web properties declined. Bewkes said the 14 percent drop in display revenue was a product of reduced spending by advertisers in industries such as automotive, travel and financial services.
Nevertheless, the company is optimistic that ad revenue on AOL’s content sites will reverse its course.
“The general reason why we think it will improve is that we look at usage as a leading indicator,” Bewkes said, citing sharp increases in traffic to AOL’s content verticals, many of which it has been in the process of relaunching.
Online metrics firm comScore (NASDAQ: SCOR) ranks AOL’s Platform A advertising division as the Internet’s largest ad network, in terms of reach. AOL has been working to continue growing its network of ad-publishing partners, recently expanding a deal with Verizon Wireless.
AOL’s operating income dropped 36 percent from the second quarter in 2007.
Shares of Time Warner were down 2.15 percent to $14.56 in early trading.
Updated with information from earnings call on the future of the company’s advertising and dial-up businesses.