Time Warner to Split AOL

In his first earnings call since taking the reins at Time Warner last month, CEO Jeffrey Bewkes delivered the vision for change in the media conglomerate that investors had been counting on.

Bewkes said that Time Warner would split the operating units of AOL, and would consider spinning off the company’s cable division.

While AOL’s earnings increased 29 percent in the fourth quarter, its dial-up Internet service dropped 740,000 subscribers in that same period, and shed 3.8 million subscribers for the year. AOL’s advertising and dial-up businesses are on opposite trajectories, so Bewkes proposed splitting them.

“Looking forward we’re trying to grow our customer usage and extend the competitive position of our advertising platform,” Bewkes said. “Doing these two things should allow us to take advantage of continued growth in online advertising.

“At the same time we need to complete AOL’s business model transition so we’re working on separating AOL’s access and audience businesses so we can run them independently,” he said.

The free content and advertising branch of a divided AOL—what Bewkes termed the “audience” business—would fulfill the campaign birthed in 2006 to transform the unit into an ad-centered business.

Last year, AOL purchased companies like Tacoda and Quigo to bolster its advertising business, with the clear goal of improving its competitive position against Web giants Google and Yahoo.

Of course, Microsoft’s acquisition bid for Yahoo has put the whole industry in flux. The leaner, ad-focused AOL that would emerge from the split Bewkes described could draw increased attention from Google—either in the form of an alliance or outright acquisition—as it calculates its response to Microsoft’s shot across the bow. Google already owns 5 percent of AOL.

It would likely take several months to divide AOL into two independent business units, Bewkes said, but investors welcomed the news in trading today.

Shares of Time Warner closed at $15.71, up 2 percent on the announcement.

While Time Warner Cable posted strong quarterly profits and is expected to produce a healthy free cash flow, Bewkes floated the idea of spinning the unit off. The cable unit is a solid source of revenue, but its business is one that demands continued capital investment to drive that revenue, Bewkes said.

“In many ways, cable has a very different business profile from our other businesses,” Bewkes said. Additionally, Bewkes said that the split ownership—Time Warner owns 84 percent of the cable unit, with the remainder owned by the public in the form of common equity—is unsatisfactory.

“We expect to reach a decision on whether and how to change our ownership level by our first quarter earnings report at the end of April,” he said.

Fourth quarter profits at Time Warner dropped to $1 billion, or 28 cents a share, from $1.8 billion in the year-earlier quarter. Earnings per share were roughly in line with investors’ consensus.

Overall revenue increased 2 percent to $12.64 billion.

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