Raise your hand if something got lost during the Time Warner AOL conference call (right, they dropped the AOL brand from the corporate namesake).
I respect Time Warner as a company and they have some very smart people, but I don’t get a sense that they know what they are doing. Actually, I don’t think they know what they want to do.
Time Warner Chairman and CEO Jeff Bewkes said AOL is “open to any strategic moves that make sense” but he feels confident about AOL’s ability to compete.
According to WSJ: in 2007, AOL generated $1.251B in revenues (a drop of 32%!) and $381M in profits.
According to Forbes: AOL remains highly profitable, having posted $1.84 billion in adjusted operating income before depreciation and amortization in 2007, up from $1.77 billion in 2006.
Either way…
The stock is at $15.50, or a market cap of $55B. The 52-week high is $21. Let’s not even mention its all-time high.
The many choices these days include:
- selling AOL - but to whom?;
- selling or spinning off the Platform A (the network that encompasses Advertising.com, Third Screen Media, Quigo, etc.);
- getting out of the access business (subscription for web access).
Bear in mind, this is all coming ten years after the disastrous AOL acquisition of Time Warner. That’s right, AOL acquired Time Warner in January 2000 and since then, the merged entity has been one big pile of disarray soup.
In the past, I argued against a Yahoo!/AOL merger because, for lack of a better term, Google could cock-block it. Google had invested $1B for 5%, valuing AOL at $20B. My argument was simple: any time Yahoo! and AOL got talks going, Google would butt in, show interest, get a price war going and then Yahoo! would back off, as would Google. I apologize for the “cock-block” term here, but I was scratching my head thinking of a better way to coin it.
I think the AOL/GOOG deal set the stage for MSFT to acquire Yahoo! and doomed any shot AOL had of reclaiming its glory of days gone by. If you disagree, I welcome your suggestions.
Incidentally, I recently suggested (before Microsoft’s unsolicited offer for Yahoo!) that Yahoo! should bundle its ad networks and spin them off, to raise $1-4B and unleash shareholder value. Anyway, now that Microsoft has set its sights on Yahoo!, Google feels threatened, Yahoo! feels like it’s on borrowed life, and Time Warner wants to burn any vestiges of its AOL days away.
Time Warner’s main concern, frankly, is its debt level. The company has $37B in debt. That’s a lot of debt to finance. Its cash hoard is less than $2B. In other words, any deal or solution would have to entail a sizable injection of cash.
It’s hard to come up with a strategy for AOL when parent Time Warner itself does not know what to do with the Web going forward. It has bought a lot of business, but I think the answer comes from looking at Time Warner.
Time Warner is a media company. Yes, it owns AOL and Netscape, along with numerous ad networks, but at its core, it is in the content and media business. So here’s what I think Time Warner should do:
Step 1 - Get out of the Access Business
One company that has come up is Earthlink. I don’t think Earthlink makes sense. Earthlink has a $800M market cap. AOL’s access business can fetch $3-5B. I think AT&T or Verizon would make a nice home and they can afford it. AT&T and Verizon are gatekeepers to the digital world, they would know what to do with AOL’s access business. They can also afford it. A cash deal of $3-6B could help pay down some of Time Warner’s debt.
The main reason Time Warner should get out of this business is that it is a slow-growth cash cow that makes it embracing the free, ad-supported content business hard. Why would anyone accelerate the cannibalization of a billion-dollar revenue stream?
Advertising, that is why. Time Warner’s clients are essentially advertisers. If you work with GM for CNN or Time magazine, it is important to be able to offer them reach online. That’s the holy grail for Time Warner, not charging someone $25/month for Web access. The person looking for Web access will look for cheaper and faster access… advertisers remain with publishers.
2 - Focus on Free, Ad-Supported Content and Media Businesses
AOL, Weblogs Inc., TMZ, Fool.com, and all of Time Warner’s online assets (Time, CNN, etc.) is where the money will be at in the years to come. I understand the focus in 2007 was ad networks, I also realize that Advertising.com (whom AOL bought for $435M in 2004) generates the lion’s share of ad revenues at AOL, but long term, holding onto and developing the content businesses will allow the most incremental upside.
3 - Spin off Platform A
I would not sell Platform A to neither MSFT, Google etc. MSFT has aQuantive. Google will ultimately own Doubleclick. There are many other independent networks and what not. But Time Warner can raise $1-5B in cash by spinning off Platform A (and keeping a portion to sell over time as it grows in value).
Ultimately, despite AOL and Netscape, Time Warner is not a technology company and I doubt TWX’s board will have the appetite and risk profile to invest what is required to compete with technology companies in the ad network space.
Conclusion:
By unloading the access and network businesses, Time Warner can raise $5-10B in cash, reduce debt and focus on pleasing advertisers.
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