International: How Time Warner's New Big Man Will Make the Media Giant Smaller

Being CEO of the No. 1 media company just ain't what it used to be. That's why Jeffrey L. Bewkes is more than willing to use his time atop Time Warner to whittle it down into a much smaller, more focused corporation.

In the most dramatic scenarios, Mr. Bewkes eventually would find himself leading a pared-down portfolio of movie studios, TV production companies and cable networks. If one of Wall Street's most passionate dreams is realized, and Mr. Bewkes cleaves the company after he ascends to CEO on Jan. 1, it's going to radically transform not just his portfolio but the dominant features of the media landscape, too.

A Time Warner breakup would "unlock value" for stockholders -- a group that includes Mr. Bewkes -- who are sick of a share price seemingly stuck below $20. But revenue at Time Warner left behind would rank far below today's No. 2, Comcast, and near Walt Disney, which comes in third.

The old Viacom has already split in two; talk is swirling that General Electric could part with NBC Universal after the Olympics; and Barry Diller's IAC/Interactive Corp. revealed its plan last week to become five companies.

So the bulky, supposedly synergic media conglomerates that ruled the landscape just a few short years ago may soon look, in retrospect, like dinosaurs. Not that Mr. Bewkes minds. He told a group at an investment conference last week that it was important for Time Warner to be the most profitable, not the biggest. Here's a look at how he can get there.

Cut cable loose
The breakup scenarios all seem to start with cable. Time Warner Cable -- which is waging a fight against the telecoms to provide consumers bundled phone, cable and broadband-internet services -- generated nearly $12 billion of Time Warner's $34 billion in 2006 net revenue, according to Ad Age estimates. But by next spring, Time Warner will be in a position to spin off some or all of its 84% stake in the cable company without the prohibitive tax hit that's chilled the option so far. And the analysts say, "Just do it."

"Getting cable out is probably the biggest piece because it's the most capital intensive and there are headwinds in cable," said Vijay Jayant, an analyst whose research at Lehman Brothers has contributed much to the breakup talk. He said he'd like to see cable spun off by next year. "Why not separate cable from the content side and let cable investors buy cable stock and content investors buy content stock?"

Thomas Eagan, an analyst for Oppenheimer, said of all the possible ways to divide Time Warner -- selling AOL as a separate stock, for example -- the easiest is to reduce its stake in cable.

Making the stock appealing enough to sell at a healthy price might take some time. Although Time Warner Cable's acquisition of Adelphia Systems gave the company an early boost going into 2007, the company still has to recover from a lackluster second quarter and a disappointing third quarter.

Viewer data
In the run-up to any exit, however, Mr. Bewkes still could do the cable division a lot of good, Mr. Eagan said. "Jeff likes to embrace technology, and we'll continue to see him trying to harness it to improve fundamentals. On the cable side, he'll likely find a way to enhance customer choice, therefore reducing customer churn ... without reducing the advertising."

That certainly was the implicit message last July, when Mr. Bewkes delivered a keynote speech to cable executives gathered in Washington, trumpeting the rich demographic data cable systems can provide, just like the major web portals. Google has been brilliant in helping consumers search for information and placing ads next to the results, he said. "Cable systems not only have that data," he said, "they have what you're watching on TV and on-demand."

Whether part of Time Warner or alone, however, Time Warner Cable shares its struggles with competitors such as Comcast and Cox. "Cable systems are trading at an all-time low," Mr. Eagan said, citing a transitional period for industry business models in the wake of on-demand technology and increased competition from HD and satellite providers.

Looking further ahead, some resolution will need to be reached on Time Inc., Time Warner's publishing division, the business where the conglomerate began and the largest magazine company in the country.

Time Inc., proprietor of brands such as People and Sports Illustrated, has both benefited and suffered from the corporate sprawl at Time Warner.

Good, not good enough
It collected $3.6 billion in estimated net revenue last year. But the digital dawn has put pressure on its business, so it hasn't grown the way Wall Street demands. Its revenue again is flat across for the first three quarters of the year -- a situation that probably won't improve unless it hits a stride that's in step with the booming web-ad market. Unfortunately, Wall Street's emphasis on quick returns makes it difficult for Time Inc. to invest for the long term as long as it's part of a public parent.

The CNNMoney.com partnership between CNN and Time Inc.'s financial sites, for one, is an online success, with pressure from corporate making sure everyone plays nice together. "You could do it as separate companies, but it becomes an arm's-length thing," said an executive at a rival publishing house. "It's a little harder without a shotgun pointed at you."

The parent's massive scale also opens doors to cheaper capital when Time Inc. wants to do a deal, an executive there pointed out. Consider Time Inc.'s 2001 acquisition of the IPC Group for $1.6 billion, he said. "You have to convince Time Warner it's a good idea, but if you were Time Inc., a stand-alone publishing company, that would have been a tough transaction to finance."

On the downside, belonging to a sprawling media empire has sometimes inhibited Time Inc.'s scope, the Time Inc. executive said. "Instead of us getting into TV, that was kind of Warner Bros.' business," he said. "In some digital things even, there've been acquisitions that we were interested in, but it was deemed 'No, if we we're going to do that, it's going to go to AOL.'"

"Had we been our own stand-alone company, we might have been a little quicker into the platform extensions," he said.

Private freedom
A transaction that took Time Inc. private, moreover, would deliver a longer investment horizon than quarterly conference calls with analysts allow. That isn't lost on anyone. During the 2006 American Magazine Conference, Ann Moore was asked hypothetically whether Time Inc. might be better off in some ways as a private company. "No question," Ms. Moore said. "Come on."

The situation with AOL is perhaps the murkiest, both because it has troubled the parent so much for so long and because smart strategy has finally appeared, better late than never.

When Carl Icahn and Lazard led their charge to break up Time Warner two years ago, they argued among other things that AOL's reliance on a paid-access business model paled next to the ad-revenue gains by others. But now AOL has switched to an ad-supported model. And it keeps making acquisitions, including behavioral-targeting firm Tacoda and contextual network Quigo, which doesn't seem to suggest an imminent sale.

Bear Stearns even rates Time Warner stock "outperform" partly because analysts believe AOL's long-term prospects are better than the market is estimating. "Our analysis finds that, while not without issues, the AOL advertising story is intact," Bear analysts said in a recent note.

After the coming change in management, Bear said it anticipates a spinoff of the rest of Time Warner Cable, a possible sale of Time Inc. and a "strategic event" at AOL.

Google question
Google already owns a 5% stake in AOL under a $1 billion deal struck in December 2005. According to public filings, Google will be able to sell those shares on the open market as early as July 1, 2008, or Time Warner could buy the stake back with cash or stock. Should Google exercise its right, it could force Time Warner into deciding the fate of the portal division sooner rather than later.

Mr. Jayant of Lehman Brothers said he'd like to see Time Warner contemplate selling what's left of its web-access business and perhaps merge what's left of AOL with a competitor such as Yahoo or MSN.

That's all imminently possible, particularly because ad sales were never integrated very deeply across the Time Warner properties. As David Card, an analyst at Jupiter Research, put it: "You can have sustainable media companies without an ad network, and you can have a sustainable ad network without a media company behind it."

Mr. Card doesn't expect Time Warner to unload AOL for a good 18 to 24 months, giving Mr. Bewkes plenty of time to explore merging the site with another portal. "The obvious thing the network doesn't have is search. AOL has lots of audience, so [its content] is kind of a good [complement] to a Microsoft, Google or a Yahoo."

Biggest platform
AOL still commands a pretty big swath of traffic on the web -- but its ad network, the web's largest, is becoming the bigger ad play. Recently coined Platform A, it includes Tacoda, Advertising.com, mobile network Third Screen Media and now Quigo.

Yahoo, Microsoft and Google have made significant investments in technology infrastructure in an effort to be able to serve and sell ads across the web. But according to ComScore data, AOL still has the broadest reach, thanks to Advertising.com, so several observers have suggested that a network strategy may be the strongest if plans for a spinoff are under consideration.

What AOL doesn't have is a major U.S. web-serving network such as DoubleClick, which has agreed to be purchased by Google, or Atlas, which has been swallowed by Microsoft. It does own Germany-based AdTech, but that unit's presence in the U.S. is limited.

When Time Warner reported its third-quarter results last week, it attributed its revenue growth to its cable, filmed-entertainment and networks divisions; the latter two are the keepers in almost any divestment scenario.

The Turner cable networks -- TBS, TNT, CNN, Court TV and Cartoon Network -- accounted for about $4.78 billion of Time Warner's $34 billion in net revenue last year.

Broadcast competitors
TNT, TBS and CNN also represent three of the 10 most profitable cable networks, with substantial signs of growth. TBS and TNT have both reached enough ratings strength and household carriage that their sales execs consider their main competition to be the broadcast networks rather than similar cable nets such as FX and USA. Cartoon, while still a sizeable third to Disney and Nickelodeon in ratings, has filled a niche in reaching young boys and thus more than doubled its ad revenue since 2002.

HBO, which Mr. Bewkes used to run, pulled in $2.93 billion last year -- before DVD sales and syndication deals. The movie business is volatile, but Warner Bros. and New Line Cinema generated $2.9 billion in net revenue last year. Their third quarter shone, Time Warner said last week, because of strong global showings by the latest Harry Potter installment, "Ocean's 13," "Rush Hour 3," "Hairspray" and, on home video, "300."

The only major room for improvement in filmed entertainment lies in Time Warner's 50% ownership of the CW, which is still trying to regain its footing in ratings and distribution after a last-minute cobbling together of UPN and WB stations.

The possibilities of a reduced stake in Time Warner Cable and a lack of integration with AOL's ad network seem to be plaguing the entertainment division's execs the least. To Turner Entertainment CEO Phil Kent, having filmed entertainment under Mr. Bewkes' watch will mean decisions on content deals will come more quickly and with a sharper eye on advertising opportunities. "He's very knowledgeable about our industry and has successfully run a division like Turner."

Tempus fugit
Time Warner has been No. 1 in Ad Age's Media 100 ranking since 1995. Last year, it collected 11.8% of Media 100 revenue -- nearly $1 of every $8 spent by U.S. advertisers and consumers on products and services from the top 100. If it were to spin off cable, magazines and AOL, Time Warner could fall as far as No. 6.

The end (of the decade) is near. So what's the deal?

A brief history of the Time Warner marriages that could end in divorce:

1969: Steven Ross buys Warner Bros., adding it to his hodgepodge of a conglomerate (parking lots, car rentals, funerals). His company, Kinney, adopts the name Warner Communications.

1989: Mr. Ross orchestrates merger of Warner Communications and Time Inc., creating Time Warner. "A perfect fit," says the press release, that "positions the combined companies ideally to capitalize on emerging technologies, new delivery systems and growing markets."

2000: Steve Case's America Online strikes a deal to buy Time Warner, trading AOL's hugely inflated dotcom stock for prized old-media assets. The January 2000 press release called it a"strategic merger of equals to create the world's first fully integrated media and communications company for the Internet Century." In that release, Time Warner's Dick Parsons said: "This is a defining event for Time Warner and America Online as well as a pivotal moment in the unfolding of the internet age." The bubble burst, and AOL began unfolding even before the AOL Time Warner deal closed.

2008/2009: Breakup?

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Contributing: Abbey Klaassen

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