AOL seeking ways to generate revenue

Jan 14, 2002  •  Post A Comment

AOL Time Warner may have lost to Comcast Corp. in its bid for AT&T Broadband, but it could still walk away a winner by squeezing a long-sought-after cable carriage agreement for its AOL online service on its rival’s dominant systems.
The addition of Comcast-AT&T’s combined 22-million-home footprint is just what AOL needs to supercharge its slowing subscriber growth in a recession year, when its 20 percent revenue exposure to the advertising slowdown has taken a greater toll on the bottom line than expected.
Although the companies decline comment, well-placed industry sources said regulators may insist that a merged Comcast-AT&T demonstrate its support for open access by hammering out an Internet service provider pact with leader AOL. AOL Time Warner has been thwarted in those efforts by rival cable operators wary of pacts to include new services such as streaming media that eventually could undermine their own products.
AOL Time Warner officials, during an investor’s call last week, assumed a more nonchalant posture about acquiring the 25 percent stake in Time Warner Entertainment, valued at more than $10 billion, that Comcast will inherit from AT&T. But the TWE stake, which Comcast says it wants to monetize, will be a big ISP bargaining chip for AOL Time Warner, high-level industry sources said. For instance, Comcast can likely secure more favorable terms for participating in the advertising, subscriber and other revenues generated by the AOL on its cable systems in exchange for giving AOL Time Warner access to its combined 22 million subscribers.
During last week’s investors’ call, AOL Time Warner Chief Operating Officer-elect Bob Pittman said discussions about an ISP agreement with other major cable operators continue “almost daily.” Charter Communications has 7 million subscribers, while Cox Communications and Adelphia Communications each have about 6 million.
Securing such ISP deals on other operator systems is critical for AOL Time Warner because it will go a long way in making sure AOL can, at the very least, maintain its 50 percent market share of online users even as they switch to broadband cable. As users convert to broadband in heavy enough numbers to justify rolling out new products and services, AOL Time Warner plans to offer high-quality music, games and home networks, which can be supported with resources from other AOL Time Warner divisions-and with each service generating an estimated $20 in incremental monthly fees.
“We have to make sure that as broadband services become available, we’re in front of consumers,” AOL Time Warner CEO-elect Richard Parsons told Electronic Media.
Mr. Pittman underscored the absolute importance of preserving and growing subscriber loyalty at a Salomon Smith Barney media conference in Arizona last week. “The best way to make money is to charge them for services,” Mr. Pittman told the gathering. AOL can sell broadband access for an additional $30 each month as well as multiple subscriptions per household for a collective $160 per home, he said. On the cable side, ISPs, premium services, video-on-demand, telephony, interactive TV and home networking and other new digital services can generate about $230 in monthly fees per home, he said.
Still, Merrill Lynch analyst Jessica Reif Cohen says the greatest risk AOL Time Warner faces is “the continued multiple compression of the core AOL segment,” whose earnings growth is being reduced to single digits this year.
Another way AOL Time Warner will seek to accelerate online subscribers is to acquire more cable systems from the smaller remaining cable operators, including Adelphia and Charter, over which it can offer its AOL service.
Well-placed sources said retiring AOL Time Warner CEO Gerald Levin and Cablevision Systems Chairman Chuck Dolan have already discussed their “mutual interests,” but that no deal is imminent. AOL Time Warner’s potential acquisition of Cablevision Systems, with 3 million choice New York-area properties and cable systems contiguous to those of Time Warner, seems more a question of timing.
“Whenever they’re ready to rock, we’re ready to roll,” Mr. Parsons said. “The reality is we believe in cable, we’re acquirers under the right circumstances, we believe it is a consolidating market and we intend to continue to be active participants.”
Growth of its core online, cable and print subscribers, which will struggle to match last year’s 12 percent gains, is critical to the company’s overall revenues and earnings growth. It hinges on such things as AOL’s narrowband subscriber additions; capturing about one-third of the U.S. broadband market over the next five years; realizing $200 million in incremental revenues from its $1 billion in cross-bundling advertiser deals; the cross-marketing of its own properties; and Time Warner’s successful rollout of new digital cable services.
Mr. Parsons said he wants to buy more cable, online and international properties this year. Sources said he actively is seeking an interactive video-game partner.
Last week, Mr. Parsons set into motion what he had promised to be a more conservative outlook for the world’s largest media concern by forecasting more modest 8 percent to 12 percent rise in earnings on a 5 percent to 8 percent rise in revenues in 2002 based on no assumed growth in adverting and no economic recovery. “We will try not to overpromise, and we will deliver,” he said, adding there are no plans for more substantial cost cutting-only “fine-tuning.”