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AOL TW not talking about downgrade

Feb 25, 2002  •  Post A Comment

Investors didn’t argue last week with the logic of veteran Lehman Brothers analyst Holly Becker, who has downgraded her rating on AOL Time Warner, warning of negative to marginal growth of its Internet service.
And AOL Time Warner executives didn’t even try.
The world’s largest media company remained mum in response to Ms. Becker’s concern that the core AOL business will lose narrowband ground while it spends more and takes longer to gain broadband business. She estimates AOL Time Warner will have to invest between $30 million and $75 million annually to drive the broadband growth of its AOL service and achieve a targeted 7 million broadband users by 2005, or about 25 percent of AOL’s total subscriber base and 23 percent of the broadband universe.
At the same time, AOL’s narrowband earnings will steadily decline-by 6.4 percent in 2003 and by as much as 10 percent in 2005. She said Internet adoption rates will shrink from 26 percent to 6 percent annually during the next four years, threatening AOL’s 50 percent narrowband market share.
AOL Time Warner has said the AOL service is the growth engine that will accelerate and advance the company’s more traditional businesses, continuing to grow 11 percent annually and contributing one-third of its earnings.
Ms. Becker’s Feb. 20 report downgrading AOL Time Warner to “market perform” drove its battered stock down more than 5 percent to a new one-year low of $24.20 per share. The stock, down 19 percent the past year, has lost 60 percent of its value since the merger announcement.
AOL’s effort to expand its broadband offerings over Time Warner Cable systems “is not progressing as well as we had hoped,” she said. “The rollout is quite complicated and slow. The companies are still sorting through revenue sharing, billing and economics.”
She cited Microsoft’s positioning of its MSN Internet service with the merging AT&T-Comcast, in which it has an equity stake, while AOL makes no progress toward becoming an ISP on other cable systems.
Ms. Becker expects other cable operators to play hardball with AOL in ISP negotiations, pressing for better than a 30/70 split in subscriber fees, ad revenues and marketing costs. She also cited weakness in AOL’s advertising business, artificially boosted by inter-company advertising of its own products and services, and pointed to $600 million in losses connected with its $7 billion acquisition of the half of AOL Europe it doesn’t own.
Also last week, Janus Capital Corp., a Denver-based mutual fund, revealed it has gradually sold 25 percent of its holdings the past year, but it remains AOL Time Warner’s largest institutional shareholder with an estimated 4 percent stake.