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TW Operating as ‘Best-in-Class’

Feb 2, 2004  •  Post A Comment

Time Warner’s two corporate lieutenants strategically and intellectually complement and challenge each other.
Don Logan, 59, chairman of Time Warner’s media and communications group, is a career publisher and a longtime chairman of Time Inc. who studied abstract mathematics in college and approaches AOL’s Internet-based challenges as if they were a complex, multilayered math problem that can be solved a step at a time.
Jeffrey Bewkes, 52, chairman of the company’s entertainment and networks group, is a Stanford MBA, a onetime Citibank account executive and operations director for Sonoma Vineyards who is credited with masterminding HBO’s creative revival, using bold original programming. They have been known to verbally spar and finish each other’s thoughts and unite more of the troops than they polarize.
Their boss, Time Warner Chairman and CEO Richard Parsons, says these two improbably matched co-chairmen have been “the key to negotiating tricky times fraught with both opportunity and peril.”
In an energetic exchange of views and wit, the two executives told TelevisionWeek Contributing Editor Diane Mermigas why, after 18 grueling months, they and their troops have not only survived but thrived in the aftermath of the AOL Time Warner debacle. And they promise things could look still different a year from now.
TelevisionWeek: This is a time of record content returns for your company. How can you sustain it?
Jeffrey Bewkes: By differentiating. We have a scale of distribution worldwide, which we had before anybody else. Warner has a broader-based slate of films and television series. It out-indexes everyone else because Warner was first in the new DVD marketing capabilities. So the amount that Warner earns off one dollar at box office is at least 25 percent more in DVD and home video revenues than any other studio because it has more places to efficiently use that product.
TVWeek: So where do you go with that strength?
Mr. Bewkes: Usually, you increase your lead with another slate of key franchise films, co-financed by partners, and a huge roster of television programs that includes ‘Friends’ and 29 shows sold into prime time this fall. All of it not only generates current earnings, but provides future assets to sell and add to the distribution library. They provide program sources for the networks-from The WB to the Turner cable network[s] to HBO.
TVWeek: You also have your first pay-TV syndication product in ‘Sex and the City,’ which represents a new source of content revenue and profits for HBO.
Mr. Bewkes: Yes. And it is distinctive from other syndication product because what you make for a pay-TV channel is different from what you would make for CBS or the Turner cable networks.
Turner is unique among cable networks because it has the critical mass and the baseline schedule that you need to create awareness of original programming. This original content-‘Sex and the City,’ ‘Sopranos,’ ‘Six Feet Under’-represents the development of a whole new business for us, even though the revenues can be erratic. But right now, HBO expects steady growth from this and its long-term license fee agreements.
TVWeek: When do you sell AOL?
Don Logan: We operate all of our businesses as best-in-class. AOL generates more money and more cash flow than the other online business. The concern we have is that it has been falling in profits instead of increasing. Our goal at the beginning of last year was to reverse that; 2003 was a trough year, and we are on target to see it move to double-digit growth in 2004.
We will add to profits in a variety of ways, from improving the performance of our business, from bottoming out our advertising. Advertising revenue is going to grow. It dropped $1.6 billion in the last two years, but this year it will be up. Europe, which lost $600 million a couple of years ago, will move to profitability.
We are selling subscription services because they are much more core to the reasons our customers come to us to begin with-things like house protection, virus protection and call alert.
We already have 1 million paying customers for those services. We didn’t have any a year ago. So that’s another area. We launched broadband, and we have a few million customers in the [Bring Your Own Access] product category.
So while our narrowband business continues to decline, it is going to be more manageable. We’ll manage our cost base so that it stays in line with our revenue, and these other areas I talked about will increase revenues. So you put all these things together and you have a business that grows.
TVWeek: To what extent do you continue to use cost cuts to keep AOL’s financial picture on track while it is improving?
Mr. Logan: We cut costs when they are too high and not to make a bottom line number. As our narrowband business continues to decline, we’re going to try and match our cost base back to the size and scale of the business. So as the narrowband base and membership decline, we expect to save money in marketing and customer service and customer care and in network costs.
TVWeek: Is there a level of decline in your narrowband business that would compel you to do something else with AOL, like sell it?
Mr. Logan: No.
TVWeek: To what extent has your attempt to mend advertiser relationships, revenues and business reputation been impeded by changes in the advertising marketplace, such as ad-skipping technology and developing digital alternatives to the 30-second spot?
Mr. Logan: Most of the changes have actually helped AOL because there is a lot more interest now in online advertising. There is enough critical mass there that it is meaningful to a large number of advertisers, so we’ll take advantage of that very rapidly in the next few years.
TVWeek: But how can you secure more of the increased Internet ad spending we’re seeing?
Mr. Logan: We’ve made a lot of progress. Maybe our growth rate has not been quite up to the speed of some of our competitors, although it has not been far off. What you see is the final runoff of those long-term deals that showed up as advertising for us and are now disappearing. We would expect to be growing fairly close to what the marketplace is over the next few years.
TVWeek: If the AOL Time Warner merger had not occurred, you likely would have done some kind of partnership to extend your Time Warner brands into the Internet using AOL’s platform and services. That said, to what extent does AOL remain integral to the growth and extension of your core businesses, even if you sell or spin off AOL?
Mr. Logan: It is important that the old Time Warner divisions have ways of extending their brands out over the Internet. We’re doing that. If AOL weren’t around, we’d still need to be doing that with somebody, so I don’t see any reason why we wouldn’t do that with AOL because they have the volume. Given the size of AOL’s base, I would assume that under any circumstances, we would want to maintain relationships where we could expose our brands to as large an audience as we possibly could.
TVWeek: Have you been approached by Microsoft, Yahoo!, eBay or Barry Diller about buying AOL from you?
Mr. Logan: Even if we had, we probably wouldn’t talk about it.
TVWeek: With the markets and your balance sheet improving, can you announce or launch the cable initial public offering you plan the first half of this year or must you wait until the Securities and Exchange Commission completes its AOL accounting probes? Comcast recently filed with the SEC to force you to move ahead with it so it can sell its 21 percent stake in Time Warner Cable.
Mr. Logan: It’s the SEC’s call whether they would approve the registration of incremental shares or not. Comcast has asked us to start this process. So per our agreement with them, we’ll do what they have requested. We’re just now in early conversations with them about this and other conversations as well. We’ll have a clearer picture of what we are doing within 30 to 60 days. We’re not obligated to buy them out.
TVWeek: To what extent do you hope to secure the same favorable terms and price incre
ases that Comcast has been able to do the past year using its new clout with program suppliers-such as the deal it just announced with Viacom?
Mr. Logan: We are in discussion as our deals come up, and they all come up at different times. If the marketplace is changing and Comcast does something that greases the skids for us, then great. Each deal is separate and stand-alone, and we have to negotiate on our own. We don’t know what Comcast is getting other than what we read in the press.
TVWeek: Regardless of the outcome of the SEC and Department of Justice probes and the shareholder lawsuits, to what extent might the ramifications of those potentially represent a financial setback to the company?
Mr. Logan: I have been in business for a long time, and every couple of years there are always some potential disaster scenarios. If you spend all your time worrying about those, you don’t run your core businesses and don’t get the kind of value for your shareholders that you should be getting. We will worry about the things we can control and do the best we can to keep our company as strong as we possibly can and keep it moving in the right direction and deal with these other issues as they come up.
TVWeek: Is HBO vulnerable? Your subscriber growth has been flat.
Mr. Bewkes: In pay TV you have HBO or Showtime. They each have lost subscribers. You either buy them or you don’t. It was a weak year in pay TV. But we still can and will use HBO as a foundation for whatever packages we sell, whether it’s multiplexing or HD. I do not think HBO is vulnerable in that it can maintain its pay TV position. The key, like it’s always been, is the product.
TVWeek: How does a News Corp.-managed DirecTV change the competitive equation?
Mr. Logan: News Corp. has got the Fox stations and Fox product. But it needs the Fox cable channels on all the cable systems as well, and we need our cable channels on DirecTV. So I’m not so sure [News Corp. Chairman Rupert Murdoch] has any more leverage than we have. He bought himself more distribution. We already have it in cable.
TVWeek: Do you need to own television stations for your WB product?
Mr. Bewkes: The economics of a broadcast network are tightly mingled with those of the stations that carry them. So in the case of The WB, which I think has been more successful than anyone, including Tribune and us, hoped, a fair amount of that success is accruing to the Tribune stations. Given that, as we go forward, we’re going to try and have the economic benefit match or line up with the economic contributions. The network should do a little better in sharing some of the reverse compensation. There are compensation payments from the network to the station groups. But the station group also can pay the network. In the renewal coming up, there probably will be a little more sharing of The WB profits between Tribune and Time Warner.
TVWeek: Have you been approached by Fox about its interest in The WB?
Mr. Bewkes: Well, we don’t want to say. Everyone who has networks and stations is talking to each other in order to see what is possible.
TVWeek: How concerned are you about The WB’s recent ratings declines?
Mr. Bewkes: I’m not concerned about it. I think you could call it an adjustment from a staggering couple of years of percentage gains in audience, ratings, [cost-per-thousand] and upfront growth. The fact it is off this year instead of up is partly because its new shows didn’t grab the audiences as we hoped they would.
Some of them are hits, however. So that network is in enviable good position. It’s in the best position of the six broadcast networks, with a huge 18 to 34 demographic lead, and that’s where you want to be.
The WB took a lot of creative risk this year. It will continue to stay with scripted shows. The problem is that every network has seen a drop. Half of it you can contribute to Nielsen methodology and the other half you can contribute to people spending more time on the Internet and with video games and other alternative pastimes. But The WB is still ahead in CPMs, even though it is not leading in the ratings.
TVWeek: There has been a lot of speculation about plans to sell CNN or find a partner.
Mr. Bewkes: We are not selling CNN. We did, at one point, talk about a partnership. The problem with that is it is very hard to keep the motivation of the partners aligned. Even then, it would have been majority-owned and -controlled by CNN just because of the sheer size and earnings that are contributed by CNN.
CNN is going through a fairly substantial increase in earnings growth and may be one of the leading earnings growth engines of the cable networks group this year. The largest audience group that used to go to the broadcast networks, and to their network evening newscasts, is shifting to CNN. We’re trying to cut back the layers and get more of the news development-get more of what is filmed-on the screen.
TVWeek: Are you adding real-time newsgathering to Time and the other magazine sites?
Mr. Logan: We add stories on a daily basis. We also work with CNN, so a lot of the news is gathered as we share the overhead costs. Our magazines have become more like an online model, and some of the content appears to be working. Our audience levels are greater than they were before.
TVWeek: Time Warner has had corporate cultural conflicts in the past. How does the management of different divisions work together now?
Mr. Bewkes: Managing for financial returns is a dynamic that is inherent in all the businesses [we] are in. It is what binds us. So we cooperate and share intelligence and information when our goal is to respond as competitively as we can to trends and issues. We bring all of our different views together to figure out what solutions will work. We manage by information. It takes constant communication.
Mr. Logan: I think it’s easier now to make things happen across divisions. There are dozens of examples. The [subscription video-on-demand] business in our cable systems would not exist if it weren’t for HBO’s willingness to work together with them to create that. But we still believe in a decentralized way of operating.
TVWeek: It appears you both agree that interactivity and increased consumer control are a good thing for this company. So what new businesses or opportunities will you pursue in the next 24 months using this new technology?
Mr. Bewkes: There will be more continued movement to simultaneous release on home video, more VOD out of our online unit and IP packet delivery of video streaming-that is a big issue. We’re not saying we will take ‘Harry Potter’ and throw it onto the Internet. But we might put it in on an Internet Protocol delivery to our distribution partners. There is too much emphasis on the delivery of media and video product on online services like AOL, when in fact, the real strength of services like AOL is the superior functionality, whether it is creating communities or ease of use or e-mail. That was a misunderstanding of prior management.
Mr. Logan: I think there will be a lot of experimentation and development work this year in streaming video offerings through AOL and more SVOD and media on-demand services through cable. But I don’t know what form they will take in collaboration with the content owners. There is not enough scale or mass for it to be significant.
TVWeek: Does the potential proliferation of tiered or a la carte programming concern you?
Mr. Logan: We’ll continue to experiment with movies-on-demand and video-on-demand. But I don’t see anything changing the level of the playing field by any quantum leap. We don’t worry about cannibalization as long as there are channels to deliver our product profitably. There is a lot of technical work being done relating to electronic viewer guides and ways to improve consumer control over channels and content. And we will become more involved with that.
TVWeek: What about the implications of ESPN’s standoff with Cox and Comcast over tiering of sports programs? You’ve been there before with your own company and with Disney. You just started a new sports tie
r of your own.
Mr. Logan: What you’re talking about is the cost of content. Cable companies are becoming much more aggressive in managing down that cost or tiering [content] so that the people who really want [it] can pay to get [it]. A lot of the escalation has been coming because we have been adding on more channels. Everyone is looking more aggressively at those costs. Price increases are not going to be as automatic, certainly on sports. That is where the lion’s share of the cost increases have been coming.
TVWeek: You just launched a low-cost Internet service provider. But Comcast CEO Brian Roberts recently talked about possibly launching a high-end ISP service. Why did you choose to go lower?
Mr. Logan: AOL is offering the low-cost ISP because there is a segment of the population that doesn’t use the Internet for much more than e-mail. I think what Brian is talking about is being able to buy incremental services on top of the basic video service that would just increase your price.
TVWeek: This company has gone from a damage-control mode to rebuilding to advancing the growth of its core businesses in less than two years.
Mr. Logan: I wouldn’t call it “damage control,” unless you get down into one business that has been broken that we’ve been trying to repair, and that’s AOL. All the other businesses have been operating just fine, and they have been outcompeting everyone you write about.
No one is forcing us to change. But we are being presented with opportunities to implement new technology. Let’s use HBO. It’s original programming on cable, multiplexing and VOD. Those are things that HBO identified, implemented and used to distance itself from the competition. The same practice of multiplexing and VOD in the network business can threaten the network schedule at NBC or CBS because it is advertising support. So HBO has original programming and the flexibility to present it in new and different ways. If you link what HBO has to the cable company, Time Warner has the capacity and the marketing ability and the high-speed Internet connection to do even more with that content. It’s an example of how our businesses reinforce each other. We can figure out what’s going to happen and how to be first with it.
TVWeek: The DVR technology you are aggressively rolling out in your cable systems allows for ad skipping and ad elimination, which force change in the ad model. Where does it lead?
Mr. Bewkes: Let me call your attention to pay-per-view, which has been coming to squash everyone’s business for at least 10 years.
What we have here is a version of people opting to VOD themselves, but it takes more time and effort. DVRs take less time and effort. So it will start impinging on the old ways of roadblock obstructive advertising. That doesn’t mean you can’t adjust to it. Magazines don’t have roadblock ads, and some magazines that have a very high CPM per page are extremely laden with ads.
Mr. Logan: Everyone makes the assumption that if you have a DVR, you’re going to watch television with your finger on the button. A high percentage are not. Most of the time they are going to be sitting there and watching like they always have. So it is not clear yet what the change will be in actual ad viewing.
There’s a big difference between someone taping a show and watching it on their VCR and fast-forwarding and those just watching it for the first time on their DVR.
It will also take a long time for there to be enough out there to reach critical mass. But this will give us the opportunity to create new forms of advertising that there is a lot of experimentation going on now with the major companies. They will find new ways of getting their message embedded in ways that haven’t existed for them before. You’re already beginning to see things happen with the signage in sports programming events, where a whole host of new things will start to happen because the media is interactive.
People are underestimating the possibilities. They are only looking at the problem and not the potential upside. If you have people truly interested in your product, you still will be able to command high CPMs.
In three to five years from now, when there is enough mass and people’s viewing habits are clearly identified, then you will begin to see those kinds of applications in campaigns where it is meaningful enough to makes a difference. Right now there is not.
TVWeek: So what is your game plan for the next 12 months?
Mr. Bewkes: We want to continue to innovate. The first two things we’re going to do is continue to drive digital channels, our digital tier and our high-speed data business. Although our penetration levels have grown to the point that our rate of growth is slowing, the absolute growth of these businesses is still very important to our overall bottom line. We’re now up to 40 percent of the homes passed with the digital tier. So we can layer on the incremental subscription services like VOD and SVOD, which includes HBO. Sports is more on-demand, where you might be charging a premium price for heavyweight fights.
Movies on-demand are a natural. Why do you have to go to Blockbuster and rent a video when you can call it up on your television whenever you want, anytime, from the headend servers of the cable companies.
Those businesses still are in the early stages of their growth cycles. Its is one way we are trying to get incremental revenues from our subscribers. DVRs is another way. We were the first to launch it in the cable industry, and we expect it to be a big business going forward.
And the last new business that we’re going to be launching on the cable side is the voice service-voice over Internet Protocol. We’ve had a successful test in Maine and rolled out an additional three markets. And this year we’re going to go as fast as we can in as many markets as we can to be fully deployed in the next 18 months across all of our systems. That allows us to build a solid customer base. We are bundling all of those things together so you can bundle high speed and video and voice. It gives us a lot of opportunity for packaging and pricing.