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Time Warner Bets Ad Growth Will Trump AOL Sub-Fee Losses

Aug 7, 2006  •  Post A Comment

Media giant Time Warner, which last week said it would offer its AOL service free to high-speed Web surfers, is counting on fast growth of online advertising to compensate for the subscriber fees it will lose. All media companies are looking to capture internet revenues as traditional ad spending slows.

Ad revenue rose 40 percent in the second quarter at AOL, which lost 976,000 of its 18.6 million dial-up subscribers in the period, and a recent forecast by ad agency Universal McCann found online advertising is growing at a 25 percent clip annually.

Time Warner’s AOL experiment seeks to cash in on that growth as the ad market in television and print slows down. Whether AOL’s mix of e-mail, instant messaging, Web search and video offerings can draw enough Internet users to attract advertisers en masse remains to be seen, ad buyers and Wall Street analysts said.

“Their dial-up was brilliant and it made a few people a lot of money, but after that we haven’t seen much excitement,” said Mitch Oscar, executive VP of Carat Digital. “So why should we think that in their next iteration as they try to prevent themselves from sinking into the tar pits is going to be any better?”

Mr. Oscar said AOL’s weakness remains a lack of compelling content. While the online unit has had some success in music and attracted viewers with its webcast of the Live 8 concerts, it can’t post a hit show like ABC has with “Desperate Housewives” or CBS with “Survivor.”

“Time Warner doesn’t have anything they create originally that they can control,” Mr. Oscar said. “They’re selling all of it to a network. So I don’t think they have the blazing guns that will cause people to sample.”

That may keep AOL from taking a significant share of Internet advertising from companies including Google, the most-used search engine, and Yahoo.

Time Warner, the world’s largest media company, is betting a mix of AOL video services will attract users and the advertisers that want to reach them. AOL’s position may improve as the TV and personal computer get better connected and advertisers seek more interactive spots in both media, said Will Richmond, president of Broadband Directions.

As one of the most-visited sites on the Web, AOL is in a good position to push its free video clips and a video download service as a way to increase ad views, Mr. Richmond said. The service’s history as a dial-up introduction to the Web for millions of people also may help.

“The AOL heritage was all about user-friendliness and providing an easy on-ramp for the mainstream market, and I think that’s what they’ve done here,” he said.

AOL’s lagging performance has been a drag on Time Warner shares since the media company and America Online combined in 2000. During a conference call last week, Time Warner executives insisted that the loss of AOL subscription fees would be offset by increased broadband advertising sales and by cutting $1 billion in expenses, including costs from pursuing new dial-up users. The company also announced plans to cut 5,000 staffers.

“By giving AOL’s valuable members the ability to stay with us free of charge as they shift to broadband we will finally enable AOL to fully take advantage of very compelling online trends,” said Time Warner CEO Richard Parsons.

Advertisers last year spent $7.8 billion on the Web, while television brought in about $48 billion, according to Universal McCann, which also forecasts that Web advertising will grow by 25 percent this year. Another ad buyer, ZenithOptimedia, sees Internet spending growing by another 15 percent in 2007 and 9 percent in 2008. In recent television upfront ad sales markets, where about 80 percent of prime-time spots are sold, networks have increased their take by a single-digit pace at best.

Those relatively small increases have contributed to lagging stock prices at Time Warner, CBS Corp. and other media companies that depend on traditional ad dollars.

The results of the new AOL strategy will be the most important thing to watch at Time Warner over the next six to 12 months, Merrill Lynch analyst Jessica Reif Cohen said last week in a report.

“The continued uncertainty surrounding its transition and uninspiring operating trends at most of the other segments should curb upside in the coming months,” she said.

Opening up AOL’s content to everyone “may make their numbers look better and may offer more opportunities to advertisers,” said Shelby Saville, senior VP and an IP director for Starlink.

Ms. Saville said AOL in the past has been wary of alienating subscribers with integrated advertising programs.

“When you have a free service, there’s more of an expectation from the consumer that advertising will be part of that,” she said.

For the past year, AOL has been more advertising-friendly as it ramped up to compete with Yahoo and Microsoft’s MSN, she said.

Time Warner, which posted net income of $1 billion compared with a loss a year earlier, said AOL’s earnings were stronger than expected in the second quarter.

In Time Warner’s network group, a 9 percent decline in ad revenue at The WB offset an 11 percent gain in cable. Bear Stearns analyst Spencer Wang estimated that excluding results from the acquisition of Court TV, Turner Broadcasting’s ad revenue grew about 5 percent.

Time Warner got a boost of $13 million in earnings before taxes and depreciation through its acquisition of Court TV. The company said shutdown costs for The WB network, which is combining with UPN to create The CW, will total $81 million.

Time Warner President and Chief Operating Officer Jeffrey Bewkes said he expects Turner Broadcasting will end up “at the high end” of cable network performances when it concludes its upfront advertising sales.

Time Warner Cable was a bright spot for the company, with subscription revenues growing 16 percent. The cable operator’s ad revenues grew 4 percent. Credit for the gains came from an increase in “triple play” subscribers—those taking video, high-speed Internet and digital phone service from the company.

Time Warner raised its full-year forecast for growth in adjusted operating income to the low double digits from the high single digits. That forecast accounts for its acquisition of cable systems from Adelphia Communications and related transactions with Comcast Corp., the consolidation of Court TV and the WB shutdown.