AOL Puts Drag on Time Warner Profit

Time Warner chief executive Jeff Bewkes expects AOL growth to pick up significantly in coming months.
Time Warner chief executive Jeff Bewkes expects AOL growth to pick up significantly in coming months. (Evan Agostini - AP)
  Enlarge Photo    
By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, August 7, 2008

AOL's expensive investment in building a leading online advertising network is not yet paying off for parent company Time Warner.

Time Warner, one of the largest media companies in the world, said yesterday that second-quarter profit slid 26 percent, to $792 million (22 cents per share).

The main reason was declines at AOL, which has major operations in Dulles. Ad sales at the Internet company inched up 2 percent in the quarter ending June 30. By contrast, Google, Yahoo and Microsoft reported double-digit ad growth in the same period.

Time Warner has staked AOL's future on its ability to become a successful advertising venture, moving away from the legacy dial-up Internet access business that made the company a household name. Losses in the access business led to a 28 percent decline in AOL's overall earnings, to $135 million.

AOL has been struggling to merge six advertising companies it bought in the past few years into one organization, known as Platform A, causing confusion for many ad customers.

Time Warner chief executive Jeff Bewkes said that those integration problems are now behind AOL, and growth should pick up significantly in the coming months. "We believe this performance was also due to the continuing effects of the acquisition issues," he said on a conference call with analysts. "There continue to be encouraging signs about the underlying health of the business."

A search partnership with Google and ad growth on third-party sites to which AOL provides ads helped lift sales. But AOL also operates dozens of sites under its own name, and ad sales on those sites fell sharply.

Bewkes confirmed that AOL had split the company's advertising and content business from the access business -- subscribers who pay monthly fees to get on the Web through telephone lines. AOL lost 604,000 subscribers, weighing heavily on the company's bottom line. It still has 8.1 million subscribers.

Starting in 2009, the divisions will be run independently, but either could be sold or merged with an outside company, Bewkes said. AOL is aggressively looking for a buyer for the access business, sources have said. It has talked with Microsoft, Yahoo and others about possibly buying the content and advertising business or partnering in some way.

"We've now made key financial and strategic decisions that will enable us to operate the access and audience businesses separately," Bewkes said. "We have the necessary flexibility to do something strategic with either of these businesses today."

For Time Warner overall, sales increased 5.2 percent, to $11.6 billion in the last quarter.

Softness in the company's Time Inc. publishing division, home to magazines including Time, People and Sports Illustrated, also contributed to the decline. Time reported a 9 percent drop in advertising sales.

Time Warner Cable was a bright spot, gaining more than 200,000 subscribers, as were the company's TV networks and Warner Bros. film studio. Time Warner is planning to spin off the cable company soon.

The company's stock fell 5 cents yesterday, to $14.83.

© 2008 The Washington Post Company