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Time Warner, AOL to Split by Year-End

By Mike Musgrove and Frank Ahrens
Washington Post Staff Writers
Friday, May 29, 2009

The nine-year marriage is over: Yesterday, media company Time Warner announced that it will spin off its AOL subsidiary.

"We believe AOL will . . . have a better opportunity to achieve its full potential as a leading independent Internet company," Jeffrey L. Bewkes, Time Warner chairman and chief executive, said in announcing that his company will unload the former dial-up giant around the end of the year. "The separations will also provide both companies with greater operational and strategic flexibility."

Tech pundits had been saying as much for years.

Although the partnership between Time Warner and AOL was once pitched as a way to advantageously meld old media with new, the deal has been regarded in recent years as one of the largest blunders in corporate history. None of the supposed synergies of the expensive union between the two ever paid off, and in recent years AOL's flagging fortunes have increasingly cut into its parent company's profit.

AOL, in the meantime, has held an uncertain position in Time Warner's corporate structure and has been limited in the types of deals it can strike.

Yesterday, tech analysts sounded a quietly optimistic note for the once-pioneering AOL as it gets ready to face the world again as a stand-alone company. If nothing else, they say, AOL will be much freer to pursue a wider range of business allies.

"This buys AOL more time to become more flexible and establish better partnerships and figure out what will work," said Tim Bajarin, a principal analyst at Silicon Valley think tank Creative Strategies. "As much as they could've tried to do that before, they were under a lot of pressure to impact the bottom line of Time Warner."

Still, it's hardly a given that a liberated AOL will succeed on its own.

"The odds are really against them, but those odds improve with separation," tech pundit Rob Enderle said.

"AOL is largely irrelevant on the Web, but they have a powerful brand," he said. "They need to figure out how to be hip and relevant again. They're not going to get there by trying to out-Google Google, or out-Facebook Facebook or out-Twitter Twitter. They have to figure out a space they can own."

Under a new chief executive, freshly plucked from the top ranks of Google, AOL has said in recent months that it will focus on content, advertising and social networking. In an all-hands meeting when he took the job, AOL chairman and chief executive Tim Armstrong boasted that there were "incredible things" going on under the surface at the company and that its Dulles campus would soon be a source of new creativity and innovation as AOL redefines itself.

Although AOL holds assets in the areas it intends to concentrate on, it is dominant in none.

AOL once introduced the world to concepts and features like buddy lists and community sites, but it never capitalized on such social-networking tools as well as later upstarts such as Facebook.

Recently, AOL has been aggressively trying again to establish itself as a player in the social media space. Last year, AOL acquired social-networking site Bebo for $850 million, but the site has largely missed the buzz and user momentum that its competitors have had.

As an advertising company, AOL will compete against three formidable firms: Google, Yahoo and Microsoft.

AOL is the smallest of the bunch. According to revenue figures from the fourth quarter of last year, Google booked 65 percent of the $8.47 billion in online ad revenue accumulated by the four major players. It was followed by Yahoo (19 percent), Microsoft (10 percent) and AOL (6 percent).

In terms of content that will attract Web surfers, the company owns a hodgepodge of popular offerings, such as Mapquest and the gossip site TMZ.com. AOL is building a staff for a political news site.

While AOL still has customers paying a monthly fee for Internet access, it has been consciously letting that business dissolve.

In 2002, the number of AOL members peaked at nearly 27 million, most of whom paid about $24 a month for dial-up access, producing a monthly cash flow of $528 million for the company.

Today, AOL has about 6.3 million subscribers.

Tech industry analyst Roger Kay, president of Endpoint Technologies Associates, said that AOL shouldn't overlook those subscribers as it experiments with new business ideas. Overall, however, he wasn't sanguine about the company's prospects.

"I wouldn't expect them to be vastly successful," he said, "but you have to have a business plan."

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