Time Warner Gets Its Groove Back As It Sheds Its AOL, Cable Units

Time Warner's lost decade may finally be drawing to a close.

The media giant is starting to look like its old self again as its nearly decade-long toxic marriage to Internet provider AOL draws to an end and the company exits the distribution business, having cut loose Time Warner Cable earlier this year.

In earnings reported last week, Time Warner behaved just like a media and entertainment company -- subject to the whims of consumer taste and the advertising market -- maybe for the first time since AOL co-founder Steve Case persuaded then-Time Warner chief executive Gerald Levin in 2000 that together, the two companies would form the first 21st-century media conglomerate. Instead, AOL-Time Warner became the century's first mega-flop.

"I'd like to close by telling you why I'm so excited about the future of Time Warner as a pure content company," Time Warner chief executive Jeffrey Bewkes said Wednesday as he wrapped up a conference call with analysts. "I think we have a sustained competitive advantage and a track record, creating and monetizing high-quality content."

The second-quarter earnings reported on Wednesday were down compared with a year earlier -- no surprise, given the economy's poor performance in the past year. But the numbers beat Wall Street expectations, and the company managed to pick up a little steam in the second quarter, compared with the first.

Traders have rewarded Time Warner for shearing off Time Warner Cable and AOL, which Bewkes predicted would happen by the end of the year. Year-to-date, shares have lagged competitors and the Standard & Poor's 500-stock index. But over the past month, Time Warner shares are up 10 percent, tracking the S&P 500's gains, and are pulling closer to rivals.

That contrasts with the stock's performance from 2000 to today. While shares of Walt Disney, News Corp and CBS are down between 20 percent and 50 percent over the past nine years, Time Warner shares sank more than 80 percent.

Typically, jettisoning revenue-generating units such as AOL and Time Warner in a bad economy would be a no-go.

But AOL is in transition, moving to become an advertising company as its business providing Internet access dwindles. And Time Warner Cable never fully integrated into the parent company. The separation was sweet for Time Warner: It got a $9.25 billion dividend payout from spinning off the cable unit.

So that leaves Time Warner 2009 as a content company, which exposes it to the vicissitudes of the ad market. However, even as a pure content company, Time Warner is less exposed to advertising downturns than some of its competitors.

The company's biggest division -- its television networks, including CNN, TNT and Cartoon Network, which provide 65 percent of earnings -- has two revenue streams: advertising and cable subscription fees. HBO has little exposure to ad swings, as it is a premium cable channel.

Time Warner's movies and television shows, which account for 18 percent of total revenues, also have no ad exposure. Moviegoers are fickle, but Warner Bros. has bankable franchises. "Harry Potter and the Half-Blood Prince," released in mid-July, has grossed $660 million worldwide so far.

"We feel increasingly comfortable with Time Warner as more of a pure content play," Pali Capital media analyst Richard Greenfield said in an interview Monday. "The cable networks are uniquely well-positioned to take share from broadcast" television, he said. Greenfield has a "buy" rating on shares of Time Warner and has maintained a $28 price target. Shares of Time Warner closed up 2.3 percent yesterday at $27.26.

Only Time Warner's struggling 115-magazine Time Inc. division, which includes Time, Sports Illustrated and Fortune, is substantially exposed to ad-spending volatility. (Unlike cable fees, magazine subscriptions count for little revenue.) And, like most print publications, the Time Inc. magazines are in trouble. Operating income was off by more than half for the second quarter compared with last year and down by a whopping 77 percent in the first half. Revenue from Time Inc. accounts for only 13 percent of the parent company's earnings.

Time Warner plans to remain in the magazine business for the foreseeable future, said a source with knowledge of the situation, if only for the reason that it's a terrible time to try to sell magazines. Still, publishing is in the DNA of Time Warner and the company might consider selling individual, less-successful titles while holding onto profitable magazines, such as People, the source said, speaking on the condition of anonymity because the strategy is private.