Transcript

AOL Time Warner: Recovery or Retreat?

David A. Vise
Washington Post Staff Writer
Thursday, July 24, 2003; 12:00 PM

AOL Time Warner reported strong second-quarter earnings Wednesday, fueled by the box office success of "The Matrix" and from the sale of its Comedy Central cable channel.

But what can be read between the lines of the media giants quarterly financial filing? Washington Post reporter David A. Vise was online earlier today to take your question and offer his analysis.

A transcript of today's discussion is below:

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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washingtonpost.com: David, thank you for joining us today. Before we get started with questions from our readers, can you give us a quick snapshot of the most interesting details in AOL Time Warner's latest quarterly financial filing?

David A. Vise: Hi everybody and thanks for joining this chat about AOL. Now for the news: AOL lost about 1 million subscribers. And problems are growing with the SEC probe into questionable accounting practices @ America Online, as the investigation spreads to new, larger deals, including some that involve other parts of the AOL Time Warner media empire.

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Baltimore, Maryland : What is Ted Turner's involvement in the company currently?

David A. Vise: Ted Turner is a member of the AOL Time Warner board of directors, a very "outside" director who has moved onto other things. He has no role in management. He also has dumped most of his AOL Time Warner stock after losing about $8 billion in value on paper as the stock price plunged following the AOL-TW merger in Jan. 2001.

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Georgetown: Despite getting enough AOL CD's in the mail to constitute a small library, I've never been a subscriber.

I've always been interested to know what they do that would make people want to sign up with AOL?

David A. Vise: They make it easy to use the Internet to access information and communicate by email and Instant Messaging.

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Arlington, VA: What are the chances that AOL and Time Warner will eventually split? It doesn't seem that the merger worked and the companies might fare better separately.

David A. Vise: I'm told by company officials there is no chance the companies would split prior to the SEC completing its investigation into accounting practices @ America Online that allegedly inflated revenue and profits.

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Arlington, Va.: What's behind the huge drop in ad spending at AOL?

David A. Vise: AOL aggressively made unconventional ad deals, many with .coms that have since gone broke when th bubble burst. The drop reflects the run-off of those deal and AOL's inability to replace those ads, even though overall spending nationwide on online ads is growing, boosting ads @ Google, Yahoo and others.

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Alexandria, Va.: Has AOL had any! success selling its broadband offerings?

David A. Vise: AOL's broadband campaign increased high-speed subscribers from 1.9 million to 2.3 million in the past three months. The company's broadband biz, in absolute numbers, is not growing fast enough to replace the subscribers it is losing. AOL is losing broadband customers to faster and cheaper Internet providers.

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Frederick, Md.: What's the timeline on the SEC probe, and what's the chance AOL will settle the whole matter?

David A. Vise: It is extremely likely that AOL Time Warner will reach a settlement with the SEC. But uncertainty lingers over the size of the settlement, and when it may come. The SEC is looking through more than 1 million pages of documents. No sign this probe will end anytime soon, at least not before Washington gets a baseball team.

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new york: What are the real synergies with the movie business and the internet?

David A. Vise: Just as people download music, they could download motion pictures.

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Miami, Fla.: Is this an example of big mergers that do not work cause of cultural differences?

David A. Vise: Yes. But the culture clashes were exacerbated by the price and terms of the merger, esp. after the AOL Time Warner stock price plunged and Time Warner employees saw the value of their pension accounts dropping due to the AOL merger.

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Washington, DC: Are you - or other experts - seeing AOL's loss in its subscriber base as a surprise? As a former AOL subscriber (in 1996!;), it is not to me -- it seems only natural that people would use AOL as a "starter" ISP, then switch to something more affordable, reliable, and quicker. What AOL offers as "unique" - the channels, the chats, the shopping, are things that subscribers quickly realize is available elsewhere.

David A. Vise: Thanks for sharing your views. The surprise is not that AOL subscriber #s are dropping these days. The surprise is how rapidly they are falling.

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New York: Any rumors of significant lay-offs at AOL?

David A. Vise: Anytime there is bad news about AOL, as there is at the moment, there are rumors of more cost-cutting, including layoffs.

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Falls Church, Va.: The Post's coverage of the AOL Time Warner earnings report stood out as very different from other coverage. Why did you focus so much on the negatives at the America Online division and not on the fact that this media giant recorded a very strong quarter? And isn't AOL actually showing promise with the fact that it signed up 300,000 more broadband users in the quarter?

David A. Vise: AOL Time Warner stock price dropped yesterday, and has dropped further today, because of the weakness @ AOL and the SEC probe stemming from AOL. The financial performance of other divisions was not strong enough to prompt AOL Time Warner to increase its financial outlook, in part due to slashing estimates for the AOL business. Finally, as a reporter @ The Washington Post, I cover Dulles, Va.-based AOL as a local company, and that is what takes prominence in the news at this time.

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Silver Spring, Md.: Your story today highlights the fact that AOL lost 1 million dial-up subscribers in past year. But what's striking to me is the 2-year number: weren't they bragging about 30+ million subscribers in 2001? That'd be a loss of 5 million in 2 years!;

David A. Vise: The plunging subscriber numbers recently, and over a few years, are staggering. Eventually, I anticipate the fall-off will level-off. The question is, how low is that plateau, and when will it be reached?

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Washington, DC: I just saw on News.com a piece that suggests Google and AOL could be seeking a partnership of some sort that would bring Google's paid-search ad listings ability over to the AOL universe. You heard anything about that? And what are the chances that AOL-TW would make a major acquisition in hopes of adding strength to AOL unit?

David A. Vise: I see no prospect of AOL Time Warner pumping cash into the AOL for acquisitions. Instead, AOL Time Warner is milking the cash from AOL to pay down corporate debt, which exceeds $20 billion. Google and AOL have an existing relationship and are exploring ways to build on that, just as Google is doing these days with others.

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Baltimore: What's a basic AOL broadband package cost? I'm guessing it's twice as much as their dial-up, so they really only have to keep 1 out of every 2 subscribers just to break even in terms of revenue (costs are a whole other item, I know). So is your comment about them not attracting enough broadband subscribers to keep up with dial-up defections only part of the equation?

David A. Vise: Dial-up subscribers are more profitable for AOL than broadband customers, generally speaking, because @ $23.90, AOL gets most of the money itself. With broadband, most customers access the web through cable or phone companies, which get most of the money. AOL has price plans now for BYOA, or bring your own access broadband, which are around $14.95 a month. To buy it all through AOL, it charges around $54.95. But it must share that money with cable/telephone firms so it is less profitable than dial-up.

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Virginia: The more I read about AOL, the more I think of AOL as a dot-com

David A. Vise: Welcome to the World Wide Wow!

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Fairfax, Va.: Will AOL consider revising their pricing structure, since so many subscribers now realize that it is overpriced?

Juno and other low cost providers are gaining market share on the dial-up side, and DSL and Cable Modem are taking all of their "premium" subscribers. What reason does any new subscriber really have to go with AOL?

David A. Vise: The most powerful reasons people stick with AOL are habit, Instant Messaging with Buddy Lists -- which is extraordinarily popular with teenage girls and many other users -- and ease of use, either via broadband or dial-up, at home, at work or on travel.

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Bethesda, Md.: Mr. Vise, I recently began using AOL version 9.0, and have found there to be some glitches that did not occur with AOL version 8.0. For example, my computer freezes much more frequently, and the "You've Got Pictures" feature tends to run more slowly, and I often receive an error message. Do you know when these glitches will be resolved?

David A. Vise: AOL is trying to get the glitches out so it can release a clean version of AOL 9.0 "Optimized" later this summer.

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Washington, D.C.: Who, besides Parsons, was on yesterday's conference call? I've lost track of who's running the company these days.

David A. Vise: Also on the conference call: Wayne Pace, AOL Time Warner's Chief Financial Officer, John Martin, head of investor relations, and Don Logan, one of two vice chairman who report to Parsons and who oversee roughly half of AOL Time Warner each. Jon Miller, CEO of America Online, reports to Logan, who has responsibility at the corporate level for turning America Online around.

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New York: Was there much discussion on the conference call yesterday about the Microsoft settlement and prospects for new partnerships with Microsoft?

David A. Vise: Stay tuned.

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Falls Church, Va.: Just how serious is the AOL Time Warner debt load?

David A. Vise: When you borrow $200,000 from the bank, you don't sleep well at night. When a company borrows $20 billion, the lenders don't sleep well at night. -:)

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Washington, D.C.: Who still pays $23.90 for dialup connections when there are so many cheaper alternatives for dial up and broad band getting cheaper all the time?

David A. Vise: The #1 reason people keep AOL is they do not want to change their screen name. People also want to use their buddy lists to IM, want broadband @ home and work, and ease of AOL dial-up when they travel. And many existing customers like AOL for other reasons. Finally, many people prefer the known to the unknown, and I don't underestimate inertia, which means if you are a subscriber who does nothing, you remain a subscriber due to automatic monthly credit card billing.

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McLean, Va.: Where's Steve Case these days? Have you spoken with him lately?

David A. Vise: Steve Case is no longer working @ AOL. He remains a director of AOL Time Warner. I spoke with him fairly recently. He continues to live in Northern Virginia and has told people he is unsure what he wants to do next.

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Orlando, Florida: Hello David,
What is the status of the SEC investigation of AOL? Have AOL executives been informed that they are also the focus of the investigation? Have executives been named; if so, who are they?
Thank You

David A. Vise: The SEC probe is continuing. Unlike a federal criminal probe, the SEC does not designate subjects and targets in the same way. AOL Time Warner lawyers, and various AOL officials, are assisting the SEC in its review of documents.

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Washington, DC: David, thanks for taking questions today. I'm wondering what the mood is among the AOL staff at Dulles these days? They've weathered quite a storm over the past three years. Has Jon Miller won them over? Do they see any light at the end of the tunnel? How many old-timers are left in middle-management?

David A. Vise: AOL employees respect Jon Miller, who has strong analytical skills, a good sense of humor, a keen intellect and who is managing the company much more tightly than it was being run before. He is having brown bag lunches to meet employees too.
Many old-timers have left the company, esp. those in senior mgmt, where Ted Leonsis is about the only high-level exec who has been around for awhile.

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Bethesda, Md.: Another Post reporter, Alec Klein, wrote an AOL book that just came out. What do the AOL-ers think of it?

David A. Vise: Alec Klein's book, "Stealing Time," is a great read. I enjoyed it immensely and a learned a lot too. The AOLers I've spoken to, for the most part, praise the book.

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Silver Spring, MD: Dear David Vise:

It was obvious that AOL had many bad business practices and was at best internet on training wheels to observers in the Washington are throughout the 1990's. Yet AOL was able to carry out its mission and buyout Time Warner. This has led to a $100 billion plus write down and much more. This all occurred literally under the nose of the Federal Govt.. The Washington Post is a leading watchdog in the region. One of its writers is a prominent biographer of AOL. What about the role of the Federal Govt. and the media esp. The Post inn creating the problem!; I am an experienced investigative writer in DC and worked with a cutting edge computer and telecom consulting company in the early to mid-1990's. Contact me at washingtontiger2003.com!; My website for investigative writing is www.washingtontiger.com!;

Charles W. Stone

David A. Vise: Thanks for sharing your views. A two-part Washington Post series last summer exposed the accounting issues @ AOL that have led to SEC and Justice Dept probes. Part of a newspaper's job, at times, is to provide accountability. My colleague, Alec Klein, and a talented team of Post editors led by Dan Beyers, did their jobs well.

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Tysons Corner, Va.: Why media is so critical of AOL Time Warner? I read all the reports and only a few pointed out the positive points: increase in broadband subscribers (about 300,000), increasing in new advertising sales etc? why is that?

David A. Vise: AOL Time Warner stock price dropped on the earnings report yesterday. The good news from its publishing, cable and motion picture units was anticipated. The bad news about America Online, and the SEC probe, was not. Investors focused on these issues as the stock fell yesterday and thus far today. The news is the news.

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Borgata, Atlantic City: Notwithstanding AOL's "turnaround" plan, they continue to shed subscribers at an alarming rate and lose ad revenue (when google/yahoo seem to be growing such revenue). If you were Parsons, what would you do at this point?

David A. Vise: I would pray a lot. -:)

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Arlington, Va.: What weight do the latest results add to the argument that AOL should be spun off?

David A. Vise: No spinoff is possible until after the SEC probe is finished. Given the wide open timetable for the SEC probe, no spinoff is possible in the foreseeable future. AOL Time Warner also says it hopes to turn the America Online business around in 2004, after weathering a rugged 2003.

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Bethesda, Md.: Do you see AOL becoming more of a pure web based company rather than using the client version 7 or 8 or 9? How valuable is their custom content?

David A. Vise: I see AOL trying to become less of a pure web based company and more of a robust content destination, with news, music, video clips from motion pictures and tv and other enhanced features from the AOL Time Warner media holdings and elsewhere. The value of their custom content is something that customers will determine over time. But it is hard to compete with "free," which is what AOL is up against with so much available online gratis.

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Washington, D.C.: Why can't AOL make more money on instant messenger? Everyone uses it!;

David A. Vise: Great question. AOL doesn't have the answer, at least not yet. AOL execs now tell me they erred by giving away Instant Messaging through its AIM service for free. So people can use IM without even being AOL subscribers.
I believe IM is extraordinary and use it regularly. It is growing faster and has become larger than email, with more than 1 billion IMs a day. And AOL dominates outside the U.S. too, through ICQ.

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Kensington, Md.: If AOL were spun-off who would/could they merge with?

David A. Vise: If AOL was sold after the SEC probe, there are numerous potential strategic buyers. They include Google, Yahoo, Microsoft, cable system operators, ATT, regional bells, and more. In addition, there are numerous wealthy financial buyers who would be interested since the America Online business throws off more than $1 billion in cash/year, despite its difficulties.

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College Park, Md.: There is a lot of hype about AOLs new blog tool. Myself and another Maryland student have already created a similar tool - MindSay.com that lets users publish with AIM (i.e. - not just AOL subscribers). Curious if you think AOL will open up its "Journal" service to AIM users or keep it as a subscriber-only feature to try and justify their $24/mo service charges. Thanks!;

David A. Vise: GO TERPS! My understanding is that the new blog tool is a feature enhancement AOL plans to make available to subscribers.
By the way, I wrote a book last year with Maryland basketball Coach Gary Williams called, "Sweet Redemption: How Gary Williams and Maryland Beat Death and Despair to Win the NCAA Basketball championship." I am a rabid Maryland hoops/Gary Williams/Juan Dixon fan. GO TERPS!

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Washington, DC: The more I read about AOL Time Warner, the more I'm reminded of Disney. Both are company's that have failed to capitalize on their rich content resources in their online endeavors.

David A. Vise: Thanks for sharing your views.

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Silver Spring, MD: is AOL dedicating a lot of resources to its new AOL Journal feature that is coming in AOL 9.0?

David A. Vise: Yes.

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Midtown, D.C.: Aside from Comedy Central, what are a few of AOL Time Warner's means of boosting earnings in the future?

David A. Vise: AOL old its half-interest in Comedy Central. It can raise cash in the future by selling its sports teams and, when the time is right, selling off a minority stake in Time Warner cable.
It can boost earnings by using cash now to reduce debt. And the continued flow of box office -- for instance, another "Matrix Reloaded"--helps too, as does the DVD/VHS current and future sales of the remarkable Harry Potter series.

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Greenwich, Conn.: David,

Given the latest results, and the obvious conclusion that AOL's BYOA strategy is not working (or fast enough), has the chance of an AOL sale increased? Who do you think might be buyers?

David A. Vise: No sale is possible while the SEC probe is pending. Once that is over, a serious review of the issue can occur. But remember, Time Warner doesn't want to buy high, and sell low, when it comes to America Online. Its goal is to stabilize the business first and return it to growth. Plus, Dick Parsons, CEO of AOL Time Warner, wants to pay down debt, and America Online, once a growth biz, is now a cash cow that generates more than $1 billion in cash/year.

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Laurel, Md: I dropped my AOL account many years ago. If my mother wasn't an internet neophyte, I wouldn't know _any_ AOL subscribers.

Almost everyone I know once had an AOL account. Today, we mostly use internet at work and have much cheaper dial-up ISPs at home. Which means we all get disks from Ted Leonsis offering 23.5 hours a day of free connection time for a month and a half.

How has AOL done at "branding" its content; so people don't think of it as just another ISP, specifically designed for beginners?

David A. Vise: AOL has done an outstanding job of branding. It is very hard to create a new brand with high name recognition. America Online has done it, as well or better than any other major company.

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Washington, D.C.: Do you think AOL Time Warner will sell off AOL? AOL generates lots of cash flow but is bringing down the rest of the company. What you think?

David A. Vise: If anyone tells you they know the answer to that question, ask them if they want to buy some swamp land from you in Florida, the Brooklyn Bridge, or a large pencil-shaped monument in Washington D.C.

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Centreville, VA: AOL dialup service is more than twice as expensive as some competing services. Do AOL's proprietary services offer that much more than what can be found free on the internet using a much cheaper service provider? What does AOL offer that would prompt someone to spend twice as much as they need to?

David A. Vise: People want to keep their AOL screen names. AOL also is easy to use from anywhere. And AOL brought the Internet to the masses. Included among the masses are many who log on once or twice/week to check their email and that's it. For them and many others, it works.
The reports of AOL's demise have been greatly exaggerated. It will have a base of customers for many years. It remains the biggest Internet service provider, despite its troubles, with 25.3 million subs in the U.S. alone.

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Birmingham, Ala.: AOL is far too expensive, and they give no better service than any other ISP that offers broadband service. Also, I think it's geared toward the younger, more liberal generations. I left AOL over a year ago and I've never looked back.

David A. Vise: Thanks for sharing your views from Birmingham. Don Logan, who oversees America Online for AOL Time Warner, lives in Birmingham. Given that it is his mission to turn this business around, I trust this question IS NOT from him. Also, pls give my best to Birmingham's famous Vulcan statue, one of my favorite spots.

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David A. Vise: Thanks everybody for the excellent questions. And let's do this again soon. In the meantime, if you have any news, tips or ideas, pls email me @ Vise18@aol.com or call me @ 20s-334-4453 @ The Washington Post.
Have a great day, on the World Wide Wow, or in your own neighborhood. -:)

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washingtonpost.com: Thanks David, and thanks everyone for participating in today's discussion.

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