America Online will undergo "relentless" cost cutting this year by eliminating a portion of its $1 billion in marketing expenses, slashing its 18,000-person payroll and trimming computer-network costs, a senior corporate official said yesterday.
Wayne H. Pace, chief financial officer of AOL Time Warner Inc., said managers at the company's troubled online unit have been directed to engage in "zero-based budgeting," which he characterized as "defending" every dollar of ongoing expenditures. Speaking to analysts and investors at a major West Coast media conference, Pace said the online firm's inability to generate much growth in its vast subscriber base, coupled with a precipitous drop in advertising, dictate that hefty spending cuts are essential to a turnaround.
Pace described 2003 in rugged terms, saying it will be a "reset" year for Dulles-based America Online, which he said is the only major division of AOL Time Warner that is not performing well. "There is going to be a focus on costs from the bottom up," he said.
AOL Time Warner is taking a number of steps to respond to difficulties at America Online and other changes in its media empire. On Jan. 29, AOL Time Warner intends to record a non-cash charge of at least $10 billion to reflect the decline in value of the Internet division. Soon after, the company hopes to embark on a high-growth path in cable television.
In response to a question at the media conference, sponsored by Salomon Smith Barney Inc., the chief financial officer said AOL Time Warner plans to spin off a portion of its giant Time Warner Cable division in the second quarter of this year. The first $2.1 billion in proceeds from the anticipated stock offering will be used to pay down debt. The goal of the spinoff is to create a free-standing cable television operation that can grow rapidly by using its stock to make acquisitions.
Time Warner Cable is the nation's second-biggest cable operator, and Pace said its revenue prospects are robust. He said growth would be fueled less by increases in basic-cable rates and more through the sale of premium services, such as movies-on-demand and high-speed Internet connections.
Pace reaffirmed that AOL Time Warner, Internet unit's corporate parent, remains committed to a long-term strategy of bolstering America Online, which generates $8 billion in cash annually. He said that the firm, which connects 35 million subscribers to the Internet, would return to double-digit growth in 2004 and maintain its commanding lead over rivals.
"We all think AOL is a long-term growth business, and not one where we will milk the cash out of it," Pace said.
In outlining potential cost-cutting options, Pace said negotiation of new computer-network contracts could yield substantial savings. He also said the company's total headcount would be scrutinized closely. Of its 18,000 employees, Pace said the largest number work in customer service, while 6,000 to 7,000 people make up its "core head count" and 3,000 to 4,000 are employed in its international operations.
America Online has about seven times the revenue of its closest rival, Microsoft's MSN, and more than three times the number of MSN subscribers in the United States. But Pace said America Online's saturation of the market means that it now must shift gears from raising its number of subscribers to increasing revenue per subscriber. The firm also must continue to market extensively since millions of subscribers drop the service each year and must be replaced by new users.
While it has long been known that America Online spends heavily on advertising, promotion and distribution of millions of CDs, Pace said he thought that the company had never before revealed it paid $1 billion a year -- a total that must now be cut.
Meanwhile, in a bid to boost revenue from subscribers, he said America Online and Time Warner officials are jointly developing ways to distribute content online from Time Inc.'s stable of magazines and CNN.
Questioned about why cooperation was finally improving after a rocky start, he quipped, "We are using a big stick."