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Thursday, July 27, 2006

TWX: Dick Parsons and George Armstrong Custer

Stocks: (TWX)(NWS)

Generals and CEOs seem to have more lives than cats do. Custer had eleven horses shot from under him and was wounded in the leg during the Civil War. He was under fire on dozens of occasions. Dick Parsons has not had such a dangerous life, but he has been around. He was the president of a modest bank in New York. Later, he was recruited to TimeWarner, before the AOL merger. He not only survived the merger, but outlived Gerald Levine and Steve Case, the architects of the agreement. Parsons has even dodged an attempt by Carl Icahn to rally institutional investors, throw the CEO out, and break the company into pieces.

The problems for Mr. Parsons are serious again. He has done most of the obvious things to improve his company’s fortunes. Costs have been cut at the lagging divisions like the old-line publishing operation, Time, Inc. The company plans to spin out its cable operation, which is an extraordinary cash cow, in the hopes that it will “unlock shareholder value” by not being tucked in with AOL, Time Inc, the Warner studio and the company’s other operations.

Sobeit. Those things are done or in process and have almost certainly been priced into the stock. Ah, the stock. The chart of the company’s stock has graced hundreds of stories about Time Warner. Suffice it to say that, at $16.20, it trades near its 52-week low. The share price is 1.6 times sales. Even down-and-out rival Viacom trades at 2.4 times.

Now, Time Warner has decided that the only way to save its most visible problem, AOL, is to allow paid subscribers of its service free access to all of its content. The internet service provider will still charge for dial-up services, but will not promote them. Various figures have been put on the loss of revenue for making this move, but the one from the Wall Street Journal is as good as any--$1 billion out the door between now and 2009. To replace that, AOL would have to make a gross margin on its business that is larger than Yahoo!’s annual gross profit.

It won’t work. Time Warner’s operating income in the quarter that ended in March was $1.866 billion. If the AOL math for replacing subscription revenue with advertising is not perfectly executed, the costs to shareholders are near the edge of reasonable calculation.

If TimeWarner thinks $16 is a low share price, they ain’t seen nothing yet.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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