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Thursday, August 03, 2006

AOL & Time Warner, The Day After

So there have been many stories discussing AOL as to the news, but what will the company and service look like after they change to a free model?

For starters they are sending about 5,000 jobs to the wolves, or a bit more than 1/4 of its 19,000 person workforce. Not all of these are firings. If it is able to sell its French operations that will be about 3,000 jobs. It is also trying to sell its UK operations, as well as its German unit. The marketing area is perhaps the largest area that will endure cuts. They will bare the brunt of many more cuts, and the company said if they stop putting disks everywhere and advertising its dial-up services that they can save $1 Billion per year. Since the WSJ has estimated that the drop in subscription revenue could be $1 billion, the AOL overall plan just may work.

The services will be free for broadband users, and you can expect the dial-up users to fall of a cliff in percentages over the next two-years. While everyone will get to keep their AOL email addresses, entering into a new free email model is sort of a me too product in today's world. The fact that they saw 40% ad growth year over year probably helped them reach this conclusion, but even a large of that growth is not sustainable for years.

Restructuring charges will run $350-ish million. What is surprising is that most Internet posts are putting this against Google (GOOG). If you will recall Google took a 5% stake in AOL for a $1 Billion price tag, and you can bet that Google will be participating in this. Maybe they will lose some of the ad dollars, but they will be participating in a new line of them as well.

In a move to ad-based services this may actually send AOL users to other services under Time Warner. If you will recall, they own Mapquest, MovieFone, CNN, CNNMoney.com, Warner Brothers movie studios, HBO, cable systems and more. So if they go to an ad model, then this means that the AOL unit is going to be tied to Time Warner for a long time. They do not have a Lord of the Rings coming out again since that is done, but when they do you can imagine what they will be hyping.

HERE is a Link to Doug's story yesterday.

Perhaps the most important thing to note here is that this is not just a Time Warner thing. This has implications for the entire sector, which is no longer the growth engine it used to be if you take all of the IT world into account. This switch is going away from TOP LINE numbers, meaning revenues. The company says the cost cutting will offset the loss of revenues after a couple years, and it is going to focus on EARNINGS. Maybe Peter Lynch really is right that "Earnings Drive Stocks."

Time Warner shares are down 0.3% today at $16.61, but they ran up over 2.5% yesterday on the news. Now that the dust has settled, this looks like the street still thinks they are making the right move.

Jon C. Ogg
August 3, 2006
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