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Wednesday, August 02, 2006

Time Warner: Perhaps Icahn Was Wrong

Time Warner's success in the last quarter may be the first glimpse of why Carl Icahn could have been wrong about breaking up the company. Results at the magazine publishing division and film units were lackluster, but investors should expect that there are more cost cuts to be made, which gives the divisions the chance for improved margins.

Cable, the mother of all that has been good at the company, saw revenue increase 15% to $2.7 billion. The company's broadband subscriber base also grew to 5.4 million, up 230,00 from last quarter. Wall St. assumes that this business will get even better with the acquisition of certain asset of Adelphia which closed recently.

The company's network business (TNT,HBO,CNN,TBS) also did well with revenue up 9% to $2.7 billion.

The surprise was AOL. The argument against giving away its content instead of aggressively marketing the service as an ISP was compelling if AOL's advertising growth was tepid. But, ad revenue rose 40% at, a rate faster than most of the industry. The WSJ projects that providing AOL free to many of its current paid base could dig a hole of $1 billion a year. Wall St. was skeptical that ad revenue could replace this quickly. The current quarter's AOL results indicate that the plan has a sporting chance of working.

The merger between AOL and Time Warner was based on "synergies" that later proved to be false. But, that door swings both ways. With video becoming critical to web success, assets like the Warner studio operations become more valuable than they were when revenue came solely from theater and DVD revenue. Studio revenue will always be choppy as film units go from blockbuster to failure and back again. But, the digital age is driving up the inherent value of those assets. Video content, which the company has in abundance, and video advertising will be critical to AOL's success. Internet video advertising now commands CPMs that are in the same league as the inventory sold by traditional networks.

As for the Time, Inc. publishing division, which is the original foundation of the company, the debate will continue. Falling circulation and rising printing and postal costs will undoubtly make this business more difficult, but closing magazines with little of no margins and cutting staff costs is probably a faster way to unlock value that trying to peddeling them off in pieces, espcially if one looks at the failure of the Knight-Ridder newspaper auction to create value.

Time Warner was reaching the point where the Parson's agenda seemed almost hopelessly flawed. Now, there is a ray of light that says the company's long-term program may just work.

With the stock down from $40 nearly five years ago to $16.65 today, the upside seems the more likely side.

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

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