Taking Stock: AOL Time Warner Must Deliver Growth To Earn Credibility - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

IoT
IoT
News
Commentary
2/14/2002
04:57 PM
Commentary
Commentary
Commentary
50%
50%

Taking Stock: AOL Time Warner Must Deliver Growth To Earn Credibility

AOL's dial-up service isn't conducive to broadband content.

Merger announcements are always full of lofty promises, and the merger between America Online and Time Warner was no different. The transaction was labeled a merger although, in reality, it was an acquisition of Time Warner by AOL.

AOL's new-economy pizzazz was supposed to jump-start Time Warner, a slow and steady company. The combined entity, AOL Time Warner, would rule the media world, benefiting from a presence both online and offline. The worry was that Time Warner's cable network would lower the combined growth rate to an unacceptable level. Two years later, AOL Time Warner faces a different set of challenges.

The company is huge, with revenue of $38.23 billion last year. About 24% of revenue is dependent on advertising, which took a severe downturn last year. The company consists of six divisions: AOL (21% of revenue), cable networks (16%), filmed entertainment (22%), TV networks (18%), music (11%), and publishing (12%).

Most of the worries surrounding AOL Time Warner pertain to the AOL division, the old America Online, which provides online services. AOL has 36.1 million subscribers worldwide and 28 million AOL subscribers in the United States--about half of the country's online population. Most of AOL's service is dial-up, with maximum speeds of 56 Kbps--not very conducive for delivering broadband content.

How AOL will transform its offering to a high-speed service remains to be seen. It could offer AOL via its own cable network, but that would reach only about 20% of U.S. households. It could strike a deal with a regional phone company such as SBC Communications to use its digital subscriber line service, but this would lower profitability and hurt net income. Or, AOL could keep offering dial-up service, which most users would probably be happy with for some time. This business would then become a cash cow with little growth.

AOL had been growing rapidly, but growth has faltered as penetration has increased. Future growth likely will have to come from overseas, and AOL has made significant investment in Europe. The company recently bought the 49% stake of AOL Europe it didn't already own for $6.75 billion when Bertelsmann AG decided to limit its capital involvement. The European market is more fragmented than the U.S. market; as a result, growth is likely to be slower.

AOL's credibility with Wall Street was damaged last year when the company continued to say it could achieve very aggressive growth targets, only to fall short several times. AOL Time Warner has demoted the previous CFO, who came from the AOL side, and replaced him with Wayne Pace, a Time Warner exec. This bodes well for more conservative forecasting at AOL Time Warner. The company now expects revenue to grow 5% to 8% in 2002, while EBITDA (a rough measure of cash flow) should grow 8% to 12%. Though these growth rates are well below what was originally promised--and well below AOL's former growth rates--they're not bad in a weak economy. Also, Richard Parsons was promoted to CEO from co-chief operating officer, leaving Bob Pittman as the only operating officer. Many consider Pittman too brash for the top spot at this point, while Parsons is more diplomatic and conservative.

AOL Time Warner faces significant competition in all areas of its business. On the content side are Disney, NBC, and Viacom, among others, while AT&T Broadband, Comcast, and Cox compete with it in cable. America Online is feeling pressure from telephone companies as they roll out DSL service. One of the more interesting competitors is Microsoft, which is pushing MSN services and content.

AOL's stock has been crushed during the last two years, falling from a high of $95.81 when the merger was announced to a three-year low of $23.60 last week. Still, I believe AOL under $30 is a very good deal. It won't grow as fast as it used to, but there's significant cash flow and, long term, the company should take advantage of its position at the crossroads of offline and online entertainment and news.

(Bay Isle Financial LLC has purchased stock in AOL Time Warner within the last two weeks.)


William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected].

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
State of the Cloud
State of the Cloud
Cloud has drastically changed how IT organizations consume and deploy services in the digital age. This research report will delve into public, private and hybrid cloud adoption trends, with a special focus on infrastructure as a service and its role in the enterprise. Find out the challenges organizations are experiencing, and the technologies and strategies they are using to manage and mitigate those challenges today.
News
COVID-19: Using Data to Map Infections, Hospital Beds, and More
Jessica Davis, Senior Editor, Enterprise Apps,  3/25/2020
Commentary
Enterprise Guide to Robotic Process Automation
Cathleen Gagne, Managing Editor, InformationWeek,  3/23/2020
Slideshows
How Startup Innovation Can Help Enterprises Face COVID-19
Joao-Pierre S. Ruth, Senior Writer,  3/24/2020
Register for InformationWeek Newsletters
Video
Current Issue
IT Careers: Tech Drives Constant Change
Advances in information technology and management concepts mean that IT professionals must update their skill sets, even their career goals on an almost yearly basis. In this IT Trend Report, experts share advice on how IT pros can keep up with this every-changing job market. Read it today!
White Papers
Slideshows
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll