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Time Warner Inc. (NYSE: TWX) is one of the world’s largest media conglomerates. It operates Time Warner Cable, America Online, and TV programming and magazines such as Time Inc., Warner Brothers, and HBO. Its publishing and AOL business segments have been hard hit with falling advertising revenue. Since 2006, AOL has been trying to remain afloat by operating an ad based business model which has not demonstrated great results.^[1] Advertising revenue for AOL fell 18 percent in 2008 due to strong competition from search engines such as Google and Yahoo. Additionally, its publishing business continues to struggle as advertising revenues continue to shift to online sources; this segment’s revenue fell 7 percent in 2008.^[2] However, in December 2009, AOL announced spun-off from Time Warner, making it an independent company again for the first time since the beginning of the 2000's.^[3] Experts at Barron's considered the spin-off to be a bargain, with AOL valued at around $2.4 billion, down from the expected $3 billion AOL's market capitalization was expected to be valued at by the spin-off date.^[4]

Although its filmed entertainment business produces successful block buster movies like “The Dark Knight” and franchises like “Harry Potter” and “Ocean’s”, a continuing trend of falling movie theater attendance is troublesome for the company; this decrease can be attributed to high priced movie tickets along with poor economic conditions, and as HDTV’s become more inexpensive and home theater systems more readily feasible, consumers will substitute to the latter option.^[2]

In Q4 2009, Time Warner's revenue grew 2.2% from the previous quarter to $7.32 billion of $7.1 billion, while the company's net income grew 34.9% to $1.52 billion.^[5] Time Warner beat analyst expectations based on the growth across the Networks and Filmed Entertainment segments. This reflects a growing trend in the cable industry, which is seeing slowing growth as a whole but still showing remarkable resilience in the face of an overall struggling economy.^[6]

For fiscal 2009, Time Warner posted a revenue of $11 billion, down 3% from the year before, while its operating income grew 21% to $1.5 billion, which the company credited to lower print and advertising costs.^[7]

Company Overview

History

Warner Communications, the parent company of Warner Brothers and Warner Music Group, was established in 1972 as a spinoff of Kinney National Company. In 1987, it was announced that Warner would merge with publishing company Time Inc., the merger closed in 1989 and in 1990 the merged companies changed their name to Time Warner. In 2000, Time Warner made a big splash by merging with America Online. The new company, AOL Time Warner, was owned primarily (55%) by AOL shareholders, while Time Warner shareholders owned the remaining 45%. The merger was almost immediately unsuccessful, with AOL Time Warner reporting USD 99 billion in losses in 2002. After 2002, AOL was dropped from the name.

Time Warner Inc. Revenue, Operating and Net Income ^[2]

Time Warner Inc. Segment's Revenue ^[2]

Business Financials

Time Warner Inc.’s revenue grew 1 percent, to $46.9 billion, over 2008.^[2] The increase was driven by the company’s Cable and Networks segments, which were the only ones to report an increase in revenues. Net income, for the second consecutive year, decreased; in 2007 net income fell from $6.5 billion to $4.3 billion, a 33 percent drop, while in 2008 it fell by more than 400 percent resulting in a loss of $13.4 billion.^[2] The large loss was due to $25 billion in write-downs, about $15 billion relating to cable assets and the rest reflecting the tumbling values of its publishing and AOL businesses.^[8] Some of the write-downs also included declining values of its AOL and magazine businesses. Poor economic conditions have slowed down consumer spending and subscriber sign-ups as fewer consumers are moving due to the housing-market collapse. The lack of growth is attributed to the challenging economic environment.

Operating Segments

Time Warner operates five business segments: AOL, Time Warner Cable, Filmed Entertainment, Television Networks, and Magazine Publishing

AOL ( 8.8% of revenue^[2])

AOL’s primary product is dial-up Internet access. As broadband penetration has increased in the US, there has been an increasing move away from dial up service to broadband providers, including Time Warner Cable. From 2002 through 2005, AOL saw its subscriber base fall by 30%. Not surprisingly, its revenue has followed a similar pattern. In fiscal 2008, AOL’s revenue fell 19.6 percent to $4.1 billion from $5.1 billion in 2007^[2]. Beginning in 2006, AOL's business model shifted from subscription based to ad based, meaning it now provides free webmail service to users and charges other companies for the privilege of advertising to its user base.^[1] The move has severely cut AOL's subscription revenue, but the hope is that advertising revenue will increase with more users using AOL mail. Another aspect of web browsing that generates revenue is the ad revenue from search queries. Time Warner’ searching network, primarily AOL, has been falling off in recent years with users favoring search engines like Google or Yahoo!.

In 2009, AOL announced its plans to spin-off from Time Warner, a process that will take place in the end of fiscal 2009 and into the first half of 2010.^[9]

Source: Company Data

Time Warner Cable (36.6 % of revenue)^[2]

Time Warner Cable is the second largest cable operator in the US.^[11] It offers video and high-speed data and voice services through its broadband cable system. Time Warner Inc. owns 84 percent of Time Warner Cable’s common stock.^[11] In fiscal 2008, its revenue increased 7.8 percent to $17.2 billion, from $15.9 billion in 2007.^[2] By the end of 1Q 2009, Time Warner Cable will be separated from Time Warner; the Federal Communications Commission approved the spinoff on February 11, 2009.^[12]

Filmed Entertainment (24.2 % of revenue)^[2]

Time Warner, under Warner Bros. Entertainment Group and New Line Cinema Corporation, produces and distributes theatrical motion pictures, television shows, and license rights to the its films and television shows. Total revenue for its Filmed Entertainment business fell by 2.4 percent, from $11.6 billion in 2007 to $11.3 billion in 2008.^[2]

Television Networks (23.7 % of revenue)^[2]

This business segment offers pay television programming services such as HBO and Cinemax and operates domestic and international networks. Revenue consists of subscriber fees paid by cable system operators and satellite distribution services, and of advertisings. Revenue for this business segment increased 8.6 percent, from $10.2 billion in 2007 to $11.1 billion in 2008.^[2] Time Warner is planning to expand into the online TV market as well, showing some of its popular shows to paid subscribers, following in the suit of Comcast.^[13]

Magazine Publishing (9.8% of revenue)^[2]

Time Inc., a subsidiary of Time Warner, is the largest magazine publisher in the U.S. publishing over 120 magazines worldwide.^[14] Aside from publishing magazines such as People, Sports Illustrated, Time, among others, it operates over 40 websites worldwide. Revenue in 2008 fell 7 percent to $4.6 billion, from $4.9 billion in 2007. ^[2] In September 2009, it was announced that Time Warner plans to eventually sell the Time Inc. magazine unit and buy holdings in its core entertainment category.^[15]

Trends and Forces

International Expansion, especially into India

In December of 2009, Time Warner acquired NDTV Imagine, an indirect subsidiary of NDTV Limited that owns a leading Hindi general entertainment channel and other entertainment assets in India. This acquisition highlights Time Warners increasing focus on developing its business internationally, especially in fast-growing markets like India.^[16]

Ability of Film Division to Find New Film Franchises

Time Warner's film division has been very successful due to franchises such as Harry Potter, The Lord of The Rings, Rush Hour, and Ocean's. The film industry tends to be extremely variable, in that it is often very difficult to predict hits with any sort of regularity. Franchises play an important role in that they provide a certain measure of stability given that they are based on an already proven concept. Time Warner's success in identifying successful franchises that has led to an industry leading 21.3% market share that has come primarily from these franchises.

Source: Company Data

Decline in cinema viewership and maturation of DVD market

MPAA, Total Moviegoers & Admissions,Admissions per Person & per Moviegoer^[17]

Most movies, even block buster movies are break even at best. As the costs per movie continues to rise and cinema viewership continues to decline, theatres are increasingly dependent on revenues from DVD sales in order to maintain profitability. DVD sales grew very quickly during the beginning of this decade, but are now starting to slow as the market for DVD players becomes saturated. This limits the growth potential for filmed entertainment.

Integration of Divisions Within the Company

As a media conglomerate with outlets for almost any type of media, there has been very little crossover within Time Warner, with each division effectively acting as a separate entity. For example, Time Warner could have offered AOL customers incentives to upgrade to Time Warner Cable's faster broadband service but did not. Time Warner could have also combined the distribution of their film, TV, and publishing assets on the Internet, but so far have not done so. As the Internet becomes a more and more integral part of people's everyday lives, Time Warner will have to incorporate their departments better and deploy their resources more strategically. If they are able to do that, profits that have been down since the AOL merger could begin to rise again.

Broadband Adoption Rates

Pew/Internet, 55% of US Adults Have Home Broadband, but 10% Use Only Dialup^[18]

Over the last decade the US has seen a dramatic shift away from dial up access to broadband access. In addition to increasing the number of applications that are practical on the internet, the shift to broadband has had liberalizing affect on the web. Previously subscription based internet access providers had a stranglehold on the web. Companies like AOL provided not only access to the internet but content and search as well. Now that companies like Comcast and in indeed Time Warner Cable are offering broadband there has been a continuous decline in AOL subscribers as users opt for higher speed connections and broader content choices. About 79 percent of Americans have a high-speed connection at home compared to the 15 percent which use dialup.^[18]

Decline of Traditional Media

Increased US internet penetration rates and the accompanying explosion of digital media has led to declining readership for publications across the print industry. Single-copy sales, as opposed to subscription, for magazines at the newsstand fell 11 percent the second half of 2008, from July to December.^[19] The economic downturn has led consumers to cut back on nonessential spending, and as readers decline so does advertising revenue.

Competition

• Both Walt Disney Company (DIS) and News Corporation (NWS) have not releases a 10-K as of March 19th, 2008.

As a conglomerate with a hand in five different aspects of media, Time Warner faces competition from a lot of different angles. AOL faces a lot of competition for Internet revenue, as shown in an above table, Time Warner Cable faces competition from a number of companies as well, shown on the Time Warner Cable page. While certain sectors struggle for market share, Time Warner subsidiaries are firmly entrenched as the leader in the film industry, with Paramount Films leading the way in 2007.

Studio Market Share

The following chart shows 2008 domestic studio market share by gross revenue. Total gross revenue in that year was ~$9.7B for the industry as a whole^[21]

References

1. ↑ ^{1.0 1.1} Time Warner Inc. 2007 10-K, Pg. 1
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15} TWX 2008 FULL YEAR AND FOURTH QUARTER, Feb 4, 2009
3. ↑ Reuters: Time Warner Inc. Completes Spin-off of AOL Inc.
4. ↑ Reuters: AOL spinoff a bargain
5. ↑ Time Warner Inc. Reports Fourth-Quarter 2009 Results
6. ↑ WSJ: Time Warner Cable 3Q Profit Falls 11% But Beats Views
7. ↑ Time Warner Rebounds from Loss
8. ↑ Time Warner Takes $25 Billion Hit, Jan 8, 2009
9. ↑ Reuters: AOL sees $200 million charges after spin-off
10. ↑ http://www.comscore.com/press/release.asp?press=2068
11. ↑ ^{11.0 11.1} Time Warner Inc. 200710-K, Pg. 5
12. ↑ FCC Approves Time Warner Cable Spinoff, February 12, 2009
13. ↑ Comcast to debut cable shows online by year's end
14. ↑ Time Warner Inc. 2007 10-K, Pg 17
15. ↑ Reuters: Crawford says Time Warner will sell magazine unit
16. ↑ Business Wire: Time Warner Acquires NDTV Imagine
17. ↑ Movie Attendance Study 2007
18. ↑ ^{18.0 18.1} Home Broadband Adoption 2008, July 2007
19. ↑ Consumer Magazines’ Newsstand Sales Plunge 11%, Feb 9, 2009
20. ↑ http://www.thefreelibrary.com/Motion+picture+distributors:+ranked+by+2007+domestic+box+office...-a0173748803
21. ↑ ^{21.0 21.1 21.2} Studio Market Share, Jan 1, 2008 - Dec 31, 2008