Time Warner’s new CEO may move quickly on weak spots
Copyright 2007 Gannett Company, Inc.
NEW YORK - Time Warner is one of the USA's most powerful media companies, with some of the industry's most highly prized assets. Still, with its share price mired, many analysts expect to see big changes - including possible asset sales - after Jeffrey Bewkes becomes CEO in January. Here's what he faces at the company's major units:
Cable systems. Bewkes will be pressured to divest much, and possibly all, of the 84% stake in Time Warner Cable, which serves more than 13.5 million customers in 33 states.
That would have been unthinkable a few years ago: [Time Warner current CEO Richard] Parsons has long believed cable could come to dominate the digital media and grow through sales of phone and high-speed Internet subscriptions, and TV services including video-on-demand and DVRs.
But investors have cooled on cable as growth in broadband subscriptions slowed and competition from satellite and phone companies, especially Verizon, intensified. Phone companies alone might poach 10% of Time Warner's basic cable subscribers by the end of 2010, Goldman Sachs estimates.
The fear is that to remain competitive cable operators will have to put a lid on rate increases, while spending heavily on equipment needed to keep pace with rivals that plan to offer more than 100 HDTV channels as the USA switches from analog to digital TV.
The value of shares in Time Warner Cable has fallen 33% since it went public in January. The stock closed Monday at $27.35, up 24 cents.
The parent company also felt that chill wind.
Time Warner "tends to trade like a cable stock even though it's less than 40% of the company's assets," says Bernstein Research analyst Michael Nathanson. "They're being whipsawed back and forth by cable, and there's another side of the company that pretty much gets ignored."
Online. Bewkes would please a lot of investors if he could stop the bleeding at AOL.
After watching AOL's online service steadily lose its dial-up subscribers, Time Warner hoped to turn the unit around with ad sales at AOL's public web site. But increasing ad sales have yet to outweigh revenue losses on the subscription side.
In addition, "The profitability (from ad sales) will be substantially lower," Pali Research analyst Richard Greenfield wrote last month.
Publishing. When Time merged with Warner in 1989, executives swore that magazine publishing would be the soul of the company.
Will Bewkes change that?
"Publishing could be up for a sale in whole or part," says Global Crown Capital analyst Martin Pyykkonen.
Bear Stearns estimated in May that Time Warner could get up to $8.9 billion for the publishing unit.
The thinking is that print magazines - including Time, People, Sports Illustrated, Fortune and Real Simple - no longer fit with a company largely in the business of transmitting video and sound.
"They control a quarter of the U.S. magazine industry - but it's not one of the major units of Time Warner because of the size of the company," says Barrington Research Associates analyst James Goss.
Magazines also may find it hard to grow as readers turn to the Internet for information. Merchant bank Veronis Suhler Stevenson estimates that total circulation of consumer magazines will fall to 1.4 issues per adult in 2011 from nearly 1.6 now.
Filmed entertainment. This unit doesn't need immediate attention. It continues to rake in cash from blockbusters, including the Harry Potter films and recent hits including 300, and has films coming, such as the much-awaited movie based on HBO's Sex and the City. Sales of TV reruns, including ER, also have been strong.
But Bewkes can't afford to ignore it completely.
Now that its successful Lord of the Rings movie trilogy is complete, and the end of the Potter series can be seen, "What would be helpful would be the development of a new, strong franchise," says UBS analyst Michael Morris. "We haven't seen something with that level of cachet to emerge."
The company's historically strong TV production business also could use a jolt. ABC, CBS, Fox and NBC are filling more time with their own shows, making Warner Bros. more dependent on the CW network, its joint venture with CBS.
Cable networks. Here, too, Bewkes doesn't have to answer alarm bells. His portfolio of channels - including HBO, TNT, TBS, CNN, Cartoon Network and CourtTV (soon to be truTV) - have been solid performers with viewers and advertisers.
But they may need more care and feeding than before as competition intensifies. More than 160 channels, as well as video-on-demand and Internet services, now vie for viewers' time, and that could put pressure on networks to boost spending for programming and promotion.