A Thought For Time Warner Regarding AOL: Keep The Access Business And Sell Everything Else

Posted by: Jon Fine on August 6, 2008

There is now a case to be made for Time Warner to hold onto AOL’s dial-up subscriber business and sell the troubled online unit’s advertising and content businesses.

As they say on lousy sitcoms: it’s a crazy idea, but it just might work!

After a very long period of hints and winks and thinking-out-loud and maybe-laters, Time Warner has figured out how to separate AOL’s Siamese twin businesses of access—that is, the customers who still pay a monthly fee for dial-up access—and advertising and content. (This was, apparently, a very complicated internal operation, and it won’t be completed until 2009.)

In the second quarter of this year, AOL advertising revenue was only up 2%, which severely lags the overall growth of online advertising. And AOL's online display advertising was down a sickening 14%. Bear in mind that this decline is occurring at one of the biggest businesses in the one hot medium going. Access revenues, meanwhile, fell 29%, but, as chief financial officer John Martin said in today’s earnings call, the “declines continue to moderate.”

Now:

Managing a simple, declining asset like AOL’s access business is--forgive me--simple. The market dynamics are in place, and not worth resisting. There are no massive costs associated with integrating acquisitions, or chasing subscribers who are trying to flee (I will generous assume AOL has learned from public relations disasters like this), or spending zillions to bulk up subscriber rolls.

AOL’s advertising and content businesses, though? Complicated. Manpower-intensive. Also, not entirely assured of success.

The thing of it is, though, that the Platform A ad business, and the massively-trafficked content network—are the ones most likely to draw more interest from buyers. And at a higher valuation than a straight cash-flow play like the subscription business.

Potential buyers of the ad and content businesses: Comcast, Microsoft, Yahoo (maybe), Google, Yahoo Japan. Possibly News Corp., if something about it strikes Murdoch’s fancy; maybe-maybe Barry Diller's IAC. Maybe a stray private equity fund that’s sitting on a few billion dollars, unsure of what to do with it, and is hankering to get into this crazy Internet thing in a big way.

Potential buyers for the access business: Earthlink, maybe a private equity fund that’s sitting on etc. and is just seeking a way to buy some cash flow.

Call me crazy, but I'm betting Time Warner would get a hell of a lot more money from selling a massive online asset more companies actually want than from selling a dying business.

There’s a very big caveat in all this. We don’t yet know what the relative financials of AOL’s two businesses will look like once they’re separated. It seems logical that running complex content and advertising businesses would require more staffing and costs, but, depending on how Time Warner allocates costs, the access business balance sheet could look much worse than I expect it to.

Still, Time Warner could be in a position to get rid of a complicated asset no one really likes, get a nice chunk of cash to reinvest from it and also get a stock bump from doing so. And also keep a smaller business on the balance sheet that throws off a nice bit of cash, and will do so without requiring much in the way of management or attention until it dies a relatively natural death.

Given that, why not keep AOL’s access business and sell the rest of AOL?

Reader Comments

jim fries

August 7, 2008 11:59 AM

If AOL did this, would AOL members in the United States using Vista be able to get software that allows them access to the US AOL community again? Currently all we can get is AOL 9.0 VR, which hooks to the AOL UK community, and doesn't provide the chat room lists and other online community features we've come to enjoy and rely on. Seems like AOL is trying to drive US users away from the community.

Sam

August 7, 2008 1:09 PM

I've thought for a long time that AOL should go ahead and consolidate the dial-up access market under their wing. AOL has the expertise and infrastructure to run it well as far as that horse wants to go. So instead of selling, it should buy: EarthLink, UnitedOnline and run those businesses well while letting them help create new unique visitors to their growing stable of web sites and blogs.

AH

August 7, 2008 3:00 PM

In the long run the Platform A business will get integrated into a larger player - just a matter of to who and at what price.

The issue is what to do with the steadily declining ISP/access business. Which the less informed "pundits" generally do not appreciate just how slow and predictable the decline is. The people that have not gotten broadband yet are generally not rushing out to get it.

They could have sold the access part ages ago when it had more "value" left in it. But they could not figure out how to separate the two since the ISP subscribers generate a ton of ad impressions. And they were VERY stubborn in admitting they had no viable broadband access/bundle play.

They could keep the access business for the high margin cash flow (no new software costs, low service costs etc). But I think they are better off to take a discount off the present value of the cash flows and sell it to someone like Earthlink that will aggregate the legacy dial up brands and ride them out to the end of the line.

By they way CompuServe, which AOL owns, still has a few paying accounts - with no marketing or upgrades in just south of a decade. Which goes to show the final death date will be much much farther out than anyone thinks. If I were valuing the dial up part I would take this into account.

Luther

August 7, 2008 5:03 PM

AOL's main problem is that they are fixated on their interests are and serving ads to customers, but are uninterested in what services customers want. They never shifted from the arrogance and control freak attitudes that they could get away with when they were market leaders.

Vijay

August 8, 2008 3:04 AM

What the author of the article says is perfectly fine. I completly agree with the aouthor of the article.

Vijay.

http://www.bizzblogs.co.cc/

AH

August 8, 2008 10:08 AM

I would agree with Luther except no one that ran the original business is still involved with AOL. The purges of the last 5+ years have basically removed the entire team that built the ISP business, the ones that defended the walled garden, and the ones that failed to find a broadband strategy. You cannot underestimate their employee turnover.

I would say more clueless than arrogant - not sure which is worse. They are just not good at researching what consumers want - and finding a way to give it to them. They always try to force fit what they have into the market. Often square pegs in round holes. Many companies lack a solid consumer facing R+D group - and AOL sadly is one of them now.

Don

August 8, 2008 10:42 AM

As they say on LOUSY sitcoms? I beg to differ, I believe the correct term would be, "As they say on CLASSIC sitcoms."

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