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.”
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?