AOL Time Warner: The Cash Had Better Flow


By Amy Borrus and Tom Lowry Is Gerald Levin the last optimist in Corporate America? With the economy faltering, CEOs across the country are slashing earnings projections. But Levin, chief executive of AOL Time Warner Inc. (AOL), is sticking by financial targets he set a year ago, when America Online Inc. rattled the media world with its $103 billion deal to buy Time Warner Inc. At a Jan. 31 all-day confab with Wall Street analysts, Levin reaffirmed his heady goal of raising cash flow 30%, to more than $11 billion, by yearend. In glowing terms, Levin and other top execs vowed the new-media and Internet colossus would be "a blue-chip powerhouse" with 130 million subscribers.

An economic downturn, coupled with troubles in Time Warner's music and film businesses, could make him wish he had set his sights lower. Not to worry, insists Levin & Co. They figure aggressive cost-cutting and strong growth at both online service AOL and Time Warner's cable systems will go a long way toward meeting the target. The new company is also counting on a revenue boost from selling ads that work across its multiple media -- AOL, Time Warner magazines, and television properties.

Here's how the company plans to make its numbers in Year One of the entertainment behemoth: More than $600 million will be saved through cutting 2,400 jobs (3% of its payroll), converting a yearly cash bonus for all employees to stock-option grants, and disbanding Time Warner's digital media unit. "Streamlining won't be that hard," says analyst Christopher Dixon of UBS Warburg. The lion's share of the cash flow will come from AOL and Time Warner's cable systems, accounting for 60% of the growth. The online service added a net 6.2 million cable subscribers, helping to boost the merged company's net income 67%, to $365 million. Execs predict AOL will add 6 million more customers this year.

STUMBLING UNITS. AOL will also help sell other company products. More than 800,000 Time Inc. magazine subscriptions have been sold through AOL's online service since the deal was announced a year ago. And in a pinch, AOL could raise its $21.95 monthly subscription price by $2 with a minimal loss of customers, say analysts. Executives say they have no plans to raise prices but don't rule it out. A $2 hike in the monthly fee could generate $365 million more in cash flow, figures analyst Henry Blodget of Merrill Lynch & Co.

But will advertisers embrace AOL Time Warner's ambitious plans to cross-sell ads, especially in a cooling economy? On Jan. 31, the company announced four such deals. Nortel Networks, for example, will buy ads on AOL and on Time Warner's TV channels and in its magazines. "All companies are looking for more efficiency. That's what we sell at AOL," says AOL Time Warner Co-President and Chief Operating Officer Robert Pittman. Still, the success of cross-selling will come down to how well AOL and Time Warner meld their New and Old Economy cultures.

And not all of its units come to the merged company in tip-top shape. CNN, once the jewel of cable news, is losing viewers. Warner Bros.' movie business has also stumbled. Its New Line Cinema unit lost several top executives recently after the Adam Sandler flop Little Nicky dragged down Time Warner's fourth-quarter revenues. And a dearth of hot young acts at Warner Music has resulted in disappointing sales. AOL Time Warner Co-President and COO Richard Parsons says the music division was distracted in 2000 by its failed attempt to merge with London-based EMI. "We need to start blocking and tackling" again to expand the business, says Parsons.

Ever bullish, Levin says the "risk of execution" for his plans has been overcome. He wishes jittery Wall Street would stop "haircutting" the company's stock price. But given what's on the company's plate and a sagging economy, Levin will have to work hard to justify his optimism. Media Editor Lowry and Washington correspondent Borrus cover AOL Time Warner


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