CEO, AOL Time Warner Inc.
75 Rockefeller Center
New York, NY, 10019
First things first: Nobody has a tougher job in Corporate America, let alone in the struggling media industry, than you do. Having to announce an all-time record loss of $99 billion for last year is nobody's idea of a good time, nor can it have been easy to divulge the new problems in the cable unit related to how ad revenues have been booked. On top of that, you still face the overhang of federal investigations into accounting at your America Online Inc. (AOL
) unit, not to mention broader questions about whether it has a future. And behind all of that, there's the debt--expected to hit $28 billion this year, which is strangling your chances for future growth. Given the pile-up of problems, it's hardly surprising that your share price has languished below $15 for months. Let me commend you for showing a cool exterior in this firestorm.
Trouble is, it's going to take a lot more than keeping up appearances to get out of this jam. And sorry, Dick, but telling investors they need to be patient because 2003 will be a "reset" year isn't going to cut it. To be blunt, you have to decide--very soon--where you think AOL Time Warner's future lies. It's O.K. to be a broad-based media-and-entertainment company, but you're in too many unrelated businesses that don't add anything to each other. And the sheer size of your conglomerate is dragging you down. Investors need to know what businesses you plan to build your future around--and which you want to dump.
Frankly, Dick, I don't envy you. You clearly need to fix America Online. More on that later. But first, to get a handle on that monstrous debt, you've got to make some extremely tough choices. You've said you want to lower your debt to $20 billion by 2004. To get there, you'll need to use virtually all of your free cash flow--some $3 billion in 2003--to pay down debt. Then, if you pull off a successful initial public offering of your cable business (a big if), you could wipe out $4 billion more. That's a good start, but you'll need to do much more. Ultimately, it would be ideal to get your debt down to under $15 billion to ensure a good credit rating and lure back investors.
That's why, painful as it sounds, you're going to have to say goodbye to some top-notch businesses. There's no other way around that ticking debt bomb. It's good news that you're considering selling your sports teams, half-interests in cable channels Court TV and Comedy Central, and AOL's book-publishing arm. That should bring in around $3 billion, though it may take time to find buyers in this market. Now, you're down to $18 billion--better, but still not enough.
I know it sounds crazy, but you should sell New Line Cinema--the movie studio that has reaped huge box-office returns in the past two years from the Lord of the Rings and Austin Powers franchises. Selling New Line while it's red hot could possibly get you $5 billion. Bingo: $13 billion in debt. True, you'd be giving up one of your most prestigious assets, not to mention some $400 million in cash flow. But look at it this way: You'd still have a larger movie studio--Warner Bros. Inc., with roughly $800 million in cash flow.
That makes selling New Line the best of a bad set of choices--better than selling magazines or music, for example. Sure, one's in a recession and the other is struggling with the brave new world of digital downloads. But that's no reason to bail. Your world-class magazine group is the core of your company's identity. You have venerable titles. Plus, you've done some innovative launches. So ride out the ad recession and hang on to the glossies.
The other keeper is music. Even though the prognosis for the piracy-paralyzed music industry is dour right now, Warner Music Group, which includes Atlantic Records and Elektra Records, has posted revenue and cash-flow gains for four straight quarters. And these established labels should thrive once the industry hits on a viable online business model.
Now, let's talk about that sorest of subjects: America Online. Wouldn't it be great to just sell the darn thing? But with nearly $10 billion in debt and a shrinking subscriber base, it might be all but impossible to find a buyer. If you have to hang on to it, why not fold it into your soon-to-be-public cable company and milk its cash flow until the dial-up biz fizzles away in broadband's wake? Sure, it might be harder to sell cable to the public, but investors could come around when you remind them of how much operating profit America Online still churns out--$1.8 billion in 2002.
None of this is easy to stomach, I know--especially since everyone and his mother has an opinion about what you should do. Some of those experts are counseling you not to rush. Don't listen to them. The time for hard choices is long overdue. Get that debt down as fast as you can. It's the only way you'll have a chance of reenergizing your empire.
Tom Lowry Lowry covers media.