Many heralded the plan by Time Warner Inc.'s AOL division to make the service free for some customers as bold and innovative. Not many heralded it as a moneymaker, however, and according to internal forecasts obtained by the Wall Street Journal [subscription required; free version available here], the company could stand to lose $1 billion in operating profits between now and 2009 as a result of the concept.
Shareholders take heart, though: Time Warner's Jeffrey Bewkes has a plan to replace that income, and then some. His forecasts indicate that $1 billion will be saved from marketing costs (yep, no more CDs in the mail) and that the operating income from the online advertising division will more than account for the $1 billion shortfall in internet access income, growing from a 17% operating margin to a highly attractive 42% in 2009.
The free access plan is for customers with a high-speed internet account; they'll be offered the ability to keep their AOL email for free if they're getting high-speed elsewhere, with the hope that the freeloading customers will still view AOL ads. The Journal notes the "forecast doesn't explore what would happen if more subscribers than expected take up AOL's free offer," which is just one thing to wonder about in a sea of assumptions, the biggest one of which (in my mind) is that 42% operating income. It's not just the growth in gross revenues, but the huge leap in margin that makes investors wonder ... and today, they wondered the stock down 11 cents, to $16.56. Hmmm.
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Reader Comments (Page 1 of 1)
7-12-2006 @ 11:26AM
Jack Daggitt said...
I, for one, have lost confidence that Dick Parsons is the man to run TWX. This latest gaffe with the leak of a half-baked AOL biz plan tells me that there is serious disagreement at TWX and AOL about this plan.
Those who disagreed with the plan probably took it to the media to bring a little attention to the flawed thinking before it was rubber-stamped by the Board.
The fact that the company has broken into various camps around this latest plan makes sense when so many other AOL turn-around plans have been put forth, approved by the TWX Board, only to fall flat on their face.
Parson’s has failed to take decisive action on his own to get TWX moving. It goes to Parson’s oft-repeated statement that he believes TWX is undervalued. While I’d like to believe Parsons is correct, I would have to believe that the majority of the investment community has gotten it wrong – and Parsons has gotten it right -- which to me is unlikely. It is more likely that Parsons is wrong in his view that TWX is undervalued.
But even more troubling is that if Parsons thinks everybody else is wrong and he is right then he is unlikely to take decisive action to shake up the company in an attempt to build value. Yet look what happened when Warner Music was sold…new management took decisive action and made a fortune by cutting expenses and focusing the business. Look what happened when Carl Icahn started pushing for change at TWX, Dick Parsons managed to find another $500 million in expense cuts and was able to increase the share buyback plan
What concerns me, is that if Icahn had not started rattling his saber at TWX, they would never have come forward with the cost cutting on their own.
So, when the troops are in open rebellion at the division that supplies 20% of the operating profit for the company and the company sells assets that with minimal effort can be turned around and when $500 million in annual cost savings are only found when an outside agitator pushes on management, then something is seriously wrong. And let’s not forget that TWX stock price is down more than 6% so far this year while the broader market is up. Dick, it seems that the investment community still things TWX is over valued. What are you going to do to change that?