Jeff Bewkes, the Stanford MBA behind HBO's huge success, took over as CEO of BloggingStocks' parent, Time Warner (NYSE: TWX) this January. The New York Times reports that he wants to get rid of everything he inherited except selected "content providers" -- e.g., people who make movies and TV programs and write articles in magazines. But would such a strategy make Time Warner's stock an attractive investment?
I don't think so. The reason is simple. Warner Brothers produced an enormous hit with Dark Knight -- the LA Times reports that its revenues so far total $441 million domestically and are expected to hit $520 million. Dark Knight's success is not typical -- it's an outlier. That's because the movie business is a huge gamble as is any enterprise that depends on the fickle combination of talent and audience tastes. Hollywood often overcomes this problem by getting wealthy individuals to pony up to finance films on the hope that they might get to rub elbows with the stars.
Meanwhile, Bewkes wants to dump the cable business. He plans to spin off 84% of Time Warner Cable to shareholders. He plans to sell AOL. And it looks like he'll try to dispense with most of Time Warner's magazines. This would leave Time Warner a much smaller company with lower return on assets -- by my rough estimate based on doubling the revenues and operating income of its first half results for the remaining Filmed Entertainment and Networks segments.
In particular, I estimate the new Time Warner would generate $21 billion in revenue and $3.8 billion in operating income annually. That is 46% of its current $46 billion in revenues but with an operating margin of 18% -- only slightly above its current 17%. Its ratio of operating income to assets would be 3.5% -- well below its current 5.7%.
The content business on which Bewkes wants to focus faces other challenges. It competes with networks' own content creation units. A new show must be exceptionally compelling to get a network to buy from an outside supplier when it could use its own internal source of talent. And it's tough to protect video content from pirates who produce DVDs or just put the videos they pirate from movie theaters and TVs onto the web.
By dumping AOL and Time Warner's cable operations, Bewkes is getting rid of the mistakes of his predecessor Gerald Levin, and he's fashioning a Time Warner that he feels comfortable operating. But it remains to be seen whether it will attract capital from investors.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
