Time Warner recently said that it would unveil the new business strategy for its AOL division on August 2, after it releases its quarterly financial results, dismissing a Wall Street Journal report that it will lose up to $1 billion through 2009 as it offers more free services.
The plan reflects Time Warner’s desire to accelerate AOL’s transformation from an internet dial-up service that charges a monthly subscription fee to a free portal, such as Google or Yahoo, which relies instead on advertising.
Time Warner declined to comment on the plan, first reported by The Wall Street Journal. However, people familiar with the matter said a decision could come this month.
“Recent media reports appear to be based on unauthorized disclosures, including of incomplete and largely erroneous financial information,” Time Warner said. The company cautions investors not to draw conclusions regarding AOL’s future strategy until the company’s presentation on August 2.
If the proposal was adopted, the company has predicted that more than one-third of its 18m subscribers could drop their $25.90 monthly subscriptions, costing it as much as $2bn in annual revenue. Part of that cost would be offset by job cuts in the group’s sales and marketing departments.
Citing internal forecasts at AOL, the Journal said plans to stop charging Internet users for many of its services could cost the company in the short term, but could ultimately yield higher profits as it benefits from an online advertising boom.
The strategy is part of AOL’s expected shift to gain more from a Web advertising boom and move away from an eroding subscription model.
Righting AOL is a top priority for Richard Parsons, Time Warner’s chief executive, and Jeff Bewkes, the company president who is his presumptive successor, as they try to prove to investors that they can shepherd the media group into the digital age and revive its slumping share price.
A source familiar with the plans said last week that AOL is considering offering some of its services free of charge to users with a high-speed Internet connection.
Led by Mr Bewkes, Time Warner executives have been mulling a plan to offer many of AOL’s services, including e-mail, for free to subscribers who already have broadband internet connections. The plan reflects Time Warner’s desire to speed AOL’s transformation from a dial-up internet service reliant on monthly subscription fees to an advertising-supported portal that could better compete with rivals Yahoo and Google.
Time Warner said it will present its strategy for AOL at a separate meeting with investors to be held after its August 2 earnings announcement. Details of that meeting were to be disclosed in the near future, the company said.
The Journal report said such plans could cut in half the profit from AOL’s subscription revenue in the United States from $1.6 billion this year to about $800 million in 2009.
Analysts and some Time Warner executives have taken pause amid predictions that the switch could lead to the loss of $2bn in annual subscription revenue at AOL.
According to the forecast, AOL subscribers would likely drop to about 6 million in the United States from about 18.6 million, the report said. The report prompted some analysts to suggest their own projections should AOL go through with such a plan.
Bernstein Research analyst Michael Nathanson wrote in a research note that deep cuts in marketing to Internet subscribers could outweigh the loss of those subscribers in the first two years.
Nathanson said the plan could add 2 cents to Time Warner’s 2006 earnings per share and 6 cents to 2007, but cut earnings per share by 3 cents in 2009.
The plan recognizes an ongoing defection of the dial-up subscribers who supply 80 per cent of AOL’s revenues to high-speed internet services offered by competitors. Since peaking at more than 26m in late 2002, AOL’s roster of dial-up clients has dropped to 18.6m.
At the same time, AOL has begun to experience a surge in online advertising. It grew 26 per cent in the most recent quarter to $392m, although AOL still trails rivals Google and Yahoo by a wide margin.
Parsons has identified an AOL revival as a priority to boost the company’s languishing share price, which last year led to a takeover fight with a group of activist shareholders.
AOL entered into a partnership with Google last year. It has also raised the amount of free content in recent months to draw more traffic.
Laura Martin of Soleil Securities said Time Warner would be sacrificing what amounted to a $2bn annuity for advertising revenues that could be cyclical and less stable.
It comes in reaction to a surge in online advertising and the steady erosion in AOL’s subscriber base. From a peak of more than 22m in late 2002, AOL’s roster of customers had fallen to 18.6m in the most recent quarter.
However, some people briefed by management said the company has projected more than $1bn in cost savings at AOL if the new plan were enacted, which would offset some of that loss.