Internet Video

Time Warner Lags on Word of AOL-for-Free

7/21/2006 8:00 PM Eastern

Time Warner Inc. stock has been on a downward slope for the past few weeks, after reports surfaced that the media giant was planning a major revamp of its AOL online unit. But at least one analyst believes that whatever Time Warner decides to do with the former America Online, it shouldn’t have a big impact on the stock.

The controversy touched off on July 6, when a report in The Wall Street Journal stated that AOL was contemplating giving away its service for free to anyone with a broadband Internet connection, in order to focus more on advertising revenue at its Internet portal.

Time Warner is expected to unveil the plans for AOL on its conference call, scheduled for Aug. 2, to discuss second-quarter results.

The news that AOL would abandon subscription revenue — a cash cow for the unit for years — sent Time Warner stock tumbling and forced the company to issue a quick statement partially denying some of the Journal’s claims.

The company’s shares have declined about 6% ($1 each) since July 5, closing at $16.13 per share on July 19.

Time Warner, in a statement issued on July 11, said: “recent media reports appear to be based on unauthorized disclosures, including of incomplete and largely erroneous financial information. Accordingly, the company cautions investors not to draw conclusions regarding AOL’s future strategy until the company’s presentation on August 2, 2006.”

In a research report, Banc of America Securities cable analyst Doug Shapiro wrote that while Time Warner shares are down after the Journal report — as investors have interpreted the news as “yet another strategy shift” — he believes that based on the available information, the changes at AOL aren’t expected to be much of a catalyst for Time Warner shares either way.

Shapiro also noted that the recent focus on AOL is a bit overdone, given that the online unit represents about $5 billion, or about 7%, of Time Warner’s total market capitalization.

While Shapiro admitted to no inside knowledge of Time Warner’s actual plans for AOL, he speculated that it will likely involve two inevitable trends that AOL has resisted so far: the eventual demise of narrowband; and the increasing difficulty in convincing broadband customers to pay a premium for AOL content.

Shapiro wrote that he expects AOL to stop marketing its narrowband service, eventually letting it dwindle to zero and abandoning the “walled garden” concept of content on the Web.

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