AOL Moves: Uneasy Fit With Cable?

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AOL Time Warner Inc.'s falling stock price spawned an internal management shift last week, resulting in new posts for Barry Schuler and Bob Pittman.

America Online CEO Schuler was shifted to chairman and CEO of a new Digital Services Development Group, and AOL Time Warner chief operating officer-designate Pittman returned to the beleaguered online unit.

The moves, orchestrated by AOL Time Warner CEO-designate Richard Parsons, puts Schuler in charge of developing digital music and home-networking initiatives, while Pittman takes over day-to-day control of AOL, the narrowband online service.

AOL also named radio veteran James de Castro, formerly of AMFM Radio Group, president of AOL Interactive Service.

"Nobody understands AOL's operations and potential better than Bob Pittman, and no one is better qualified to manage this business," Parsons said in a statement.

With narrowband growth slowing at AOL and the unit's advertising business stymied by the recession, analysts saw the move as Parsons sending Pittman to fix the division that's most hurting AOL's stock.

In a research note, UBS Warburg analyst Chris Dixon said, "We view the new changes as a positive change," and cited Pittman's strength in advertising.

Schuler is viewed as a gadget-developing visionary whose strengths are bettered suited to the new development group. Schuler said in a statement that the new group "will create a whole new generation of digital products for consumers and will help drive the growth of AOL Time Warner."

CABLE TIE-INS?

One question is how Schuler's group will integrate its home-networking plans with various initiatives throughout the company, including those at Time Warner Cable, the second-largest domestic MSO.

Last August, AOL created its Interactive Video division, headed by Joe Collins and charged with multiple Internet-service-provider rollouts, on-demand video services and an enhanced version of AOL TV.

The cable division seems to be further ahead with various parts of the home-networking equation. It is looking at home networking in the context of Cable Television Laboratories Inc.'s various standardization efforts, including CableHome 1.0 (released last week) and PacketCable.

EarthLink Inc., an Internet-service provider running on Time Warner Cable, also is actively marketing its own home-networking solution to Time Warner subscribers.

Time Warner itself has quietly tested home-networking solutions in two markets, using wireless and wireline home networking setups for monthly fees below $15.

And Time Warner Cable Ventures, under the direction of Chris Bogart, is spearheading the push into IP telephony based on the rollout of DOCSIS 1.1 equipment.

IP telephony is on a fast track to be implemented by the cable division this year.

A Time Warner Cable spokesman declined comment but referenced a quote in The New York Times
last week, attributed to an AOL spokesman: "Barry and Joe will work together."

HOME-NETWORKING VIEWS

For AOL, a home-networking solution today would encompass connecting PCs and perhaps mobile phones that run AOL software. That appears to be part of Schuler's charge. In future, it could extend to other devices, including televisions.

But AOL's foray with AOL TV has yet to make a dent in the marketplace.

Likewise, AOL has been stymied in its AOL Broadband effort to get carriage with other MSOs.

Time Warner Cable executives have their own vision of home networking, which would include linking PCs and TVs throughout the home. Consumers could start watching a VOD movie on the living room TV and watch the rest on their bedroom TV, for instance.

All-in-one media-center devices, like that unveiled by Moxi Digital Inc. earlier this year, could be key components of a home network that goes beyond connecting PCs and includes voice and video services.

But those futuristic services are the least of AOL Time Warner's current problems. AOL's advertising revenue dropped from $686 million in fourth quarter 2000 to $637 million in the same period of 2001, with $138 million of that coming from other AOL Time Warner units.

The company is expected to report a $54-billion writedown when it reports quarterly earnings on April 24.

While subscriber growth is up, average revenue per AOL subscriber is dropping.

Pittman not only has the online subscription and advertising business to turn around. He will still have to deal with AOL's overall broadband strategy at a time when analysts are viewing the traditional parts of Time Warner — including the movie studio, the cable networks and the cable division — more favorably.

"We believe the AOL division is facing several fundamental challenges: a slowing narrowband business; a challenging broadband transition; collapse of the online ad market; and a murky path to profitability internationally," wrote Holly Becker, an equity analyst with Lehman Brothers.

Last Thursday, AOL closed at a new 52-week low, $19.60, down $1.10.

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