Mastering Time Warner’s Future

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It has been two years since Richard Parsons was named CEO of Time Warner Inc. and about one year since adding the title of chairman of the world’s largest media company. Parsons took the reins of the media giant at a turbulent time — its much ballyhooed merger with America Online Inc. turned out to be a bust in the eyes of Wall Street, and it was carrying an enormous debt load. But Parsons took charge quickly, shaving more than $10 billion of net debt, mainly by selling off non-core assets and unwinding several onerous partnerships that helped simplify Time Warner AOL’s balance sheet substantially.

While the company still has work to do — mainly turning around the AOL unit and weathering federal investigations into the online unit’s accounting policies — Time Warner is clearly a healthier company under Parsons’ direction. Parsons sat down with Multichannel News senior finance editor Mike Farrell at Time Warner’s corporate offices in New York recently to talk about the industry and the issues facing Time Warner. An edited transcript follows:

MCN: What’s your assessment of your performance so far?

Richard Parsons: So far, so good. We have accomplished some things, and we still have other things to accomplish. The place has settled down. We’ve gotten ourselves off the front pages. We aren’t an organization in crisis any more.

We’ve got the businesses running well. We still have to deliver on the turnaround of AOL. But there’s more reason to believe now that we will [do that] than there was a year ago: AOL seems to be stabilizing and seems to be getting back on a growth track. It needs a couple more quarters to put some real momentum behind that story. We still have to untangle our investigations with the government.

That will proceed according to its timetable, not ours.

We’re just trying to work with the government to get it done as efficiently and as quickly as we can within the context of what it has to do.

We have the right new management in place. People are focused on getting the job done. The level of anger, disappointment and looking backwards is way down. I’m happy with all that.

MCN: One of the first things you did as CEO was try to unwind all the partnerships that your predecessors had been trying to unwind for 10 years and couldn’t do. How were you able to do that so quickly? Was it just that the times were changing?

Parsons: Well, to some extent it was that. Everything happens in a context. But have you ever heard of the expression, “The perfect is the enemy of the good”? If you try to get things too perfect, if you try to cut the thing too fine, you’ll just never get there. To me, the larger objective was to simplify the balance sheet and the corporate structure, to get these things behind us. And so maybe we approached it in a way that we were attempting to effect a good outcome as opposed to a perfect outcome. That helped us move things along.

MCN: Were they contentious negotiations, or were people more willing to make a deal?

Parsons: 'Good morning’ is contentious in this space. But that doesn’t mean you can’t get things done, particularly if your focus, as I said, is on accomplishing a good result as opposed to the absolutely killer deal of all time.

MCN: Everybody is talking about vertical integration now. Comcast tried it with Disney, but it didn’t work out. And News Corp is trying it in the U.S. with DirectTV. You guys seem to be the ones who have actually made it work.

Parsons: Well, first of all, we have the right assets. But it was not easy, and we still have some distance to go. Everybody can make the horizontal mergers work: where you take one cable company and tack on another cable company, and now you have a bigger cable company. Or you take one magazine company and you buy another magazine company. You go horizontal.

The ones that are tougher to make work are the ones where you really put different businesses together and then try to figure out how to integrate them along the vertical chain. People recognize, however, that as the world markets consolidate — and as the need for scale and reach become more compelling — vertical integration, at least the businesses along the same value chain, has become more and more of an imperative.

By that I mean manufacturing, wholesaling and retailing. If you control the whole value chain, you can with greater predictability, certainty and comfort manage the flow of things through the value chain so that you’re not taking big bets. You’re not making movies and then not finding cable networks to put them on. Or you don’t have all your bets in the cable network space, yet you can’t make a deal with a distributor for the cable company.

So having control of the value chain gives you greater certainty, which helps your financial underpinnings and your resources and gives you scale.

People have seen that work for Time Warner. [News Corp. chairman Rupert] Murdoch has been trying to move in that direction for years.

The discussion about whether content or distribution is king has raged in our industry for years: [Viacom Inc. chairman] Sumner Redstone says that content is king. [Comcast Corp. CEO] Brian Roberts says distribution is king. [Liberty Media chairman] John Malone says distribution is king.

I’ve always felt the way Jerry Levin put it — and I give him credit for this quote — content may be king, but distribution is the power behind the throne. And you need them both.

MCN: But then you’ve got Sumner Redstone, who says he doesn’t need distribution.

Parsons: It’s what he says, and right now, the way the market sits and based on the strength of his assets. He probably doesn’t. But the pendulum swings up and down the value chain, and at different points in time and in different economic cycles, value can move from one place on the value chain to another.

It can be moved from the content side to the distribution side or back and forth. So the way to hedge and protect yourself is to be in both places.

At least that’s our theory. And so far, so good.

MCN: Let’s talk about scale. Time Warner was involved in the AT&T Broadband auction and decided to back off on that.

Parsons: No, we didn’t. We lost. [Laughter] We bid on the assets. We lost. Brian [Roberts] won.

MCN: Was it because you didn’t think they were as valuable as he did?

Parsons: Here’s what I’d say: I’d say it was just that he put in a higher bid than we did. We knew that they were valuable assets, and we knew that we could integrate them very easily into our platform — as could Brian. AT&T ran a fair process.

The combination of attractive economic terms offered by Brian and greater regulatory certainty that the deal would get done pushed AT&T in that direction.

MCN: You’ve said publicly you would like to grow your cable footprint. But is there a concern in the back of your mind that any deal you do — or any deal you contemplate — is going to have a regulatory problem?

Parsons: No, I don’t think so. One of the things that the Comcast/AT&T deal did was raise the bar in terms of scale.

There is still concern about media consolidation, but it’s more rational at this point in time. So we think we have plenty of room to grow our cable footprint without creating any kind of regulatory issues.

MCN: That leads into the Adelphia Communications Corp. question. Everybody seems to be interested in that. You’ve said publicly that you will only be interested in acquisitions that make sense or are at a good price, but if you don’t get involved in this, is there a sense that maybe this is the last big chance to grow?

Parsons: No. I don’t have that sense at all. People who revert to those kinds of arguments — that this is our last shot and that this is the last chance at the trough — are doing so because they can’t make the right business argument. To me, if we did nothing else, Time Warner is already the largest media company in the world by revenues, and by market cap, too. We are already vertically integrated, so we don’t have to do anything. I don’t have to get bigger in cable in order to fulfill our destiny. We don’t have to have X, Y or Z. So what we’re trying to do is put our resources to work in a way that increases the value proposition for our shareholders. So if it doesn’t do that, we’re passing, even if it is the last shot.

MCN: And there have been several “last shots” at growing over the years.

Parsons: Trust me. There is no such thing in reality as, “this is your last chance.”

MCN: Where does that leave content, as far as acquisition targets? You own 50% of Court TV, and you’ve got a partner in Liberty Media Corp. that seems to want to increase its content scale. Is that a buy or a sell for you?

Parsons: The way that deal was structured was that [John] Malone — a good, smart man — has a put and we have a call on that asset in 2006.

So he can either put it to us, or we can call it from him. It doesn’t go the other way, by the way. That should give you some sense of what the intention was at the time we structured the partnership. We like that asset. We like the management. We think it’s highly complementary to the other cable networks.

What I’ve said is we like the businesses that we’re in. They are all category leaders. That’s the other thing about this company. With the exception of our cable company, which is the No. 2 company, all the rest of our businesses are sort of No. 1 in their space, and we’re going to look to grow them all.

MCN: There seems to be a lot of concern about Rupert Murdoch ever since the DirecTV deal. You guys are at 10.9 million subscribers. He’s around 12 million, and he has been saying he wants to get to 20 million. That’s got to come from somewhere. So how do you stop it from coming from you?

Parsons: If you go back over the last couple of years, we may have been the only cable company of size to actually either grow subscribers or basically remain flat. This year we’ll grow subscribers again. I think what we need to do — and what we are doing — is we’re offering a more compelling consumer proposition to keep our customers, so that it’s not just cable, but it’s cable, high-speed data and now, telephony.

And if you get all that bundled in a nice package, a so-called triple play, you can keep your customers, and, in fact, start to take customers back from satellite, because the value proposition is just more compelling.

MCN: Does that tie into the whole innovation culture here at Time Warner?

Parsons: It does, particularly the cable company. We have the only cable company in the world that has won a television Emmy [Award], because the television industry basically recognized the contribution of what is now the standard architecture of all cable companies in this country, hybrid-fiber co-ax, on-demand and the so-called subscription video-on-demand that now rides on the Internet.

The problem with our Full Service Network was we essentially created our own intranet within our cable system. It was too expensive to maintain, but now that there’s an Internet and a way to move all these bits around, the concept of video-on-demand and interactivity is clearly one that you can innovate around.

The more things we can put on our cable platform, the greater the chance we have to keep our cable customers happy. Other providers, like satellite or telephone companies, can’t offer parts of the bundle completely.

If we give our cable customers good service and make sure that we can give them whatever the competition can offer and more, they’re not going to leave.

MCN: There’s been a lot of talk about CNN losing the ratings war to Fox. Is that a big concern of yours?

Parsons: CNN is still by far the premier brand name throughout the world in 24-hours news. It generates more revenue and has more viewers overall than Fox News. And if you add in Headline News and its Web site, it reaches over 50% more people than Fox News every month.

What happens with the Fox viewers is that they stay longer. People will tune in for 10 to 20 minutes to get the news from CNN and move on. Fox has these destination shows like The O’Reilly Factor. Some people stay an hour.

You take a smaller audience but longer staying time, and you get net results in higher ratings.

So, we realize one of the challenges we have at CNN is that we’ve got to get that larger audience to stay with us a little longer, and it has to do with the quality of the programming, the nature of the program. But we are going to keep it fundamentally a news channel as opposed to talk TV.

MCN: Is CNN still a highly costly operation for you?

Parsons: Yes, it costs a lot, but it makes a lot. CNN has always had very good margins. We probably spend more covering the world and gathering the news on a global basis than any other news organization. And I think we do a better job at it.

MCN: There was talk not too long ago about combining CNN’s news operations with a broadcaster. ABC was talked about a lot. Is that something that could happen in the near future, either with them or another broadcaster?

Parsons: It’s too hard. There was talk about it. There was a lot written about it. There is a conceptual opportunity here. On the one hand you have CNN spending this much money to collect this much news, which is being reported 24 hours a day, to this size audience.

On the other side, you have broadcast networks spending a lot of money collecting the same news for one hour a day, sending it to this much audience. So if you could somehow put all that together, you could back out a lot of costs. Then you would have your 24-hour-a-day feed, and you’d have your special at 6:30 at night.

However, the closer we got to seeing if you could put these two together, we realized that there were just too many decisions. It wouldn’t work as a practical matter. How do you actually share the news between the brands and how do you make it work as a practical matter?

We couldn’t figure out how to do that. So we pulled away from that. I do think in the next couple of years, it would not surprise me to see one of the big broadcast networks — ABC, CBS, NBC — decide that they’re going out of the business of producing their own news, and they’re going to essentially turn to outsourcing. They’re going to retain somebody to fill that kind of spot.

MCN: Other than the stock price, what would you think is your biggest disappointment?

Parsons: I suppose at this point in time, my biggest disappointment is that we haven’t been able to get to the end of the trail with the government — the [Securities & Exchange Commission and Department of Justice] — but I have confidence that we’ll get there.

I’d like to get to the end of the trail as expeditiously as we can. But again, as I said, essentially the government mandates the timeframe.

MCN: Do you find yourself spending more time on one aspect of the business than any other these days?

Parsons: I probably don’t spend more time with one division over another. In the past, it would have always been the cable division. Just because it is so large and it relates to so many of our businesses.

But now that we have [Media & Communications Group chairman] Don Logan and [Entertainment & Networks Group chairman] Jeff Bewkes, where I spend a lot of my time now is with employees, organizational development and investors.

MCN: Do you like that better or would you rather be focusing on something else?

Parsons: I particularly like the engagement of the employees. Because they are the ones who are making the boat go. And usually in a job like this the only thing that comes to you is a problem because that’s where it comes up the line, and things get resolved, they get resolved down below.

So it’s a pretty steady diet of issues and problems. When you hang out with the employees, you get to participate vicariously at least in their successes.

They’re really pumped about what they do. That’s good fun.

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