Time Warner Buoyed By Traditional Media, AOL Stabilizes

by Michael Shields, Jul 28, 2004, 12:00 AM

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Buoyed by strong growth from its film and cable businesses, as well as rebounding advertising business from America Online, media mammoth Time Warner released solid second quarter earnings results Wednesday, announcing a revenue increase of 10 percent while raising its profit expectations for the second half of the year. It also sent a strong signal that its most immediate growth and expansion plans have more to do with traditional media like, TV networks, magazines and cable TV service, than they do with newer media like the Internet.

"I feel pretty good about the operations of the company at this time," said CEO Richard Parsons. "I have great confidence in our ability to achieve updated results."

For a company that was once the preeminent player in the digital media space, its traditional media businesses continue to shine, particularly the cable TV properties.

The company's cable business saw a 10 percent increase in revenues, with advertising revenues climbing 7 percent and subscription revenues growing 10 percent.

The Turner networks were the primary source of cable's advertising growth, (+ 8 percent in revenue). Parson emphasized that a "differentiation strategy" at those networks has "Paid off handsomely. TNT and TBS have never been stronger," he said, pointing out that the two networks are ranked first and second in total audience. Parsons added that TBS had its best quarter ever in reaching adults 18 to 34, fueled by the recent debut of "Sex and the City" reruns.

Parsons hinted that there might be more to come from Time Warner on the cable front. "We are interested in expanding our cable footprint," he said.

Time Warner's footprint is also expanding in the digital cable realm. Though basic video cable subscribers declined 21,000 from the prior quarter, Time Warner Cable added 124,000 net digital video subscribers, bringing that group's total to 4.6 million subscribers. In addition, the company also reported steadily increasing penetration for its DVR, Video-on-Demand and hi-speed data businesses.

While its cable networks are providing stability, its recent albatross, America Online, is finally joining the party that is the online advertising recovery, showing its first quarter-over-quarter growth since the third quarter of 2001. Parsons called that segment "the most exciting growth opportunity in our company," and praised the unit for "executing an impressive financial turnaround."

Though America Online's total revenue was up just 2 percent, advertising revenues climbed 23 percent, boosted by $31 million in revenues coming from the red-hot paid search sector.

Yet Parsons implied that future online advertising growth would likely occur outside of the AOL properties, perhaps through increasing revenue coming from other Time Inc. online properties and through the finalization of the company's purchase of Advertising.com

Meanwhile, AOLs' subscriber business continues to bleed customers, and executives are not predicting a turnaround. "Narrowband subscribers will continue to decline," said Parsons. While subscription revenues were essentially flat in second quarter, the AOL service lost 668,000 subscribers in the second quarter, largely driven by a churn in trial memberships.

While the company highlighted growth in cable and online advertising, it was wizardry and magic that continued to bolster Time Warner's overall bottom line. The spring release of the latest "Harry Potter" film and the video release of the final "Lord of the Rings" film combined to drive a 12 percent increase in revenues for filmed entertainment.

Meanwhile, the oldest of the company's media properties, and its slowest to recover of late, magazine publishing appears to be on a more solid footing than in recent years. "Time Inc. is seeing a return to the kind of growth we've seen in the last dozen years," Parsons said. The company boasted that it is launching five new magazines in 2004, four in the second half of the year.

Publishing showed a modest 4 percent increase in revenues, though ad revenues were up a healthy 10 percent, due mainly to increases at Time, Real Simple, Fortune, Sports Illustrated, Entertainment Weekly and In Style.

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