• by Diane Mermigas , March 28, 2008

Obsessing over Time Warner's fate and fortune is a time-honored pursuit that usually ends with the same discouraging realization. Even after adding AOL, subtracting cable, tweaking filmed entertainment and contemplating an overall breakup, the $50 billion behemoth is a product of reactionary rather than visionary leadership-and is, at its core, a content company.

Wall Street analysts and investors have for decades tracked the steady flow of acquisitions, sales and restructurings Time Warner has relied on in its twisted search for enduring success beyond cyclical content hits--from "Lord of the Rings" and Harry Potter to "The Sopranos."

New CEO Jeff Bewkes could preside over Time Warner's final unwinding in recognition that the company has created some--but not nearly enough--value from billions of dollars in empire-building. That begs the question: Was it the particular selection and scale of assets, prevailing circumstances, or flawed management vision and execution?

Perhaps no other media giant's situation has been so closely related to the well-intended, but fumbled, missions of its high-profile chief executives: Steve Ross, Jerry Levin, Steve Case and Dick Parsons. Exhaustively chronicled in pithy books and magazine articles with clever headlines-like the most recent "Dead (AOL) Man Walking" in Fast Company and "Lord of the Things" in New York--it all comes down to the company's failure to leverage its wealth of assets and opportunities. Instead, an impressive collection of media assets has been in a constant state of damage control, distracted from creating the greatness that might have been.

Bewkes may eventually halt the vicious cycle by reducing Time Warner to the content common denominator that has always been there. This approach would play to Bewkes' strength, as the executive who led HBO's landmark turnaround a decade ago with a genre of enterprising original productions. Reducing Time Warner to its most potent element --at a time when digital platforms and devices can't get enough good content--might finally allow the company to creatively and financially flourish as a smaller, better-focused concern, in ways it has never been able to as a conglomerate.

The first big step in that process, the uncoupling of Time Warner Cable from the parent company, is being closely scrutinized by Wall Street. Restructuring its 84% stake in the second-largest cable operator by spinning off much of it to shareholders is a technical move that may not accrue "quantifiable benefits to Time Warner"--perhaps only a special dividend, according to Bear Stearns analyst Spencer Wang. A non-cable Time Warner could have a $54.5 billion enterprise value based on projected $7.5 billion earnings, putting it on par between Disney and News Corp., Wang estimates.

The separation of cable from the corporate parent should force investors and management to pay closer attention to Time Warner's content assets. That means bolstering incremental investments in its branded cable networks and reallocating capital at its filmed entertainment operations, which have not materially grown earnings this decade, according to Bernstein Research analyst Michael Nathanson. Management should stay riveted on boosting investment returns on its content assets, which have only grown related earnings as well as return on capital by about 5%--the lowest among its media peers. Folding New Line Studio into Warner Brothers will accomplish more than $150 million in cost savings to encourage more co-financing and distribution deals, boosting margins on fewer numbers of films. If Time Warner could borrow a page from Walt Disney Co.'s playbook using such strategy, it could generate $274 million in incremental earnings, Nathanson said. Likewise, Time Warner should focus more on quality rather than sheer quantity of television shows--and more on its cable networks than broadcast, where leveraging content in the traditional network and syndication models is becoming more tumultuous.

Some argue that these strategies will not be possible as long as AOL is in the company fold, which seems strange at a time when most digital gold is still sifted through the Internet. At the very least, the sale of AOL's access business will render $2 billion in after-tax proceeds and allow for faster growth on lower earnings at what remains of Time Warner. The rationale for selling all of AOL for an estimated $20 billion-plus: Time Warner has never managed it effectively (not to mention blowing $125 billion in post-merger shareholder value), and it would be better served by the involvement of Google, a minority stakeholder and partner (although regulators might not see it that way). Alternatively, AOL could be combined with the Time Inc. publishing brands that can be best exploited on the Web by AOL's advertising Platform A and about 90 million in domestic traffic.

Perhaps the most pressing reasons for redirecting Time Warner to its content roots are the extraordinary external forces at work that are radically reshaping all media players and processes. The cable networks appear to be the safest haven for sure growth, supported by estimated 8.4% ad growth in 2008 and an average 5.5% in national brand advertising growth through 2011--triple that of broadcast network television and second only to the Internet, according to Morgan Stanley analyst Benjamin Swinburne.

In these tenuous economic times, there is plenty of value for Time Warner to capture--running fourth behind Disney, Viacom and News Corp. in projected large cap media earnings growth through 2011, Swinburne said in a report Thursday. Still, the most formidable obstacles lie in wait for the company: a weak economy and ad spending, the collapsing credit market, and the volatile stock market could continue to fuel massive declines in valuations as well as available expansion and deal financing.

One quirky catalyst for getting a move on is a clause in Bewkes' contract allowing him to resign from his new $19.6 million gig if he isn't named chairman by the beginning of 2009, less than a year from now. It gives new meaning to the concept of adversity--Time Warner style.