Yes, Time Warner is still separating AOL’s advertising/media businesses from dial-up access, and no, CEO Jeff Bewkes can’t foresee any more Bebo-style deals, or even an acquisition of NBC U.
Those were three takeaways from Bewkes’ presentation to Deutsche Bank’s media & Telecom Conference. He said the work to divide AOL’s businesses is indeed complicated, but it would be complete by the end of Q2.
Bewkes also admitted there was no way to quantify the Bebo aquisition like previous deals for Tacoda or Quigo, and tried to reassure one irate investor that some projections of revenue and traffic valued Bebo at $1.5 billion. See? We didn’t pay that.
Call begins… we start out talking about film and TV.
13:32: Jeff Bewkes: Our motivation is to improve our return on capital. We think our cable business will grow in value but we felt it would be structurally better to separate them from our entertainment businesses.
I think we ought to focus on the profit performance of the content businesses and focus on how they are going to grow.
What will be TWX’s rate of growth? 3%? 5%?
Bewkes: We don’t give specific guidance.
On the film side, will the Warner Bros film studio remain the largest?
Bewkes: Warner is focussed on supplying all networks while the network-owned studios are focused on supplying their own networks with TV content first. We changed its structure. We eliminated New Line–that is an ongoing operating overhead improvement. The second is focusing and reducing the slate of films. We are going to making half as many films as a few years ago. With these things we can move profit up. DVD was a huge provider of cash flow growth for every studio–and we had more DVD revenues than anyone. But if you go to new areas–there is some room in high-def DVD and VOD. We were the first studio to go to day-and-date on sell-through at the same time as the rental window and there has been no cannibalization.
How do you do fewer Speed Racers and more Sex In The Citys?
Bewkes: Our strategy is to only make hits…. When you have scale and you have reasonably successful distribution capability, talent comes to you. Its true at HBO and at Turner as well. We will have misses–Speed Racer was one. But if you have superior distribution capabilities, the talent knows their films will get the best shot, the best distribution, the best theatres and the best splits with distributors. It leads to a cycle that attracts talent.
If you look at the hit/miss rate at the networks, you have a much higher hit rate at TNT, TBS or HBO you have a much higher hit rate than the old TV networks. HBO is about 50%.
If the network TV business is cutting its’ cost, doesn’t that hurt a supplier like Time Warner?
Bewkes: What we’ve been doing is we’ve been the second supplier to all four networks. All these networks are trying to capture more of the profit from making shows. There is a hope on their side that they would make more hits themselves and get more of the benefit out of it. But they can’t do it themselves. You don’t have to own 100% of the show you’re making for ABC and CBS. There is a way to spread the risk and share it.
Would you acquire a broadcast network? Are you enticed to buy one since you are producing so much content for them?
Bewkes: Enticed is not the word. Jeff Zucker said earlier that NBC U’s profits comes mostly now from cable. We don’t need to or have an agenda with any of those networks. If they go into change we would look at it if it came up. But we don’t have a clear aim to own [one of the broadcast networks].
Any concern that a lot of your profits are being driven by past shows, like Seinfeld or West Wing?
Bewkes: We do have over the last 3 years plenty of new shows in their 3rd or 4th year at the networks coming up for their next round. Because the broadcast networks have leaned so much to reality, they don’t have as much programming to sell into syndication. There’s a scarcity of scripted programming and we have a lot to sell. The rise of the cable networks also increases demand for scripted shows.
Cable network growth is flattening; is it still a good business model?
Bewkes: Years ago the cable networks were living off the cable network carriage fees. What we’ve done in the past few years we’ve branded our channels. Started producing original programming–movies and sports. In movies, we’re the only ones with two large high-reach channels. We can amortize across two channels which gives us a bidding advantage. On sports, with TNT, TBS, we have a good position to finance sports rights, and that holds up our affiliate fees. All that gives us an engine to finance more original programming. The Cartoon Network business has a very strong earnings pattern in the US, but it also works overseas.
CNN is the lead destination in the world for people seeking news online.
Does on-demand threaten general entertainment?
Bewkes: It only hurts those who are re-running shows. HBO really is a general entertainment channel. But it is branded. The movie part of HBO still gets really high ratings. People will watch a movie again even if they’ve already rented it. People will watch a movie on HBO, even if they have the DVD right there on the shelf!
How did the upfront go and any comments on advertising–any cancelations or softness?
1:04: We think we’ll be at the high end of all cable networks in aggregate dollars and price improvements. We think that will carry through to the last-minute scatter market.
It seems like Time Inc. is going through wrenching change, like that going on at newspapers. How do you think of the business going forward?
Bewkes: We’re not being wrenched in the same way as newspapers. Their readership are older and they’re getting hit by classifieds losses. Our magazines are national brands. We are moving to digital–but even in print we are growing more robustly. The celebrity (People) and service (Cottage Living) titles are doing well in print. The men’s, business and news titles are getting hurt in this economy, but women’s and service titles are doing well–double digit growth in earnings. We want to have the publishing business growing at a healthy enough clip as an investment vehicle for a public stock. We think we can do it. We don’t know if we can. But we won’t be able to figure that out during this down cycle.
Let’s talk about AOL. Bebo: what’s up with that?
Bewkes: We made a bit of stretch in Bebo. I can’t prove this investment to you today like we could Tacoda or say Quigo. We are moving away from instant messaging. We do think we’ve got some opportunities putting Bebo into circulation with AIM and ICQ. We think we can monetise that and cover more than the cost of the acquisition. It’s too early to say how well its going to work.
How is AOL going?
Bewkes: Ad revenue from search has at times gone well and other times less well. Everyone is losing share from Google. We happen to be powered by Google. We are seeing AOL users shifting from using search on AOL to search on Google.
There were some integration issues when we were putting together Tacoda, Quigo, etc. Some demand side has moved into performance-based ad buys and away from display advertising like AOL represents. We think we are pulling that around. We think we will have an up year in ad revenue overall by the time we get to the end of the year.
The access business continues to lose subs as we planned.
AOL has facilities everywhere. Dulles is more access and infrastructure. A lot of the software people are working for Platform A. We have moved a lot of programming and ad sales to New York.
Audience Q & A begins:
Update on the separation of access business and
Bewkes: The AOL audience is getting younger and more engaged. The value of AOL is not realised in the stock right now. The rationale for separating the ad platform, social networks, AOL from access is to make the company better able to do partnerships. Microsoft and Yahoo are out there trying to figure out who is going to dance with whom.
Is the access part of AOL going to be sold off? Any reason to keep it?
Bewkes: The interest in AOL by all the usual suspects has been pretty strong in the last 3-4 months. I can’t tell you much more about it. Given the uncertainty of Yahoo-MSFT there are a number of scenarios that might implicate AOL. The subscription business–by the end of this quarter we will know where all the finances go so we will be able to do with that business whatever makes sense.
Any possibility you would partner with newspapers where you would sell subscriptions, DVDs on local newspaper Web sites?
Bewkes: We will work with anybody to sell magazines and DVDs.
Given the importance of cash flow and the $10b you now have, how can you reconcile your with to return on capital and Bebo? Is that representative of deals going forward? If not, what went wrong there?
Bewkes: You arent the only one who has questioned it. It isn’t representative of risk we have taken lately. In terms of thoroughness, I cant give you projections. But I’ve seen some projections on revenue and traffic that valued Bebo at $1.5 b. We didn’t pay that. When News Corp bought MySpace no one could figure that out for the first year either. The earnings on that deal are underperforming. Things like Bebo–we’ve said while we were thorough looking at it, I don’t see us making any acquisitions on the horizon that would have such a lack of pure quantification. I don’t think you ought to worry that we will be doing things like that.