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Executives

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Time Warner Inc. (TWX) Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference March 4, 2013 11:30 AM ET

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

All right. We're going to get started with our next presentation. I'm very pleased to have with us, Jeff Bewkes, Chairman and CEO of Time Warner. Thanks for coming, Jeff.

Jeffrey L. Bewkes

It's great to be here. Please eat as you need to.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And Jeff's responsible for the ocean view, the raise of the curtains, so thank you for that.

Jeffrey L. Bewkes

You're welcome.

Question-and-Answer Session

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So why don't we start by -- I think we'll walk through the growth outlook for each business, we'll circle back to some more specific questions. But I wanted to set up the discussion with sort of a topic that's been growing for media companies, they've been pointing out cash returning to shareholders. That's something that's helped drive the stocks nicely. Can you talk about the balance that you strike between returning capital and investing for growth at Time Warner?

Jeffrey L. Bewkes

Yes, I'd like to -- basically, we don't see it as a trade-off, returning capital versus investing for growth. And I'm going to say something a little provocative, maybe, which is that we're not interested in investing just for growth's sake. We are interested, basically, in increasing our returns. So whether we're doing that with investing in our internal production, whether we're doing it in investing in, say, external investments, or whether we do it by investing in our stock, we are focused on increasing our returns. So let me just tell you how -- that's conceptual, what do we do? First of all, I think you all track very well our earnings growth and our cash flow performance. So we've got pretty steady growth in earnings, we've got tremendous record of cash conversion. And if you take the cash flow after we invest fully in production, and this we'll talk about today, we've been increasing our investments in production, TV series, programming, movies, et cetera, holding out our expenses flat, and our cash flow and earnings have been pretty steady. So if you take the cash flow that comes out after fully investing in the businesses and the leverage which we've kept steady and now we've been at our leverage target, that produces a fair amount of capacity financially. Now we look at M&A, but we're very firm about what we try to do in M&A. We're big enough. We don't need to do anything to protect ourselves. We're not going to do M&A to solely drive some kind of absolute growth number. We're only going to do it for returns. And if the -- if our projected return on an M&A opportunity does not deliver net of execution rift, net of the purchase cost, a pretty reliable financial return that's superior to other uses, and I think you all know what the other uses have been, then we're not going to do the M&A. And as a result, we've been essentially finding some mix of M&A. But basically, our best investment has been in our stock. Now when you look at that, we're not pursuing a slavish arbitrary program to buy our stock. We have a very firm value about what our stock value is. And as long as we have excess capacity with having looked at all our internal growth opportunities, where we don't see a better use outside the company, then as long as our stock is a good value, which we think it is now, then we're going to buy our stock. And that's basically what we've been doing. I think you can see us pursuing that course in the future. And it's conceivable we could get interrupted by a tremendous opportunity, but it would have to be a tremendous opportunity.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So you said you sort of have a definition of the value of your stock.

Jeffrey L. Bewkes

Yes.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So what is that value?

Jeffrey L. Bewkes

Much higher than where it is now.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I see.

Jeffrey L. Bewkes

Yes, and we've been right about that.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

It's good to be right.

Jeffrey L. Bewkes

I'm sorry to say that, but it's true.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So that's helpful, thanks. I think that sorts of set the table for diving into how you're driving growth at each of your businesses, so big question, but ...

Jeffrey L. Bewkes

Okay. So the overall, I want you all to take away, is we're going to accelerate our growth. And we're going to do it -- more of this -- basically, 4 main areas -- a bit more than 4, but let me give you the main 4. So the first is, we've made huge investments in content and we're going to increase our affiliate fees dramatically as a result of that. And I'll talk through that. Second is, we've been increasing pretty fast our international network performance. We're going to increase our international business faster. So we'll talk about that. Third, we think there are exciting new ways, and I think we've been at the forefront of realizing these to monetize our content through new business models, like the On Demand. And then fourth, which you've seen us do, cost efficiency. We've been increasing our investment in operating and programming costs, keeping our unproductive spending flat, and increased our margins about 500 basis points, you've seen that. So let me just say a couple of things about the content investments and the acceleration of revenue in our networks. If you think -- let's take Turner basic networks first, like headline investments or things like March Madness, NCAA rights, that was billions of dollars, Conan's launch, which has done really well with that demographic, original programming, which has been up and been successful on Turner, 5 of the top 10 hour-shows on cable are on TNT. We go to HBO, 3 of the top 5 hits that have ever been on HBO in its history are on HBO now. And each of them is generating something like 12 million viewers. So the pipeline for shows there is going up. And then if you take -- and I think all of us think of HBO, first, when you think of HBO Go, which is the best example of Internet VOD and on television, VOD functionality. If you take the strength of the increasing programming on HBO, the strength of the increasing program on Turner, and the fact that Time Warner's networks, HBO and Turner, are the most vigorous in granting TVE rights, VOD rights out there, so we basically have the pole position. All of the content, plus the VOD functionalities, made the networks stronger. So that drives subscribers, that drives wholesale pricing. And that's basically the story on how do the network revenues, particularly affiliate revenues, grow. We've been very clear that we're going to increase those more than double digits between 2013 and 2016 at Turner, on the basic side. And HBO's very healthy. It will continue at least on the path that it's been in terms of pricing, and its subscription strength is, in terms of sub-volume, is going up. So that's the first lever, which is content into affiliate revenue. The second one is international. And just to give you a size of it, leaving Warner product sales out, half of Warner's revenues are overseas, we have about $3 billion a year now in 2012 in overseas network revenue between Turner and HBO, driving about $650 million of operating earnings. That's up double from where it was in '09. So that's the path it's been on. We are on track to do what we have said we were going to do, which is to increase that from $650 million up to $1 billion in roughly 3 years. And that is basic that's on the investments we have in place now. That's not requiring any further international investments. So that's the international networks growth. And I've -- I got to point out, just look at HBO last year, had subscriber growth outside the United States, up 33% -- 35%, and is now at 70 million subs outside the United States. So that's not probably going to continue at that pace, but it will grow faster than domestic, and we had a good year on domestic pay TV at HBO this last year. So that's international growth on the network side. Third area is new business, new models. Think of Subscription VOD. Time Warner had $350 million of Subscription VOD sales last year. We think that's higher than any other media company. At the same time, as we had robust VOD offerings on our network, so we didn't chip into that. And where I get excited, and I hope you can get excited about it, we have the largest library of movies, 6,000 movie titles and 75,000 television episodes in our Warner Bros. vaults to sell into, not only an increasing Subscription VOD market in the United States, but the increasing demand overseas for that programming. And none of those numbers count any of the originals at HBO or Turner, which is a dramatically increasing slate. So that's the new business, SVOD, and international side. Last is cost. I'd already said we'd raised the margins 500 basis points. We've essentially kept our SG&A cost flat. We've increased our programming, things that go on the screen. And we are now doing some initiatives to take certain costs like IT, real estate and shared back-office and essentially, centralize them and make them more efficient in cost sharing. We think we can drive hundreds of millions of dollars of run rate cost savings from that in the next few years, on top of everything we've talked about. So those are the reasons why you can all do it. You can write a path for increasing earnings growth at Time Warner.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Pretty interesting. The -- a quick follow-up, we're in touch on a lot of those with similar questions. On the back-office and IT and the real estate, is there any CapEx that has to go into that to achieve those savings? Or is that something that's relatively organic?

Jeffrey L. Bewkes

Not much, about 200 to 300. But it's in our CapEx projection. So it's not -- you shouldn't add it to any models that you have.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So as you know, at this point, I wanted to shift over to your perspective of some of the industry issues, particularly focus on online video. And I think if you look at pay TV subscribers last year at year end '12, where you're pretty flat with year end '11, occupied homes according to the government statistics are growing. And so that suggests that the pay TV bundle from a price value perspective, from a competition with online video perspective, perhaps affordability might be coming under some strain. So 4 areas, the first, price value and affordability. Do you worry the pay TV service has gotten too expensive or is no longer holding its value? And what responsibility do the content companies play in that ecosystem as part of that?

Jeffrey L. Bewkes

Yes. I hope that none of you think that we're cavalier about the answer I'm going to give to this. I -- we don't think that the multichannel bundle is becoming a less good deal. We think it's getting to be a better deal for consumers. And we think it's getting to be a better deal in the opinion of consumers. And if you say, why do you say that? You got to look at the data. And what you see, even in this recession with what you've talked about, you don't have cord cutting. You got penetration staying up. You have hours of viewing staying up. And I'm going to wait and talk about some of the younger cohorts for that. You have increases in the quality and programming budgets of all these networks. And I bet you, you're going to ask me about that. And so you don't see evidence of cord cutting or even cord shaving. And if you look at a couple of -- challenge that, if you say, well, what about online video offers at 8 or 10 or box or whatever it is? You got things like Netflix go from 0 to 27 million subs, households, and no effect on multichannel penetration. You have -- basically, if you look at the -- think of the question, if the price is too high, you would expect to see people revolting in some way. You'd expect to see them cutting their packages. And yet, if you look at the low-priced offers, that DISH company offers, if you look at Time Warner essential package, these are all economy packages, nobody buys them. If you look at the average revenue per sub at those companies that push the low-priced bundles, it's $80 a sub. So we haven't seen it, not in viewing, not in disconnects, not in penetrations, move away. And if you look at what's now happening, which is the, all of your television bundles because you're all paying for it, you have it at home, it's all going On Demand, it's going on every Internet device you have for free, because you have a subscription. So the programming's getting better. The utility of it across Internet device is getting better. You just don't see a sign of it going down. But last point, let's say, I'm wrong. Let's say, that there starts to be impinging on the penetration. Well, that would mean that people would start to offer -- distributors would offer, people would buy, some cheaper packages. Some of them without sports. Because we all know the reason this is up is the sports fee, it's not anything else. And half the citizens don't want that. So you'd find them going to cheaper bundles without sports. Well, that's good for us. We're well-positioned. We've got, in our Turner networks, 90% of our affiliate fees in our top 4 networks. We have a bigger percentage of must-carry networks in the top 40 in our company than any other media company. So if there's a focus on cheaper bundles with essential programming in them, we'll be in those bundles, because we have the leverage and the network. We don't have any weak networks that have to go in. And then last point, if something like that happens, let's not forget HBO. HBO would then be riding on top of a cheaper bundle, which would be great for HBO. So I'm saying, I don't think that is happening. But if it does, we're very well-positioned for that.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So let's say, the world changed and online video, all of a sudden, does start to have an impact to pay TV bundle. We all start to have a different view, has Pandora's box been opened at this point? You both have networks, but you're also the arms supplier for Netflix and Hulu, and you've got turner.com and others, is it too late for media companies to pull back on online video licensing and SVOD services at this point?

Jeffrey L. Bewkes

No. But we don't need to. So this has actually worked out quite well. And I think we've been talking about this every year for a couple of years now. And so what's happened? Well, I think -- sorry to mention it again, we just sold $350 million of SVOD to players like Netflix and Amazon last year. And we've got plenty left to go. We're hoping they're viable enough to increase what they're buying. And what they're increasingly buying, and it makes sense for them and it's actually an efficient development, they're buying series programming that's serialized, that is more watchable by a consumer, in order, on an On Demand network, than linear syndication. So they can't really afford these new SVOD services. They can't afford to buy all of the major live programming or syndicated non-serialized series that are going to NBC, CBS, TNT and so forth. The programming budgets for those networks are massively larger than the SVOD guys. But it's shaking out really well. They're coming in for the things they ought to do, which is library and serialized, big advantage for those of us being the leader, in terms of library of that programming. And they're fitting in nicely as a complement to the other networks. I would just throw out there that the overlap, most people -- a lot of people that have HBO have Showtime. A lot of people that have Netflix have HBO and vice versa. They tend to be things, that together, are driving up the American consumer habit of On Demand viewing across their favorite networks and favorite shows. So it's all fun. Now if you end up right now, it's working out very well. If it goes in some direction that becomes difficult, these contracts are short term. So it can be recalibrated. What we don't see is some new SVOD service running away with the business and getting so big. I mean, you all know the numbers for these companies. They can't go that far.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So third area, young people, use media, but differently. Folks are worried that they won't be pay TV subscribers as they get older, that they'll watch less TV. Does media have a young person's problem?

Jeffrey L. Bewkes

We don't think so. We watch it very carefully. This is not a new question. And I'm not as young as I was. So I remember when it was video games were going to take us all out, if you all remember that. So let's do some facts about it. If you look at 18 to 34s, they're watching 1 hour more television now than they were 5 years ago. If you look at 16 -- wait a minute, 20-somethings, their multichannel subscription percentage is 87%, as it has been. So it's not been going down. And those numbers, by the way, don't measure the viewing of those age cohorts on alternate devices that Nielsen is not capturing. So it's not measuring a lot of VOD that's coming out of TV Everywhere yet. It's not measuring a lot of HBO Go, which has a lot of viewing. So at this point, we don't see that. Now you could see it, if the existing distribution and cable companies and so forth, if they don't offer an interface that's as good as what the broadband video guys offer, then eventually yes, they're going to drive everybody away. But that's not a rights issue, that's just kind of an interface problem that we think will be solved. HBO Go would be our Exhibit A for solving that problem.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So the fourth area, and last on the online video question series, it will be real powerful for online video, rather than just having older shows and niche content and movies would be a true over-the-top pay TV provider of showing the networks and having a package. Intel seems to be the latest showing interest. Would Time Warner break ranks and offer its networks online through an over-the-top provider?

Jeffrey L. Bewkes

Maybe. I don't -- we don't think of it as breaking ranks. We all, not just Time Warner, but all of us have to look at these new distribution methods, as whether they're viable, whether they offer customers a better experience at a lower price, or whatever it would be that would make them viable. No one has come along with that yet. And we'd look at it, it would have to be economically accretive to us, and once you figure out all of the ramifications. And so far, and we all know it, many have tried and theorized about what these things would be, but nobody's done it yet.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So TV Everywhere. You've been an outspoken industry leader on the concept and implementation of TV Everywhere. News Corp. just got a full TV Everywhere deal with Comcast. Others are doing it as well. What grade would you give the industry at this point on TV Everywhere?

Jeffrey L. Bewkes

Well, it's not an A because it's been a little slower. But I think we all focus a little too much on that, I mean, it basically has been a big success. I remember being up here and talking about this 2 years ago. And there was a lot of skepticism about whether this would prevail and it would work. I'm not -- now, I think it has. It's a concept that's been adopted. It's now every distributor, telco, cable, satellite. Every network company has adopted and cleared its rights for a pretty uniform TV Everywhere VOD offering. Now some of them had been slow, some of the other companies, and you should chastise them when they're up here later today. They have waited for affiliate deals to change and offer their rights, which is questionable, I think, when you're trying to create a consumer change. But here's some good news. I brought one note so I can do justice to our competition. I remember all our data but not theirs. So here's some good news just in. Viacom just launched its Nick app, quickly became the #2 free app on iTunes. Disney launched apps for ESPN and for its kids network and it's marking them quite aggressively. And in fact, when Disney first lost their app or all these apps, including the Nickelodeon one, 4 of the top 10 iPhone apps were TV Everywhere apps, when they were launched. When Disney went up on their iTunes launch, Cartoon Network, our app, jumped from 3,000 downloads a day to 30,000, a 10x increase for us because of their activity. That's good stuff. NBC U chose to put the Olympics behind an authentication wall, served millions of streams a day, a lot of attention to that as it should be. And Fox is now authenticating prime time content on Hulu and Fox.com. So there's a lot of momentum across our competitors. And as you all know, we were the most vigorous and we've granted these rights across our networks. So we think this is happening. It's going to be good.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So now it's a little bit of a look at what you've gone and done and did. Right? So the world is shifting to On Demand consumption media versus the old EPG, electronic programming guide, where you channel surf and find stuff. And some of your channels have pretty broad programming strategies. Is an On Demand world good or bad for Time Warner?

Jeffrey L. Bewkes

It's fantastic, unequivocably -- very good for us. Well, okay. So of course, we think that. We put our most pioneering network On Demand more than 10 years ago. You've all been watching it for more than a decade. It's HBO. And when -- we think every network in the world should be On Demand and scheduled. There are some benefits to scheduling, by the way, to launching new shows. I think we're going to -- we should talk about that. But you want your favorite shows On Demand. So why is it so good for us, Time Warner? Well, it's simple. We have, as you all know, the biggest slate of big-budget movies, the biggest slate of hit TV series, I think 1/4 of all series on every network in the United States is made by our company, the biggest, most-known originals on TNT, TBS and HBO. So when you give On Demand to people, it means they can all watch the hit stuff. We have that. That's what we concentrate in. So it's a very good development for us. And it makes the major ways in which we get our revenue, particularly subscription, more viable.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So I have actually have one more online question. Netflix says, Reed in the last conference call, it's better TV. So no ads, entire seasons available at once, entirely On Demand. Do you worry that Netflix is onto something with their better TV pitch?

Jeffrey L. Bewkes

Well, they are. What you're describing is HBO 10 years ago. Let's do it again. What if, say it again?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

No ads, entire seasons available at once, entirely On Demand.

Jeffrey L. Bewkes

Fantastic. 1997 at HBO. So I think that's great. We've been encouraging that just so everybody gets the idea. The -- I mean, that's HBO, Showtime, et cetera. One wrinkle there and maybe you're interested in it, I'm not so interested in it, but there's -- they put up 1 series, a new series that no one had seen all at once, that was House of Cards. I think it's pretty good as a series, but there are a lot of other great series, also, on other networks, including ours. I don't -- we don't think it's the best way to launch a series. Think of Game of Thrones coming up now, then it's going to be huge. I think Game of Thrones on HBO is the most stolen series on the planet Earth in 2013. If you go around the globe, the #1 stolen series is Game of Thrones. We have to fix that. But in places where we're selling it, like the United States and our -- places where we have HBO networks, it's a fantastic hit. We don't want to put it up all at once. We want to have the watercooler effect, introduce it, bring people to it. And as you all know, you could always watch it if you happen to find out about it mid-season. You can watch the whole season on HBO On Demand. You can also watch all the old seasons, for those of you that are remiss, and haven't kept up with Game of Thrones, or Girls, or Boardwalk Empire, you can always do that on HBO. But we don't think the new stuff needs to go that way. Now we can do it if we want to do it. I don't -- I just think it's hard if you envision a world 5 years from now with all On Demand. How the hell are you going to find everything? You got to use your network to launch things in a way where people can understand what it is. So we'll see, that will shake itself out. The real issue is, this kind of thing, offering everything On Demand, is a good thing.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And I'm glad that you found that out. So serialized dramas, Downton Abbey, House of Cards, Homeland, Walking Dead. It seems like there's a greater breadth of success there. Is competition on TV getting tougher?

Jeffrey L. Bewkes

Yes, but I would say, Doug, that think of -- I mean, you just said it. You just listed off some shows that everyone in this room knows are very good, high-quality shows. And most of us sitting here want to watch those shows. So remember for the last 10 or so minutes, we've been asking whether TV is good, whether it's growing, whether it's healthy. Well, of course, it is. Listen to that stuff. So those are big hit shows. Some of them are available On Demand, which makes them even more accessible, and that is exactly why pay TV subscriptions all over the world, including U.S., are up, hours of viewing are up, programming budgets are up. That's why people want to subscribe to HBO and Showtime and the full bundle. It's why the cord shaving and cord cutting is not happening. And you take all of it and you put it On Demand across your Internet devices, free if you maintain your subscription and 95% of our citizens have that. Therefore, it's not a price increase. It is a very robust business. It's really hard to think of a consumer business that isn't -- that has that much strength, in terms of inherent consumer attachment, habit, engagement and the quality and the economic resources of all of these companies that are participating in this business, which is simply going up.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So you mentioned earlier, I should ask you about programming costs and we're talking about competition. Any concerns about the need to pay actors, directors, writers, special effects, more money to keep up with the competition on programming?

Jeffrey L. Bewkes

No. I mean, that's always an issue, but it's not changed in the trend line of where it's been.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So Turner ad trends, I'm required to always ask you about Turner ad trends?

Jeffrey L. Bewkes

Turner ad trends, right.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

How are they?

Jeffrey L. Bewkes

They're good. So we think our scatter-pricing is up either high singles or low double-digits over the upfront. It would help that we're doing it, if we could increase our ratings, which we are now doing. We've done -- well, I will wait for you to ask.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

How are your ratings?

Jeffrey L. Bewkes

They're good. Which one do you want to know about?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Why don't we do, well, TNT and TBS, really.

Jeffrey L. Bewkes

Yes. TBS was up 30-plus% last year, mostly Big Bang Theory. It was off a little bit in the first quarter, but not a trendable issue, it's good. And it's #1 in 18 to 49 in prime time, all those quarters. So that's not a bad thing, #1 is good. TNT, we think we're refreshing the programming there, and it's coming back up. We did have, and I think I said it, of the top 10 original series, our series on cable, 5 of them are on TNT. So...

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And so do you look at TNT and do you look at the success of your original programming? Do you look at the syndicated part that's coming? What...

Jeffrey L. Bewkes

Yes. Well, the syndicated programming, hours and 1/2 hours, is an advantage for Time Warner because Turner and TBS -- TBS and TNT had big reach and we have the biggest supply, at Warner's, of hit shows. So in terms of access, we have it. Where it's been a little weak on the acquired programming is that, if you all know this, when NBC, ABC, CBS were in economic straits, 3 or 4 years ago, they were not ordering as many new scripted series as they then resumed doing about a year or 2 ago, when they added their retrans. So they're a little healthier, that's good for Warner TV production, it's good for the pipeline of syndicated stuff coming to TBS, TNT, and we have an advantage when it happens. But the result of that, I'm not going to miss one of our weak points last year, is that we had some unusually old programming on TNT that hadn't been refreshed because of that whole, mouse-and-the-snake phenomenon. And we think that's recovering, we're now -- Dallas is on, coming out. And so we think we're getting the TNT pipeline back. And as we move between the acquired hit series, which we think is an important part of the network schedule and also creates a good launching pad for original series, and we've said and it's in our numbers, we're going to add 40% to our original series programming expense at Turner without changing the earnings track. That's going to help. And if you then throw in the basketball, which is performing better-than-expected, Conan, which is performing better-than-expected in its age group, it's a pretty good story. It's got some -- it had a little weakness, but it's actually viable and I think it will be moving up. If you had -- so I think we'll do better in ratings, therefore, better in ad sales. We're proud of the affiliate side. We shouldn't forget, I won't go into it, truTV, CNN, HLN, Adult Swim. All pretty strong, particularly on the carriage fee side, and we're looking to a real resurgence at CNN as well.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

On HBO, I was curious, you went through a lot of renewals and updates. You talked about helping the pay TV guys understand how to market HBO better. And as a result, perhaps of many things, last year was a pretty good year for HBO subs.

Jeffrey L. Bewkes

Yes, it was.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And I think what investors are trying to understand, is that sort of a onetime bump because the pay TV industry did a better job marketing, or is that sustainable?

Jeffrey L. Bewkes

Well, I think -- I don't know if it will go this year at that rate, this is domestic. It might, but it fluctuates a little bit. I do think it will be an upward trend. We see both pricing power at HBO, we see buoyancy in affiliate subscriptions -- affiliate penetration. We -- the reason I say that is we have a couple of affiliates that are under-penetrated. And I think they're realizing how strong HBO is. And it makes no sense if you're a cable operator to under-penetrate HBO, there's free money there if you can get at that. We haven't really seen the full retention, reduction of churn and selling power of HBO Go, which is becoming more widely used, but I think it will -- it takes a while to get that habit embedded. And if you put together the increasing pipeline of HBO Originals with that functionality, it could develop a more buoyant trend long-term. Overseas is obviously very strong but -- and domestically, I think, we'll be heading -- continue up. But I don't know if it'll be as good, it might be, as last year.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So we should switch to film.

Jeffrey L. Bewkes

Yes.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any strategy shifts we should expect at Warners with the management change?

Jeffrey L. Bewkes

Is Kevin going in? No. Kevin has been at Warners for 20 years. He's been a very key part of the management team that has been doing -- if you think of Warners as distinct from the other studios, we've got a much bigger film slate, operation. We're making 6 big budget tentpoles a year, and nobody else is doing that. We've got a much bigger television series, production business. Kevin's been involved in all that, including the distribution convergence of our giant film slate with our large television series. We also handle HBO, which adds power to it. And so obviously, those strategies are working. There's no studio that has been as steady or superior in earnings and cash flow as Warners, over the last 10 years. We plan to continue that. And I think he's going to stay on that course. And he knows it all very well. So what we should all want is more of the same, at Warners, with growth and earnings.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Has home entertainment hit an inflection point? We have the decline in the DVD in the United States for a long period of time.

Jeffrey L. Bewkes

Well, the news in the home video business, last year, as you all know, is that the decline in physical DVD sales got offset, finally, by electronic sales, electronic rentals and so on. The number of -- the amount of spending on home video by consumers was flat last year, I'd like it to go up, but it wasn't going down. The number of movie transactions, the number of views was flat, not down. I think it was up a little bit. And so -- really, the challenge is to move the business into the higher margin ways, hopefully sales of electronic movies -- electronic sales and movies, rather than the low-priced rentals like kiosks, et cetera, that remains to be seen. That's why we did UltraViolet. We do have the other studios in it. We'll see.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So I'm going to ask one more question and then we'll have time for a couple from the audience, if anyone has any questions. But I thought by now, we'd have a Time Inc. deal announced and we'd be talking about that. Any comment that you want to make around press speculation on Time Inc.?

Jeffrey L. Bewkes

Yes, we can't comment on those things. The press is very active. I think there ought to be one Chauncey god in their comment on every one of these things. Right? The press is very active, who knows if they know what they're talking about?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Would you call Time Inc. a noncore asset?

Jeffrey L. Bewkes

No, I wouldn't speak about it in the -- given the context that you're asking.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Do we have any questions from the audience? Or I'll throw in 1 or 2 more. Any one at all?

Jeffrey L. Bewkes

There's got to be somebody out there.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

We do have one over here in the corner, all the way up front. You have to wait for the microphone, please, since we're webcasting. He's on his way.

Unknown Analyst

Could you please explain the growth in HBO in Europe despite the slow economic environment there?

Jeffrey L. Bewkes

Okay. The HBO subscriber growth in Europe is not mostly in Western Europe, it's Eastern Europe. And it's essentially, I wouldn't say, totally disconnected from economic trends, but what you have all over Europe, or certainly in Eastern Europe, is you have the buildout of multichannel TV distribution. And so, as homes get it available, they tend to buy it, HBOs in that bundle. I don't want to give the impression that most of the growth on HBO international is in Europe, though, because most of it is actually in Latin America and some in Asia. It's growing everywhere. It's #1 in every territory in where it operates. But the big growth is in Latin America. And some of it is basic, not discretionary pay TV, depending on the country.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any more questions? Or I'll throw one last one in there. Looks like it's me. So I wouldn't say -- it might not be fair to say, you made a point of separating out the Turner originals and the HBO Originals, when you were talking about SVOD and the licensing fees you were getting up at Time Warner, but it sort of seemed like you were doing those, certainly, putting them in a different bucket. What do you think about the prospect for licensing Turner originals and HBO deep library or library to SVOD services?

Jeffrey L. Bewkes

Yes, well, it's a definitional thing. So if you -- let's take HBO stuff, first.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

They have some pretty good shows.

Jeffrey L. Bewkes

Yes, they do. So are you asking about, say, an HBO -- are you just talking about a current HBO show or an older HBO?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Older HBO.

Jeffrey L. Bewkes

Right, so let's break it down. So you have -- I'm sure all of you are HBO subscribers, right? So there's once couple -- 2 HBO -- jeez, you guys have a -- you got to get a life. If you think of an -- the shows that are on HBO are on the world's leading #1 best exotic pay TV SVOD service. It's called HBO. So when I think of that question, I -- we do think of it with an open mind. Should we license our HBO series to an SVOD service called Showtime? Because Showtime is an SVOD service. I mean, I don't know. They have that much ability to pay. If you go on your HBO service, you're going to find the old episodes of The Wire and Deadwood and The Sopranos, that Doug's thinking about. They're all there because you're an HBO sub.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Those are the exact 3 I was actually thinking.

Jeffrey L. Bewkes

And they're exclusive to HBO subscribers, which is partly why you are an HBO subscriber. And they're on every Internet device. Whatever you want. So now you get to the idea, should we then, for a relatively small amount of money, because they don't have that much, should we also put those shows on a competing subscription VOD service? And probably you should throw in, should CBS take Revolution and license it to NBC? I don't know, it doesn't seem like a great idea. But I guess, we'll keep thinking about it. We do meet with him and talk about it. It's not a lot of money, actually. We think there's more money in having it on HBO and furthering the penetration of HBO.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Jeff, thank you so much for coming.

Jeffrey L. Bewkes

Thanks, Doug. Good questions. Thank you.

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