- Summary: Time Warner expects that its plan to offer AOL for free will reduce its subscription revenue from $1.6 billion in 2006 to $800 million in 2009, with the impact on profits offset by a reduction in marketing of $1 billion over 3 years and a rise in advertising operating margins from 17% to 42%, leading to single digit growth in operating profit from 2006-9. The plan assumes growth in advertising revenue of 25-30% annually, lower than the actual growth rate of 35% since 2004 including acquisitions. The plan is supported by Time Warner CEO Jonathan Miller but resisted by some employees who may be hit by management restructuring and thousands of layoffs. AOL currently accounts for 20% of Time Warner's operating profits. "If AOL fails to meet growth targets for ad sales, Time Warner could take a substantial hit to its bottom line. "
- Comment on related stocks/ETFs: This is the second article on AOL's new strategy; the key points it adds to the first article are (1) support from CEO Jonathan Miller, and (2) more detailed numbers to back up the assertion that AOL can grow its operating income by single digits from 2006-9. But investors will want to examine the risks carefully. One scenario: The number of AOL subscribers will decline faster than expected due to cuts to AOL's marketing budget, its workforce reductions and mass defections, as subscribers move to high-speed ISPs without facing loss of their email accounts. That could lead to fewer page views for AOL properties and therefore less advertising revenue. Moreover, freed from automatic log in to an AOL home page, subscribers might find that they prefer the free content offered by Yahoo (YHOO) and Google (GOOG), and might even be lured into moving their email accounts to those providers. Bottom line: this is high-risk for Time Warner's stock (TWX), and the value investors who currently own it may not want to stick around to see what happens.
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