Time Warner Can Still Be King

Today’s generations have come of age during a boom in entrepreneurship and are helping shape the future through disruptive innovations: Google (GOOG), YouTube, Twitter, Facebook, wireless communications, instant messaging, etc.

For business, timing is everything. According to Christopher Gergen and Gregg Vanourek, authors of Life Entrepreneurs, a window of opportunity can close as quickly as it opens. These windows open and close with changing customer preferences, new technologies, competitor moves, fluctuations in the market, and more.

Time Warner Inc. (TWX) is a leading media and entertainment company, whose major businesses encompass an array of the most respected and successful media brands. After Time Warner Cable Inc. (TWC) separation from Time Warner on March 12, 2009, Time Warner classifies its operations into four segments: Networks, Filmed Entertainment, Publishing and AOL. For the 1^st qtr of 2009, revenue and income percentages of each business segment is as follows:

Time Warner has become a more content-focused company. In the quarter, revenues declined 7% from 2008 to $6.9 billion, due mainly to decreases at the AOL, Publishing and Filmed Entertainment segments, offset partially by an increase at the Networks segment.

The Company's Networks segment recently has focused on international expansion. The US television industry faces a $2 billion slump in advertising revenues during the next four years as advertisers turn away from broadcast and cable networks, according to a Financial Time’s article. Some of the decline will be clawed back by US TV networks by online video advertising, which it expects to triple during the next four years.

With online video advertising representing only 2.2 per cent of all TV advertising, this will not be enough to offset the slump, exacerbated by the recession. US broadcast and cable-advertising revenues will fall from $69 billion in 2008 to $67 billion by 2013.

The sale of DVDs has been one of the largest drivers of the Film segment's profit over the last several years. However, it experienced a decline in DVD sales in 2008 and 1^st qtr of 2009.

The Publishing segment generates revenues primarily from advertising (including advertising on digital properties), magazine subscriptions and newsstand sales. Online advertising sales, like online video ads, are not mature enough and won’t mature quickly enough to fill the gap left by the decline of traditional advertising.

In the golden age of media, it was relatively easy to reach a broad audience to launch a new product. Today, attaining critical mass for a new national brand is much more difficult, as there is no easy way to advertise to a majority of the population. As media fragments further, the incumbent brands simply become that much more entrenched. The number of options for receiving information via any given medium has exploded. Each additional channel slices the existing pie into pieces that are that much smaller.

Time Warner Inc. (TWX) confirmed plans to spin off its AOL division by year-end. It may also need to seek option to divesting its publishing segment. The Company continues to have strong liquidity to meet its needs for the foreseeable future. At March 31, 2009, the Company had around $14 billion of unused committed capacity. Its Price/Operation Cash Flow is only around 5.

Even though Time Warner Inc. (TWX) faces major issues in each and every segment of its business, with strong brands and cash flow, I believe it is still worth holding if it can catch a window of opportunity and focus on “online” business model. After all, sites marketed and sites directly supported by the content owners have gained a substantial lead over third-party sites like YouTube.

Disclose: I have no position in TWX. TWX is my company’s client.