If Content Is King, Then AOL Is a Handsome Prince, Not a Toad

| About: Time Warner (TWX)

Dear Mr. Bewkes, As you ponder the future of the Time Warner (NYSE:TWX) empire, don't be so quick to jettison the AOL internet access service. Or at least wait until you've managed to turn the unit around and can spin it off like you will Time Warner Cable (TWC) ...

That's how my letter to the company's new CEO would begin. I might also send him several more letters urging him to ignore Yahoo (YHOO) and Microsoft (NASDAQ:MSFT) , said to be suitors of AOL, and perhaps Google and Earthlink (NASDAQ:ELNK) as well, and even Liberty Media -- but then I'd be writing an epistolary novel instead of a blog post. (Sorry for the digression.)

You see, there's value yet in all of AOL. Seriously. In my letter, I'd skip the financials and instead offer a principled argument.  The web's evolution, and the stock market, may soon favor carriage afterall.  You can think of the newly "split-up" AOL as millions of subscribers, or as a mix of web advertising and tools, but at the end of the day it's what connects more than 8 million consumers to online content and services, so let's just call a distribution network.

Consider social network Facebook's $15 billion valuation. Or the video portal YouTube, for which Google (NASDAQ:GOOG) paid $1.65 billion two years ago. Or even the yet-to-be-launched Meettheboss.com, which will launch later this month. While these companies all do something different, they are part, large scale distribution networks. Which suggests the problem with AOL isn't that it's a bad business, it's more likely a badly run business.

In  2001, the old Time Warner paid $184 billion for AOL. In 2006, Google took a 5% stake in AOL at a $20 billion valuation. And at present, analysts peg AOL's value in the $10 billion range -- and that's for its content and ad business. The Internet access group might fetch $2 or $3 billion. And why is this? It's because AOL has allowed its content and access businesses to deteriorate from a once valuable walled garden to just a bunch of dumb pipes ferrying data.

But that's changing, if slowly. In March, AOL picked up Bebo for a hefty $850 million in cash, and acquiried its 40 million members. That's a lot of money, but it's 40 million more members of a potential distribution network.

So, why not add some value to the distribution network -- notably the very content referred to as a cash cow -- filmed entertainment like Batman, and cable networks like HBO and Turner. Look at what NBC and News Corp have done with Hulu. The time is right for a similar offering to showcase Time Warner content. (Could they do this and still sell off AOL? Admittedly, yes. But so much better to launch with a built-in audience of 50 million users.)

I'd close my letter by suggesting to Mr. Bewkes that this strategy would leave him two choices: spin off the now more valuable AOL unit (Mr. Ballmer?) or, watch as the markets applaud a mix of carriage and content that makes sense.

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Tagged: , Entertainment - Diversified
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