Time Warner Refocusing With Move to Spin Off Cable
TIM ARANGO, Hendersonville Times-News
The move spotlighted the company’s future as a pure content provider and signaled a renewed focus on its Warner Brothers movie studios and Turner Networks.
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Hendersonville Times-News
In another era at Time Warner, before a star-crossed Internet merger, the hard-held belief of Gerald M. Levin, then the chief executive, was that “content is and will remain king, but distribution is the power behind the throne.”

These days the king seems to be losing his throne.

On Wednesday, Jeffrey L. Bewkes, who became chief executive in January, succeeding Richard D. Parsons, said that Time Warner would completely spin off its cable company, essentially shedding the pipes that have underpinned much of the company’s fortune.

Although the announcement was largely anticipated by Wall Street — it had earlier spun off a 16 percent stake to shareholders — it still underscored a profound philosophical shift.

For years, it was a widely held belief within Time Warner and the media business that there were real financial advantages to owning both the content — television shows and films — and the means of distributing it to people’s homes.

But Wednesday’s cable announcement, which came as Time Warner reported first-quarter earnings, spotlighted the company’s future as a pure content provider. From now on the media company will revolve around two core content businesses that have been out of the limelight in recent years: the Warner Brothers movie studio and Turner Networks, which includes the television channels TNT, TBS, HBO and CNN.

Although those divisions have produced steady revenue and cash flow, investors and the media have focused instead on the debate over cable and the drama unfolding (still) at AOL.

Without the cable business, the bulk of Time Warner’s revenue will come from the movie studio and the cable networks. In the first quarter, Warner Brothers generated $2.84 billion, while the networks brought in $2.66 billion; the cable business that is being split off brought in $4.16 billion in revenue in the first quarter.

“Over time, Warner Brothers has been a gold mine,” said Larry Haverty, who runs the Gabelli Global Multimedia Trust fund, which owns 230,000 shares of Time Warner. “And at the cable networks, they’ve done a great job. CNN has come back against Fox. And HBO is a juggernaut that is probably at a low ebb in terms of content.”

Mr. Bewkes, in a conference call, pointed to several growth areas. TNT and TBS, for example, will focus more on original programming than on introducing new channels. Original shows can be particularly valuable in the long run because the company owns the copyrights; some of Turner’s existing ones are “The Closer” and “Tyler Perry’s House of Payne.”

“While some network groups have invested in niche networks, we funneled our resources primarily into expanding our big-reach existing brands,” Mr. Bewkes said. He signaled that Time Warner would compete more directly with the broadcast networks for viewers and advertising dollars.

“We believe Turner is now positioned better than ever to challenge the broadcast networks,” he said.

On Wednesday, Time Warner reported net income of $771 million, or 21 cents a share, compared with $1.2 billion, or 31 cents a share, in the period a year ago, a 36 percent drop. Revenue increased 2 percent, to $11.42 billion.

Time Warner stock has languished for years as it cleared the wreckage from its ill-fated merger with AOL, and Wednesday’s news — which generally matched what analysts had anticipated — had little effect on the share price. Shares of Time Warner closed at $14.85 Wednesday, down 42 cents.

AOL is still a question mark for Mr. Bewkes, who has been in discussions about a possible deal to combine it with Yahoo, which itself has been fighting off a bid from Microsoft.

On Wednesday, Time Warner said that revenue at AOL — which has been in a seemingly perpetual state of transition from a subscriber business to an advertising business — declined 23 percent, to $1.1 billion.

But relative to some of its peers in the media industry, Time Warner’s stock price appears cheap — at least, that was the hopeful sentiment among some investors and analysts.

Mr. Haverty said that Turner and Warner Brothers were “a collection of businesses that anyone on the planet would say should be worth more than eight times trailing cash flow.”

Laura Martin, an analyst at Soleil Media Metrics, said, “the strength of the networks and film was an upside surprise.” Without cable, she said, Time Warner closely resembled Viacom, which combines a grouping of cable channels under the MTV Networks brand and the Paramount Pictures film studio.

Time Warner’s film business had a 4 percent increase in revenue, to $2.84 billion from $2.74 billion in last year’s first quarter. The division’s profit declined, however, to $183 million, from $243 million in the year-ago period, reflecting a $116 million restructuring charge from reorganizing New Line Cinema. Mr. Bewkes said the unit’s television production would continue to be a source of growth, particularly from selling shows to cable networks, like FX, that are not owned by Time Warner.

Another piece of Time Warner’s content business — although of lesser importance to investors — is its magazine publishing unit, Time Inc. The unit, which publishes Sports Illustrated, People, Time and Fortune, saw revenue remain essentially flat at about $ 1 billion, but its operating income, before depreciation and amortization, rose 73 percent, to $145 million.

Time Warner is not the only big media company that has disavowed the industry mantra of marrying distribution and content. Rupert Murdoch, the controlling shareholder of News Corporation, recently agreed to give up control of the satellite company DirecTV in an asset swap with Liberty Media.

Part of the rationale for the mantra in the first place was that owning both sides of the equation gave companies instant distribution when introducing new networks, as well as leverage with other cable companies.

“There is huge growth in further original programming,” Mr. Bewkes said in an interview. “There’s more money in putting resources into HBO, TNT and TBS to create hits than into a start-up channel.”