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Time Warner to Give AOL Service Free to Some Users
by Cecile Daurat, Bloomberg.com

Aug. 2 (Bloomberg) -- Time Warner Inc., the world's largest media company, said it will give away its AOL service to high- speed Internet users, sacrificing subscriber revenue in a bet that online advertising will compensate for the loss.

New York-based Time Warner today also reported second- quarter net income of $1 billion, or 24 cents a share, compared with a year-ago loss, as higher cable-television sales made up for customer losses at AOL.

The Internet unit will offer AOL e-mail service and security software free to users with broadband connections, an effort by Chief Executive Officer Richard Parsons to restore sales growth. Revenue at AOL, which has been a drag on Time Warner's earnings for five years, fell 2.4 percent in the quarter as it lost 976,000 subscribers.

``They needed to do something with this business, it was in constant decline,'' said Dan Poole, who helps manage about $34 billion including Time Warner shares at Cleveland-based National City Corp. ``The old model just didn't work.''

Shares of Time Warner rose the most in six months, gaining 52 cents, or 3.2 percent, to $16.77 at 2:13 p.m. in New York Stock Exchange composite trading. They declined 6.8 percent this year before today.

Time Warner's 6.875 percent bonds maturing in 2012 fell 0.11 cent to 103.5 cents on the dollar, according to Trace, the bond- price reporting system. The yield rose to 6.14 percent. The price is down from a year high of 107.18 cents on the dollar on Feb. 1.

Revenue rose 1.2 percent to $10.7 billion in the quarter. Excluding some costs, profit of 20 cents a share exceeded the 19 cent forecast of Merrill Lynch & Co. analyst Jessica Reif Cohen. In the year-ago period, Time Warner lost $409 million, or 9 cents, on costs to settle a shareholder lawsuit.

Strategy Shift

Abandonment of its focus on subscribers marks a shift in strategy for AOL, which started up as a dial-up service in 1985 and became the most popular U.S. online network before users began to defect to for faster, cheaper Internet access.

``We're going to stop sending our members to our competitors,'' President Jeff Bewkes said on a conference call with analysts.

The number of U.S. subscribers dwindled to 17.7 million in June from a peak of 26.7 million in September 2002. Revenue losses will continue for at least another year.

``We will turn the corner and increase the overall revenue during 2008,'' Bewkes said in an interview. He said annual sales will rise again in 2009.

Site Overhaul

Dulles, Virginia-based AOL already added news and music to lure visitors and advertisers and overhauled the aol.com Web site, offering more content for free to boost advertising sales. AOL in January teamed with broadband providers such as AT&T Inc. to offer subscribers high-speed connections at a discount.

Second-quarter sales of $2.05 billion at AOL beat the $1.92 billion estimate from Reif Cohen, the top-ranked media analyst by Institutional Investor magazine. Operating profit fell 4.4 percent to $505 million.

AOL's profit will be about unchanged this year, as costs to advertise and maintain dial-up Web access service decline, Time Warner said. AOL will save more than $1 billion by the end of next year, Bewkes, 54, said on the conference call. The new strategy will cost $150 million to $200 million in restructuring expenses, he said.

Online Advertising

Second-quarter online advertising rose 40 percent to $449 million, exceeding the 26 percent increase estimated by Reif Cohen. Online ads make up 22 percent of AOL's sales.

``AOL's advertising results only serve to bolster our confidence in AOL's prospects,'' Parsons, 58, said on a conference call. AOL increased its share in the U.S. online ad market ``for the first time in a long time,'' Parsons said.

AOL is in talks with Vivendi Universal SA's Cegetel fixed- line unit to sell the Web access part of its business in France, AOL chief Jonathan Miller said on the call.

Time Warner Cable, the second-largest U.S. cable operator, was Time Warner's fastest-growing division for the 10th quarter in a row. Revenue increased 15 percent to $2.7 billion from $2.36 billion, meeting the $2.68 billion forecast from Reif Cohen. Profit gained 16 percent to $1 billion.

The company added 230,000 high-speed Internet access subscribers and 234,000 digital phone customers, for a total of 1.6 million. The company and No. 1 operator Comcast Corp. this week completed the $16.7 billion purchase of Adelphia Communications Corp. assets.

Film, Networks

Network sales climbed 8.7 percent to $2.69 billion, helped by higher rates and more subscribers at Turner Broadcasting and ancillary sales of original HBO programming. Profit rose 8.6 percent to $696 million.

Sales at the movie unit fell 10 percent to $2.4 billion as ``Poseidon'' disappointed at the box office. Profit gained 10 percent to $229 million, helped by revenue from the TV division and lower costs, Time Warner said.

Parsons is making changes to AOL amid pressure from shareholders to stem a slide in the share price to near four- year lows. Billionaire investor Carl Icahn prompted Time Warner to boost a stock buyback program to $20 billion after withdrawing demands to break up the company.

Too much attention focus has been placed on AOL, said Steve Roukis, managing director at Matrix Asset Advisors in New York, which owns 3.3 million Time Warner shares.

``AOL is going to have problems and it will take time, but the bigger picture you have is this quite undervalued franchise that is growing,'' Roukis said.