Time Warner Prepares to Spin Out AOL

There was much more substance in the ether today about AOL then there was yesterday: while being somewhat mealy-mouthed about the language, Time Warner executives made it clear on their earnings call today that in all likelihood they will spinoff some or all of AOL, casting new CEO, and former Google exec, Tim Armstrong in the role of the contractor who comes into the handyman’s special, replaces the wiring, updates the bathrooms and installs the granite countertops. Peter Kafka did the heavy-lifting here in excerpting this paragraph from the TW 10-Q so I didn’t have to (it’s been a long day):

Although the Company’s Board of Directors has not made any decision, the Company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner’s stockholders, in one or a series of transactions. Based on the results of the Company’s review, future market conditions or the availability of more favorable strategic opportunities that may arise before a transaction is completed, the Company may decide to pursue an alternative other than a spin-off with respect to either or both of AOL’s businesses.

Well, at least TW is holding out some hope. Not to be completely down on AOL — Armstrong is one of the smartest guys in online media and marketing — but I also found today’s earnings call to be a reminder of just what AOL and Armstrong and TW are up against. Not only did ad revenue at AOL decline by 20 percent, but subscription revenues were off by 27 percent or $146 million.

While that’s a lot of money, what’s astonishing is that AOL still even has that much in subscription revenue, years after it began to walk away from that model. As that revenue stream is sure to show further double-digit declines, ad revenue will have to make up not only for its own losses, but for still-substantial subscription revenue that is leaking out the back door. Another trouble spot: some signs that Bebo, the social networking site which AOL bought in March of last year for $850 million, is beginning to show signs of user erosion at the hands of Facebook. Though TW CEO Jeff Bewkes said that unique visitors were up five percent, and that they were seeing growth in some key markets, uniques declined by 15 percent in its core U.K. market, because of Facebook. Armstrong’s got a lot to do.

I’ll close this post by linking to part 1 of 3 videos Advertising Age plans to post of its editor’s interview with Armstrong at the 4As Leadership Conference this week. After today’s announcement, the timing of this interview couldn’t appear more awkward. Armstrong skirted questions about the spinoff and also didn’t, and probably couldn’t, tell the audience that TW was planning to buy back his former employer’s five percent stake in AOL, which TW announced today. If parts 2 and 3 are more interesting, I’ll post them here.