Time Warner has been one of the three largest magazine publishers in the United States. This was surprising, since I had usually associated the media conglomerate with network/cable television and film. Studying the magazine sector within a media conglomeration has shown how the breadth of the company either offers astounding revenue or immense struggling across the board, which is currently the case.
The “Business” portion of the 10-K revealed how Time Warner organizes itself: AOL (interactive consumer and advertising services), cable (the actual systems), filmed entertainment (film, TV, home video), networks (principally cable) and publishing (principally magazines).
AOL
AOL is trying to shift its focus from gaining subscriptions to “attracting and engaging” consumers on the Internet. AOL hopes third parties can incorporate AOL content and services on their websites and is utilizing the People Networks business unit to hone in on social networking to attract advertisers. Time Warner’s advertising services on AOL and third parties are managed by Platform-A. Platform-A uses in-house and third party technology for various online advertising, though it plans to use its own technology in early 2009. AOL and Google have also partnered and benefited from the exchange of ads and ad space. AOL’s main competition includes other Internet companies, social networking sites, traditional media and other third party advertising.
AOL’s decline in subscriptions have not been offset by advertising, but still feels that it should keep high rates despite low demand from advertisers. The only advertising that grew was through its partnership with Google. AOL does not have its own search service and is losing out on selling search advertising. AOL must stay appealing to lost subscribers by coming up with new content (though expensive to develop or borrow from Time Warner) and must find distribution other than traditional media. All of this is ironic, considering that AOL was at the forefront of the Internet revolution. Perhaps the costly time it takes to develop new content and methods will be worth it if the company can try to be more innovative while trying to survive. Only if this is successful can the maintenance of high ad rates be successful.
CABLE
Time Warner Cable (TWC), undergoing a separation with Time Warner (discussed later) is the second-largest cable operator in the U.S. and concentrates its services in five geographic areas. Its services include video, high-speed data, voice services and advertising. Most customers purchase services in discounted bundled packages, which differ on how many channels and options are available. The company is expanding video on-demand (VOD) through innovative enhancements like “Start Over” (allows subscribers with a set-top box to restart programs in progress but without being able to fast forward through commercials). Time Warner hopes to expand its HD offerings, digital phone packages (especially to commercial businesses), and local advertising efforts. TWC also plans to expand network capacity through switched digital video (SVD), technology which will transmit only the digital and HD channels being watched at a given moment to save bandwidth space.
The most risks for TWC stem from its ongoing separation from Time Warner. Time Warner cannot make an exchange or offers of the TWC share and both parties can’t enter into any business combinations without the approval of independent directors who must comprise at least 50% of TWC’s board of directors. The separation will eventually result in more flexibility for both parties, but Time Warner will be less diversified and will be more susceptible to risks associated with international business. TWC has incurred debt of around $7.0 billion from the separation and must deal with the typical competition of other stations and outlets, need for more bandwidth, regulations and keeping its subscribers. Perhaps Time Warner should capitalize on the fact that it has dropped one of its companies during this economy, since it can lend more focus and enhancement of its companies in other sectors. Still, it is a huge distraction to what resources and time could have been invested in simultaneously improving Turner Networks and HBO to make up for the loss.
FILMED ENTERTAINMENT
Warner Bros. Entertainment Group produces, distributes and licenses the rights for its films and distributes films from other producers. Warner Independent Pictures and another independent producer and distributor, Picturehouse, ceased in October 2008. Warner Bros. still rely on “event” movies/blockbuster hits and its franchises to rake in revenue. Warner Bros. also operates home entertainment, games, TV, digital media, and various worldwide distributions (Warner Bros. Digital Distribution [WBDD] has many channels). One of the most interesting on-demand distribution services expected to launch in 2009 are online or in-store kiosks to select content to burn on discs to deliver it to your home. WBDD also plans to work with Warner Home Video to offer electronic copies of movies through specially marked DVDs with a code to download it or a file already on the actual DVD to download. Competition exists between motion pictures, TV, games, animation, DVDs, the Internet and shifts in consumer habits.
Both Time Warner networks and filmed entertainment must respond to changes in technology, consumer behavior’s shift from physical to digital needs and consolidation from already vertically integrated companies hurting ad revenue and licensing revenue, especially for syndication. DVD sales are declining because of retail hardships and maturation of the format (i.e. Toshiba’s discontinuation of HD and shift to blu-ray). Production and marketing costs stay high as the company is relying on international business and other media outlets for distribution and must keep an eye out for piracy and risk of “labor interruptions.” Offering legal, electronic copies of its movies through DVDs seems like a great compromise to the growth of piracy and desire for viewing digital content other than the TV. Of all the upcoming innovations Time Warner discussed in the 10-K, this plan seems very viable in its digital efforts and hopefully will be easy for consumers to understand and use.
NETWORKS
The company’s domestic and international networks are under Turner Networks and premium networks are under HBO, distributed via cable and satellite. Turner gets its money from advertising and affiliates who receive and distribute the networks as well as ads and subscriptions from its news websites. It also relies on Time Warner’s library and partnerships for exclusive sports programming with the NBA, MLB, NASCAR and the PGA. HBO relies on subscribers, DVD sales of its series or original films, and licensing for syndication. It is the nation’s “most widely distributed premium pay television service.” The CW (joint venture between Warner Bros. and CBS) was carried by an astounding 94% of households in the U.S. as of December 31, 2008. Both of these companies compete with other networks for marketing, distribution and advertising.
The networks’ ad and subscription revenues are being hurt by the consolidation of multichannel video programming distributors (vertical integration limits options for distribution). The networks still struggle in trying to predict or capitalize on fluctuating popularity of its programs to third parties, and license rights and renewals may be costlier. Still, the film and network segments of Time Warner don’t seem to suffering as much from the pressure of the Internet, as its operating costs are not a daily fluctuation, unlike AOL. Its partnerships with sports organizations must be a huge profit and I wonder how the revenue from these deals compare with Disney owning an entire sports station—ESPN.
PUBLISHING
Time Inc. is the largest magazine publisher in the U.S. based on advertising revenues. It also gains revenue through direct marketing and direct-selling businesses, websites and product/license extensions. In the fourth quarter of 2008, Time Inc. reorganized its magazines and websites into three business units with its own management: Style and Entertainment, News and Lifestyle. The company hopes this new structure will reduce costs, as it also reflects the centralized operations of distribution and subscriptions. Time gets about half of its revenue from magazine advertisements, then circulation (mostly subscriptions) and some from its websites. The company also runs direct marketing, direct-selling businesses, niche book publishing and many international publications. Costs and competition include postal rates and competition from the Internet and other media, mostly for advertising.
As with the company’s other sectors, Time is suffering from the decrease in advertising revenue and the competition for the ads and audiences shifting to the Internet. All magazine publishers are having trouble with the consolidation or desertion of wholesalers and increasing distribution costs, making it hard to meet rate bases for advertisers. Legislation on a “do not mail” option can severely affect Time’s revenues from direct mail. Because the information on publishing was less than the company’s other sectors, I wonder if it is being somewhat neglected. I was surprised that the 10-K didn’t report on Time’s online efforts. Unlike News Corporation, Time is lucky that most of its publications are major magazines which don’t seem “foldable” quite yet, so this may explain the neglect.
REGULATIONS
Though the 10-K reported on the potential effects of regulations, I felt that the company treated these factors as a separate entity rather than really integrating them with their improvement efforts in 2009. Several regulations that could significantly affect the company’s practices and revenues are pending. Under the Communications Act and FCC Regulations, local commercial television broadcast stations every three years elects a cable company to carry its channels (“must carry”). A cable system with more than 36 channels must designate a portion of it to third parties. The Communications Act allows for negotiation for the amount of cable’s public, educational and government programming. The FCC, however, has not been receptive to net neutrality (networks limiting access to certain content and websites). Other ongoing regulations to be dealt with include the switch from analog to digital television, product placement policy and marketing regulations. If anything, these regulations could serve as indicators of future trends to look out for.