AOL Time Warner's Crown Jewel

No, it's not a marquee media property. It's the 130 million subscriptions to its wide range of offerings

By Scott Kessler

When I was a young staffer on Capitol Hill several years ago, I had the chance to work on two pieces of legislation that forever changed the world of technology. One has promoted competition and innovation in various communications markets through deregulation. Another has helped free technology companies from the blackmail of class action securities lawsuits.

And that's also when I had my first professional contact with the leaders of America Online and Time Warner, some of whom are now running the newly-combined AOL Time Warner (AOL ). Back some six years ago I never would have guessed that the purveyors of America Online, CNN, CompuServe, Netscape Navigator, and Time magazine, which were all owned by separate companies at that point, would eventually join together to form the world's largest media company.

And large it is. After attending the AOL Time Warner Investor Day on Jan. 31, I found myself thinking of a way to make some sense of this massive and complicated company, with businesses as different as cable systems, magazine publishing and Internet access. "What is AOL Time Warner's most valuable asset?," I asked myself. It occurred to me that the answer might very well be found in my monthly bills. AOL, Time Warner Cable, HBO, magazines...

Hmmm. My question might be best answered with just one word: subscriptions.

SUBSCRIPTION MAVEN. At the end of 2000, AOL Time Warner had 130 million subscription relationships that directly accounted for $14.7 billion (41%) of the company's pro forma revenue. Here's how it broke down:

AOL Time Warner's Subscribers
Magazines 49 million
HBO and Cinemax 37 million
America Online 27 million
Time Warner Cable 13 million
CompuServe 3 million
RoadRunner 1 million

These relationships also contributed significantly to the $8.7 billion (24%) in advertising and commerce revenues the company generated in 2000. It seems that subscriptions may the company's single most valuable asset.

Time Inc., the foremost creator of publishing brands, puts out 64 magazines, including four of the nation's top five consumer magazines: People, Time, Sports Illustrated and Fortune.

Home Box Office is the most successful premium television network in the U.S. by a number of measures: operating performance, awards, ratings, critical acclaim, and subscribers. Its HBO and Cinemax services are the two highest-rated pay channels on television.

America Online is the world's leading interactive service, offering its members convenient and easy-to-use online features and content. AOL members average about an hour online daily, indicating the importance of the service to their everyday lives.

Time Warner Cable owns and manages one of the most advanced, best-clustered cable systems in the country. By the end of 2000, 92% of its cable plant was upgraded to facilitate its deployment of digital services.

CompuServe is one of the leading value Internet access services.

RoadRunner is a jointly-owned high-speed online service that is number two in its category.

SELF-PROMOTION. When two companies announce a merger, they always talk about the benefits of the combination, particularly revenue synergies. America Online and Time Warner were no different. However, they have not only talked the talk, but have already walked the walk. Keep in mind that the companies were still independent entities last year, as the merger was completed only a few weeks ago.

The two firms indicated they had significant cross-marketing opportunities. They were absolutely right. In 2000, America Online promoted Time Inc.'s magazines and helped generate more than 800,000 gross subscriptions. Over 80% of these new subscriptions were payable by credit card, which provides a greater ability to raise rates and secure renewals.

During the summer of 2000, America Online promoted the Warner Bros. movie The Perfect Storm. Not only did the movie's website receive an unbelievable 268 million hits during the one-week pre-opening ad blitz on AOL, but the film also reached $100 million at the North America box office in just 10 days. The movie grossed a whopping $182 million in last year.

Warner Music Group and even Time Warner Cable have also reported notable results by utilizing America Online as a marketing platform. And, AOL has begun to market itself in conjunction with Time Warner properties. Compact discs with its software have been included with Time Inc. magazines and Time Warner Cable has started trying to help sell subscriptions to the America Online service.

These joint-marketing efforts have been extremely successful in large part because of the size and loyalty of the involved subscriber bases.

AD POWERHOUSE. That AOL Time Warner has done a good job at promoting its own properties strongly suggests that other companies could benefit significantly from marketing to the combined company's subscribers. According to the Myers Group, America Online and Time Warner individually were the two most attractive partners for long-term marketing relationships.

Together, they offer an unparalleled ability to reach consumers in a variety of meaningful and innovative ways. As a result, the combined company recently announced multi-brand promotional relationships with Cendant, Compaq, PurchasePro and Nortel Networks. Of the top 100 marketing clients of AOL, Time Inc. and Turner Broadcasting, only 5 are shared among all three - and AOL Time Warner sees great opportunity to win additional advertising business, even in the face of a weakening economy.

Again, it is the possibility of winning AOL Time Warner subscribers that greatly appeals to new and existing marketing clients.

SPINNING MONEY. As AOL Time Warner Co-COO Bob Pittman says, "Consumer relationships are the company's building blocks of value." In addition to its 130 million subscribers, the combined company has 266 million Internet users, 250 million magazine readers, 1.4 billion weekly television viewers and 50 million video viewers. AOL Time Warner touches customers over 2.5 billion times per month. It's the company's ultimate opportunity and challenge to monetize these interactions.

There are basically three ways to go about doing this: 1) through subscriptions, 2) using strong relationships to sell additional products and services, and 3) renting these relationships to third parties via advertising.

It is our belief that notwithstanding a slowing economy, AOL Time Warner will increase its subscriber base and succeed at monetizing its customer relationships. During tougher economic times people tend to spend more time at home, where most of the company's billions of monthly touches take place. In addition, during fiscal slowdowns advertisers tend to gravitate to the big and established media players like AOL Time Warner. They also become more interested in efficiencies and high-productivity, which the company provides across its multiple properties, including the largest paying audience on the Internet. Lastly, of course, any unsold inventory can be used by AOL Time Warner to promote its own brands.

Thus, we believe that the company's base of subscribers is its most attractive asset. They contribute significantly to sales and growth, constitute a recurring revenue stream, and serve as the engine for incremental increases in advertising and commerce sales. If AOL Time Warner becomes the world's first $1 trillion dollar (market cap) company, as Chairman Steve Case hopes, it will do so only as a result of its most valuable asset -- its subscribers, including yours truly.

Kessler is an equity analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.