Time Warner rethinks Net spinoff to staff's dismay

Executives at Time Warner's Entertaindom Web site met yesterday to examine ways to overhaul a stock option plan for employees of the site, CNET News.com has learned. No final decisions were made, according to sources familiar with the discussions.

According to a Time Warner spokesman, the company is not planning to spin off any of its digital businesses any time soon. But the possibility has been under discussion since the formation of Time Warner Digital Media.

Warner Bros. spokeswoman Barbara Brogliatti confirmed that a meeting was held with department heads to "talk about plans of going forward with Entertaindom." But she declined to comment on anything dealing with employee compensation.

Still, sources said Entertaindom employees are upset over the development, which could mean the end of a potentially lucrative stock plan tied to an Internet IPO--a key part of the compensation package aimed at recruiting high-tech help for the venture, germinated under Time Warner Digital Media less than six months ago.

The decision to sidestep a possible IPO of Entertaindom is not surprising, given Time Warner's pending merger with America Online. With the largest Internet company behind it, the desire to create Internet valuation seems muted.

The strategic shift in Entertaindom's future underscores the latest in a string of problems that have gripped Time Warner's Internet strategy. The media giant has made many attempts to extend its offline influence to the Web but has ended up retreating from battle bloodied.

Some employees said they are willing to ride out the latest storm.

"People are trying to be positive," said one Entertaindom employee who requested anonymity. "I think a lot of people put their heart and soul into this site, and you're not going to see this thing fold."

Although the final plans have not been worked out and the company may yet offer generous rewards, several executives and a team of the site's technicians are already considering leaving en masse, sources said.

"Time Warner Digital Media was formed to attract and retain employees," said one Time Warner executive who requested anonymity. "They realized they had to have a different kind of compensation package."

According to a document forwarded to CNET News.com, Entertaindom employees were originally presented with a stock option program that offered them equity at a fixed price. Dated Dec. 20, 1999, the document stated that employees were offered options priced at $7.55 a share based on a $200 million valuation of Entertaindom. In addition, the document added it would "anticipate an IPO within 12 to 18 months, but no guarantee."

The plan also included a provision in which Time Warner would buy back the commensurate amount with its own stock. But the terms of this provision may also be revised, according to sources.

Tentative replacement plans include giving employees Time Warner stock over a three-year vesting period as well as a restricted period during which options will not vest for five years, sources said.

Executives at AOL and Time Warner are trying to shape the perception that the company's combined stock will continue enjoying the high-growth valuation of an Internet asset. Issuing other Internet currency would distract investor attention from the primary assets under the merged company, according to Time Warner sources familiar with the decision.

"AOL Time Warner wants to show high growth. If they are spinning out the highest-growth entity, what will that do to the growth of AOL Time Warner?" said one Time Warner source who requested anonymity. "What's the signal you're sending to the Street?"

Regardless, the pullback of a possible Entertaindom IPO may harm the company when it comes to attracting much-needed talent to create content on the Internet.

Time Warner's first foray into the Web was its long-beleaguered pre-portal site, Pathfinder. The site was an attempt to combine all of Time Inc.'s publications, such as Time magazine, Entertainment Weekly and Sports Illustrated, into one megasite. But abysmal revenues, a slew of executive departures, and the heightened popularity of Web portals such as Yahoo, Lycos and MSN eventually caused the company to shutter Pathfinder last year.

The end of Pathfinder followed another strategic shift. In an attempt to centralize its Internet initiatives, Time Warner created a digital media division to jump-start its strategy to develop a handful of Web "hubs." These hubs would filter Time Warner content into specific topics, such as news, sports, finance, lifestyle and entertainment.

To date, only Entertaindom has launched as part of this hub initiative. And with the pending merger with AOL on the horizon, questions remain surrounding the place of Time Warner Digital Media.

Entertaindom was launched in November 1999 as Time Warner Digital Media's entertainment hub. The site combines original programming with Time Warner-branded content, such as articles from Entertainment Weekly and "Superman" cartoons. The site had 1.3 million unique visitors in its first month, according to an Entertaindom statement citing research firm Media Metrix.

But since AOL announced it would acquire Time Warner, the focus of Time Warner Digital Media has changed. The division has stepped back in directly managing Entertaindom and instead has folded the site back into its Warner Bros. subsidiary. As a result, the desire to pursue an IPO for its smaller Internet entities remains chilled.

"Our merger with AOL turbo-charges our digital media efforts," a Time Warner spokesman said. "Time Warner Digital Media is working closely with AOL to integrate our digital businesses and to ensure that our digital resources and assets are managed with a concerted, coherent strategy."