AOL to address tough questions

It's showtime for AOL Time Warner on Tuesday, when the company is scheduled to present investors with its latest sales pitch regarding its troubled America Online unit.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
It's showtime for AOL Time Warner on Tuesday, when the company is scheduled to present investors with its latest sales pitch regarding America Online.

Billed as an "update" for Wall Street, the event is expected to give AOL executives a chance to address a handful of problem areas that have drained investor confidence in the media giant's once-highflying Internet division. But despite a new management team and a renewed promise of change, the company may have a hard time convincing skeptical analysts that there's more to the performance than another song and dance.

"Clearly, we believe much of the company's management credibility resides in their ability to right this division," wrote Merrill Lynch analyst Jessica Reif Cohen in a note to investors. "Unfortunately, since the merger, the AOL division has consistently overpromised and underdelivered."

Tuesday's presentation will be a crucial test for AOL Time Warner, which has stumbled badly following the high-profile marriage of the world's largest Internet service provider and the world's largest media company. Buffeted by declining revenues and questions over its accounting, the AOL division is widely seen as the main culprit for a nearly 60 percent decline in the company's stock price in recent months.

AOL's new management team, lead by CEO Jonathan Miller, will present its plans to plug AOL's leaks and restore the division to its former luster. The meeting will also involve AOL Time Warner's top brass, including Chairman Steve Case, CEO Richard Parsons and Media and Communications Chairman Don Logan.

Other AOL executives slated to join Miller include division Vice Chairman Ted Leonsis, broadband chief Lisa Hook, international head Michael Lynton and Vice Chairman Joe Ripp.

Wall Street expects the group to address a number of hot-button issues, including the following:

• Online advertising. In October, Miller announced the AOL service would phase out pop-up ads as part of the new AOL version, 8.0. Miller explained the move as a way to improve AOL and pacify annoyed subscribers. The bigger issue will be how Miller plans to change online advertising on future versions of AOL. He has hinted the service will find new "contextual" ways to advertise.

• Subscriber growth. The October financial quarter showed flat subscriber growth from the previous quarter. AOL, the largest Internet service by far with 35.3 million subscribers, must find ways to prevent defection to competitors such as Microsoft's MSN and broadband services offered by phone and cable companies.

• Exclusive content. One way to keep subscribers will be to offer them perks found nowhere else. AOL has been hinting that it plans to offer exclusive content from other AOL Time Warner properties, such as its magazine, film and music divisions, to lure people to sign up.

• Broadband. AOL has found itself in a tight squeeze. Deals to distribute AOL onto a major cable network such as AT&T Comcast mean thin profit margins. Meanwhile, dial-up subscribers graduating into home broadband access are turning to cable and phone companies. Some analysts expect AOL to promote its "Bring Your Own Access" plan, which charges people less to access AOL from a different broadband network.

Analysts see the many changes going into effect in the not-too-distant future.

"We expect management to offer a sober outlook for the AOL business, emphasizing that the company is seeking to evolve a new strategy over the coming year," wrote UBS Warburg analyst Christopher Dixon in a note to investors.

From jewel to cubic zirconium?
Investor perception of AOL has indeed changed since the merger between the companies closed in January 2001. Executives and Wall Street alike heralded the birth of a new breed of media company, capable of harnessing the Internet to inject new life into traditional businesses. Executives, including former CEO Gerald Levin and former co-Chief Operating Officer, Robert Pittman, adhered to aggressive financial targets for the company's first year of existence despite signs of an advertising recession.

By the end of the year, trouble began to brew when the company retreated from its financial goals. By December 2001, Levin announced he would retire, and he chose co-COO Richard Parsons as his successor over Pittman.

In January 2002, the company reported it missed its original financial targets, citing the economic slowdown. This was also the first time AOL began to show weakness, reporting a 27 percent revenue decline in its advertising and commerce business from the previous year after factoring out advertising dollars received from other divisions.

AOL's situation has deteriorated to the point that AOL Time Warner recently announced it would restate earnings by $190 million because of improperly accounted deals at the division.