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Time Warner

Strategic Plan Report

Team #2: Arthur Anderson, Johanna Delicana, Sianna Koleva, Brian Schneck, Blondell McCoyCox

Team #2: Arthur Anderson, Johanna Delicana, Sianna Koleva, Brian Schneck, Blondell McCoy ‐ Cox March 15,
March 15, 2007
March 15, 2007

Table of Contents

Context

3

Introduction

3

Company History

3

Divisions

4

AOL

4

Time Warner Cable

5

Warner Brothers

6

New Line Cinema

7

Turner Broadcasting System

7

Home Box Office (HBO)

8

Time

9

Industry

9

The Economy

11

SLEPT Analysis (Social, Legal, Economic, Political, Technological factors)

11

Mission Statement and Stakeholders

17

Mission

17

Stakeholders

17

Core Values

18

Objectives: Quantitative and Qualitative

19

Analysis and Quantitative Forecast of Industry and Company

20

Adaptability, 3 Questions

21

Effectiveness – Drucker’s Eight

22

Efficiency

25

Porter’s Analysis

34

Share Analysis (see appendix A)

38

Recommendations

38

Time Warner- Overall Objectives

38

Time Warner- Overall Strategies

38

Time

39

AOL

40

Filmed Entertainment Strategies

41

Time Warner Cable

42

Networks

45

Alternative Strategies

45

Appendices

50

Share Analysis (Appendix A)

51

Cash Flow Statement (Appendix B)

56

Balance Sheet (Appendix C)

57

Income Statement (Appendix D)

58

Schedule of Strategy Implementation (Appendix E)

60

(Schedule cont’d)

62

Bibliography

64

Context

Introduction

Time Warner is a leading media and entertainment company with businesses that include

interactive services, cable systems, filmed entertainment, television networks and publishing.

The company is headquartered in New York, New York and is publicly traded on the New

York Stock Exchange under the TWX ticker symbol. Time Warner is the world’s largest

media conglomerate, employing over 92,000 employees, and operating worldwide through

its seven divisions: America Online (AOL), Home Box Office (HBO), Turner Broadcasting

System, Time Inc, New Line Cinema, and Warner Brothers Entertainment.

The different divisions are among the leaders in their respective entertainment,

broadcasting or publishing sub-industries. Each of the divisions consistently wins prestigious

awards for excellence in the business, as well as awards for outstanding business

management. Some of the awards won by Time Warner’s divisions include Turner

Broadcasting System and HBO placing fifth and seventh on Diversity Inc.’s Top 50

Companies for Diversity in 2006, Time Warner’s 10 Academy Awards in 2007, 3 Golden

Globe awards for HBO in 2007, 2 Emmy Awards for Business and Financial Reporting for

CNN in 2006, 40 Emmy Primetime Awards for Time Warner in 2006, and many more.

Company History

Time Warner, as we know it today, is the result of many mergers and acquisitions. The

company’s history can be traced back to 1922, when Warner Brothers was established. The

company was later renamed to Warner Communications. Quantum Computer Services

launched what would become America Online’s services 1985. In 1991 Quantum Computer

Services changed its name to America Online, and went public in 1992. Meanwhile, in 1990,

Time Inc merged with Warner Communications to form Time Warner. Then in 1996 Time

Warner acquired Ted Turner’s Turner Broadcasting System. America Online acquired

CompuServe in 1998 and then Netscape Communications in 1999. Later on, in 2001,

America Online acquired Time Warner to form AOL Time Warner. The name was shortened

to Time Warner in 2002 in an effort to draw away attention from the enormous losses AOL

was reporting. There have not been any more significant mergers or acquisitions since 2001;

however Time Warner has been gradually selling off some of its business, such as Warner

Music Group in 2002, and Time Warner Book Group in 2006.

Divisions

AOL

AOL is a leader in the interactive services sub-industry. It operates a leading network of

web brands such as AOL, AIM, ICQ, MapQuest, Netscape, and Moviefone. The AIM/ICQ

instant messaging program is one of the biggest and most widely used in the world. In

December 2006, there were over 1.7 billion instant messages sent through it. AOL has 13.2

million subscribers (as of December 2006). Even thought the division has been trying to shift

revenue generation from subscription fees to advertising, monthly dial-up Internet

subscriptions still account for the majority of AOL’s revenue. AOL has recently started to

offer many of its traditionally paid-for services for free to anyone who has Internet access,

such as its email accounts. Some of the services which remain paid include online storage, as

well as safety and security products and services. In 2006 AOL expanded its strategic

alliance with Google. According to the terms of the agreement, AOL issued a 5% indirect

equity interest to Google for $1 billion in cash, and Google provided search services to the

AOL network. In an effort to cut costs and improve its financial performance, AOL sold a lot

of its European access businesses in 2006. Prior to 2006, AOL was a leading Internet access

provider in the United Kingdom, Germany and France. Also, AOL has been trying to market

its services in new, less traditional ways. The company has long-term agreements with

personal computer manufacturers for the installment of free trials of some of its services and

products on several brands of personal computers. AOL faces severe competition from many

companies, including Viacom Inc, CBS Corp, News Corporation, The Walt Disney

Company, NBC Universal, Yahoo!, Google, eBay, EarthLink, NetZero, as well as newer

enterprises such as Facebook, MySpace, and YouTube.

Time Warner Cable

Time Warner Cable is the second largest cable operator in the U.S. after Comcast with

services such as analogue and digital video, high-speed data and voice services, which are

marketed and can be bought separately and as bundles. Because the market for basic video

has matured, cable companies now offer many new services such as high definition television

(HDTV), video on demand (VOD), digital video recorders (DVRs), high-speed Internet

access, and digital phone. As of December 2006, Time Warner Cable has 13.4 million basic

subscribers, 7.3 million digital subscribers, 6.6 million high-speed Internet subscribers, and

1.9 million digital phone subscribers. The company’s subscriber base is highly concentrated

in five geographic areas. Eighty-five percent of all of the company’s subscribers are located

in the state of New York, North and South Carolina, Ohio, Texas, and Southern California.

Some of the services that Time Warner Cable offers include analogue and digital video plans,

‘Start Over’, HDTV, DVRs, high-speed data services, ‘Road Runner’ – high-speed Internet

access for residential customers, Time Warner Cable Business Class – high-speed Internet

access for commercial customers, and digital phone. ‘Start Over’ is a new service to be

offered in 2007 which would allow digital cable subscribers to start watching from the

beginning television shows which have already started, as well as pause, go back, and fast

forward them. In order to keep the revenue from advertising contracts, ‘Start Over’ will not

allow subscribers to fast forward or skip any commercials. Time Warner Cable also has

agreements with Verizon Communications Inc and Sprint Nextel Corporation for traffic

carriage and enhanced 911 service for its digital phone service. The company faces strong

competition from Comcast, Dish Network, and DirecTV for its cable and high-speed data

services, as well as Vonage for its digital phone service.

Warner Brothers

Warner Brothers is a leading producer and distributor of feature films. Its films are

produced under Warner Brothers Pictures, Castle Rock and Warner Independent Pictures

banners. It also distributes feature films to over 125 international locations. During the

2006/2007 season Warner Brothers released over 20 television series which were produced

by Warner Brothers Television Group. Titles of some recent full-length movies and TV

series include ‘Superman Returns’, ‘March of the Penguins’, ‘Nip/Tuck’, ‘The O.C.’, ‘Harry

Potter and the Goblet of Fire’, ‘Happy Feet’, ‘Batman Begins’, ‘ER’, ‘Lady in the Water’,

‘Poseidon’, as well as ‘Charlie and the Chocolate Factory’. In 2006 Warner Brothers released

twenty-eight original motion pictures, four of which were financed entirely by Warner

Brothers, with the rest being financed by or with others. Because the costs associated with

producing and distributing feature films has gone up significantly in recent years, and

because the filming industry has traditionally been characterized by a lot of volatility in

revenues and uncertainty regarding profits, many filming companies have started to enter

into co-sponsorship agreements with other companies. Warner Brothers has such co-

sponsoring agreements with Village Roadshow Pictures, Legendary Pictures, and Virtual

Studios. Warner Home Video is a division of Warner Brothers Home Entertainment. It

produces and distributes DVDs for home use with content material produced by various

divisions of Time Warner, such as Warner Brothers, New Line Cinema, HBO, and Turner

Broadcasting System. Warner Brothers is also a leading supplier of television programming,

which is distributed in over 200 countries and in over 45 languages.

New Line Cinema

New Line Cinema is a leading independent producer and distributor of theatrical motion

pictures. In 2006 it released eleven feature films. Just like Warner Brothers, New Line

Cinema also has co-financing agreements, most notably with the Royal Bank of Scotland.

One of New Line Cinema’s biggest successes to date is the ‘Lord of the Rings’ trilogy which

generated $2.9 billion in worldwide box office receipts. Other than the ‘Lord of the Rings’

trilogy, New Line Cinema also recently produced ‘Wedding Crashers’, ‘Monster-In-Law’,

‘Final Destination 3’, and ‘The Number 23’.

Turner Broadcasting System

Turner Broadcasting System is a leading U.S. network operator, provider, and producer.

It operates TBS, TNT, Cartoon Network, Turner Classic Movies, as well as Boomerang,

CNN, Headline News, and CNN International. Many of these networks are watched by over

70 million households and CNN International is broadcast in over 200 countries. The

company generates its revenues by a mixture of advertising and monthly subscriber fees paid

by cable system operators, hotels or other affiliates which have contracts to receive its

services. Turner Classic Movies is an exception because it is commercial-free and therefore

all revenues from this network come from subscription fees by the affiliates. Turner

Broadcasting System’s networks are some of the most-watched among different age groups

in the U.S. TNT was advertising-supported cable’s number 1 network in prime time with

adult viewers in 2005. Also, in the same year TBS was number 1 with younger adults and

Cartoon Network was number 1 in prime time with children. Furthermore, CNN aggregates

about 2 billion audience impressions a day worldwide, which makes Turner Broadcasting

System a leading network provider worldwide.

Home Box Office (HBO)

Home Box Office (HBO) is America’s most widely distributed pay television service. As

of December 2006, the company had over 40.5 million subscriptions for HBO and sister

service Cinemax in the U.S. The majority of the programming HBO offers consists of

recently released, uncut, uncensored motion pictures. Some of the services HBO offers

include high definition TV (HDTV) channels, as well as video-on-demand (VOD). HBO also

produces and distributes award-winning drama and comedy series, movies, and mini-series.

Titles of some of the recent popular HBO programs include ‘Curb Your Enthusiasm’, ‘The

Sopranos’, ‘Rome’, and ‘Entourage’. HBO generates revenue mainly by subscription fees

from the affiliates for the delivery of its services. It also licenses its original production to

basic cable channels. Examples of that include the very popular ‘Sex and the City’ and ‘The

Sopranos’ series. HBO has a strong international presence as its programming is sold in over

150 countries. Furthermore, HBO-branded services are available in over 50 countries in Asia,

Europe, and South America. HBO’s production has consistently been recognized for its

excellence and innovation. Some of the more recent awards won by HBO include twenty-six

Emmy Primetime Awards in 2006 (more than any other network), seven Emmy Sports

Awards in 2006, and three Golden Globe Awards in 2006.

Time Inc.

Time Inc. is a leading publishing company which publishes over 145 titles worldwide

which are sold in over 100 countries. The company targets a very broad consumer market,

from sports fans to business professionals. Some of its more popular magazine titles include

‘Time’, ‘People’, ‘Sports Illustrated’, ‘Popular Science’, ‘Essence’, ‘InStyle’, ‘Fortune’,

‘Money’, ‘Life’, ‘Now’, ‘Real Simple’, and ‘Entertainment Weekly’. It also operates several

very popular websites, such as ‘CnnMoney.com’, ‘SI.com’, and ‘People.com’. Time Inc.’s

magazine production and distribution tend to be centralized. For example, most of the U.S.

magazine activities are administered from Tampa, Florida. In terms of revenues, ‘People’

generated about 15% of Time Inc’s revenue in 2006 and is the company’s biggest single

revenue source.

Industry

Time Warner is classified as being in the diversified entertainment industry. More

specifically, it operates in the media, publishing, cable services, high-speed data services, and

filmed entertainment. All of these industries are characterized by severe competition from a

variety of companies, such as Viacom Inc, CBS Corp, News Corporation, The Walt Disney

Company, NBC Universal, Yahoo!, Google, eBay, EarthLink, NetZero, Facebook, MySpace,

YouTube, Vonage, Comcast, and Microsoft. Also, because of the nature of the industry,

competition also comes from a variety of websites, motion picture producers, and publishing

companies which all compete for the consumers’ attention and money.

The industry’s performance is positively correlated to the general economic

conditions. When the economy is strong, people have more disposable income and tend to

spend more money on entertainment, media and communications products and services. And

vice versa, when the economic conditions are weak, people tend to spend less on this type of

products and services.

Overall, the industry environment that Time Warner operates in is highly competitive and

very volatile.

In recent years, the company’s returns (TWX) have been lagging behind market averages,

as illustrated in the graph below which shows the company’s returns plotted against those of

the S & P 500 (^GSPC), the Dow Jones Industrial Average Index(^DJI), and the NASDAQ

Index (^IXIC) (http://finance.yahoo.com):

P 500 (^GSPC), the Dow Jones Indus trial Average Index(^DJI), and the NASDAQ Index (^IXIC) (http:/

The Economy

The U.S. economy for the next few years is extended to be strong, with steady

unemployment and interest rates. Furthermore, the consumer confidence expectations and

forecasts for 2007 are high, which would further translate into a healthy economy. This should

act favorably for Time Warner’s future performance, as the company does better when the

general economic conditions are strong.

SLEPT Analysis (Social, Legal, Economic, Political, Technological factors)

Social

As consumers have become increasingly exposed to a wider variety of media,

entertainment and communications outlets, their demands of such goods and

services have grown as well. Media companies have began consolidating their

service and product offerings, and society is shifting for towards a demand for an

all-in-one service provider; in the near future consumers will be able to do far

more than simply watch TV with their remote control.

The U.S. population's demographics are changing and so are its needs. As the

baby-boomers, which constitute a big proportion of the U.S. population, are

reaching retirement age, they would have more free time and a much higher

demand for entertainment. This would position the entertainment and media

industries well for their future performance and should help companies in these

industries experience increased revenues.

Legal

Media and communications industries have always faced substantial regulation,

from the FCC to consumer protection legislature. As a diversified media and

entertainment conglomerate, Time Warner faces much of this burden; more

specifically, a company that provides its customers internet, cable, and phone

services must avoid antitrust lawsuits by being careful in how they tie their

products in. In addition, accounting practices are heavily regulated by the

Securities and Exchange Commission. There was recent incident with Time

Warner having to settle a $105 million lawsuit to the California State Teacher’s

Retirement System and $405 million lawsuit brought on by its shareholders

concerning accounting problems at AOL. T.W. just paid out $260m in the last of

AOL lawsuits to Univ. of California.

According to the most recent annual report, during the fourth quarter of 2006, the

company established an additional reserve of $600 million, bringing the total

reserve for unresolved claims to approximately $620 million as of Dec. 31, 2006.

During February 2007, Time Warner reached agreements in principle to pay

approximately $405 million to settle certain of the remaining claims. As of

February 22, 2007, the remaining reserve of approximately $215 million reflects

the company's best estimate, based on the many related securities litigation

matters that it has resolved to date, of its financial exposure in the remaining

lawsuits (which it plans to defend itself against).

Time Warner is currently under litigation investigation by the SEC following the

putative class action and shareholder derivate lawsuits which alleged violations of

federal and state securities laws and regulations and breaches of fiduciary duties

by some of its current and former top executives.

Piracy of any of the Time Warner's content productions is associated with

decreased revenues. Some countries in which the company operates have

weaker/inefficient laws regarding protection of intellectual property, which

exposes the company to an increased risk of losses due to piracy.

Economic

Media and entertainment companies' performance tends to be positively related to

the general conditions in the economy. This is so because as people have more

disposable income, their demand for media and entertainment services and

products increases. 2007 is expected to be a year with a strong domestic economy

and the forecasts for the next few years are also suggestive of strong economic

conditions. This would position companies in the media and entertainment

industries to perform very well in the next few years.

As recent innovations in the media/entertainment industry (such as digital cable,

HDTV, TiVo, etc.) become more commonplace in consumer households, the

demand for lower costs increases. However to stay ahead of the curve, firms must

invest substantial amounts of capital into the infrastructure, research and

development, and integration of the communication and media technology of the

future. While people seem to be bracing new media (blogs, podcasts, self-made

videos, YouTube, MySpace, iTunes, online technology), old media like radio,

television, newspapers, and magazines seem to be on the downward slope.

However, that’s not to say that a media meshing of these can’t be done. Media

meshing is a good way for a company to allocate its resources to save initial costs

and promote communication within its businesses, and levering on their strengths.

There are many opportunities to mesh new media and old media together that

would be economically successful on Time Warner’s part. An example of this

includes AOL’s IN2TV.com, where television shows and films copyrighted by

Warner Bros. could be seen for free online instead of buying them on DVDs or

other forms of media.

Political

Time Warner faces significant political risk associates with the sovereignty of the

countries where it operates. Political instability and volatility in one or more of the

countries where Time Warner operates could mean large financial losses in lost

revenues.

Time Warner is a U.S. based public company and as such it is required to disclose a

lot of financial and operational information to the public. This puts the company

under a lot of scrutiny and pressure to meet the expected returns calculated by

analysts. This pressure could lead the company to focus on meeting short-term goals,

such as achieving certain short-term profitability ratios, instead of focusing on its

long-term goals.

Technological

Several of Time Warner's divisions operate in highly competitive, consumer-driven

environments characterized by rapid technological change. In order to remain

competitive, the company needs to keep up with the ever-changing technology. The

success of the company depends significantly on its ability to exploit and implement

new technologies in a timely manner so that it distinguishes its products and services

from those of its competitors.

Firms such as Time Warner have had extreme technological advantages, as their

existing infrastructure has allowed them to easily roll-out newer technologies such as

digital video and voice transmissions over existing lines. However, new technologies

such as fiber optics prove to be a difficult obstacle, as firms must find feasible ways

of implementing a new technology. Even worse, with today’s dynamic and quickly-

evolving marketplace, it becomes even more difficult to discern which technologies

will revolutionize the company and/or industry, and which will simply be fads. With

the recent spin off of Time Warner Cable, Time Warner may be able to put their

focuses on this company as innovative technologies for the cable industry is great. In

addition, these new technological innovations provide many opportunities for

acquiring companies that bring success to these new fads. Technological advances

online has also great changed the advertising, customer usage, and production of

online content and entertainment.

New websites with high entertainment value are being creating that attract millions

and millions of users. Time Warner is not keeping up with this new standard in

entertainment. Their online portal, AOL.com, is losing viewership every month.

Mission Statement and Stakeholders

Mission

Increase shareholder value

Stay ahead of the technology curve

Continually strive to improve the various segments of our businesses

Look for opportunities in new and emerging diversified media and entertainment markets

Provide an environment for employees that fosters creativity and problem solving

Be socially responsible by giving back to communities in which we operate.

Stakeholders

Internal

o

Employees: Employees are the backbone of any business, and with Time Warner

having 92,700 they are no exception. One of their core values is diversity in their

workforce, and they try to attract and develop the best talent in the world.

o

Investors: As with any business, investors require a certain rate of return from

their investment. If management is not doing what investors feel is in the best

interest of the company, then management will hear about it. This was case On

February 7, 2006, a group led by corporate raider Carl Icahn and Bruce

Wasserstein unveiled a 343-page proposal calling for the breakup of Time Warner

into four companies and stock buybacks totaling approximately $20 billion. On

February 17, 2006, the Icahn-lead group agreed with Time Warner to not contest

the re-election of TW's slate of board members at the 2006 shareholders meeting.

In exchange for the Icahn group's cooperation, Time Warner will buy back up to

$20 billion of stock, nominate more independent members to the board of

directors, cut $1 billion of costs by 2007, and continue discussions with the Icahn

group over their proposal.

Influential

o

Society: The needs of society are ever changing, and Time Warner has to stay

 

abreast of these needs. Also, the reputation of the company in the eyes of society

can either help or hurt the company.

Transactional

o Customers: Through Time Warner’s various business segment’s, there are many

different types of customers. These range from consumer’s buying products such

as magazines and dvds, to subscribers of their cable, internet, and phone services,

to businesses licensing their various movie and television products. By having so

many different types of customers, Time Warner has to make sure they determine

the various needs of each type of customer and figure out how to solve those

needs.

Core Values

Creativity

o

We thrive on innovation and originality, encouraging risk-taking and divergent

 

voices.

Customer Focus

o We value our customers, putting their needs and interests at the center of

everything we do.

Agility

o

We move quickly, embracing change and seizing new opportunities.

Teamwork

o

We treat one another with respect—creating value by working together within and

 

across our businesses.

Integrity

o

We rigorously uphold editorial independence and artistic expression, earning the

 

trust of our readers, viewers, listeners, members and subscribers.

Diversity

o

We attract and develop the world's best talent, seeking to include the broadest

 

range of people and perspectives.

Responsibility

o We work to improve our communities, taking pride in serving the public interest

as well as the interests of our shareholders.

Objectives: Quantitative and Qualitative

Qualitative: remain the biggest media conglomerate in the world, increase market share for

Time Warner Cable; improve quality of service for digital phone and cable;

Quantative: increase revenues for Time Inc, Warner Brothers and New Line Cinema by at least

Analysis and Quantitative Forecast of Industry and Company

2007 and next couple of years the United States are expected to see a strong economy.

Entertainment and communications companies usually do perform very well during such

economic conditions. This is mostly due to the fact that as people have more disposable income

and therefore can afford to spend more on entertainment and communications products and

services, which are not considered basic needs. Therefore, the projected average annual sales and

net income growth rate for the entertainment industry would be between 5 and 10 %. Because

Time Warner has diversifies divisions, some of them could actually perform better then the

industry average, which would give Time Warner a combined growth rate of above 10%,

pushing Time Warner ahead of the industry average.

If 2007 actually turns out to be a year with normal economic conditions, Time Warner

and the entertainment industry would not perform as well, but it would be unlikely that they

would be making losses. During normal economic conditions, the growth rate for the

entertainment industry would probably be around 5%. Because Time Warner has the benefit of

diversified divisions, it would expect a growth rate of about 7%, slightly above industry average.

Finally, if 2007 turns out to be a year with weak economic condition, or a recession, the

entertainment and communications companies are very likely to experience a much harder time

generating growth. Under such economic conditions, the industry would probably have changes

in revenues of about negative 5 to 10%, depending on the severity of the recession, and profits

would probably change by about negative 5%. Under such conditions, we would expect Time

Warner to report a decrease in combined net sales of about 5%, and no change or a slight dip in

profits, because the company has diversified divisions which could offset the harsh economic

conditions (for example, Time Inc would probably still be profitable under weak economic

conditions).

Adaptability, 3 Questions

What business are we in?

Time Warner Inc. is in the media conglomerate industry. Its businesses involve anything that has

to do with entertainment. This includes television, film, internet, and printing. Its businesses are

spread apart to cover any aspects that would entertain people. Its film and television networks

businesses are doing very well and they are the top of their industry. However, their internet and

publishing entertainment has been struggling due to their late start-up and fledging business

coming from AOL and uncontrollable consumer trends with the Time Inc. business.

What business will be in?

Time Warner Inc. will most likely continue to stay with its current businesses. They have so

many products per business that it would be hard to divestiture many of them. Media

conglomerates tend to stay with media. Since, Time Warner has covered all of the aspects of

media, then they are most likely to stay with what they have, disposing of only some fledging

products. The focus of the type of media might differ as consumer trends tend to influence what

is shown on television, film, internet, and magazines. Other than that, there really is no reason

for Time Warner to divert to another type of business.

What business should we be in?

Time Warner has been at the top 5 of media conglomerates in the world. They've been successful

with what entertainment they've produced. Time Warner is where they should be. Although their

AOL business has not been doing well (disposing of AOL access in Europe and China), Time

Warner has done considerably well in leveraging its strengths to offset AOL's weaknesses. They

should continue to do this and focus on other things that could turn its AOL business into a

bigger success than when they had bought it. While Time Warner's CEO is soon to be replaced

(his contract is expiring), the change in management should not deter Time Warner from its

current businesses. If anything, it should bring them up to where they should be. Jeffrey Bewkes,

the President of Time Warner, is next in line, and as he's known to bring in his entertainment

background, he should be able to raise Time Warner's quality of entertainment to a higher degree

that could bring in more customers and revenues to its businesses.

Effectiveness – Drucker’s Eight

Market

To increase the # of subscribers for TWC, Time Warner should improve its current Triple

Play bundle

Internationally, AOL as a content and e-mail provider still has the opportunity in foreign

markets to focus on and increase the children and teenager as well as families markets

Other international markets that haven’t be reached could expand by way of joint

ventures in its Turner Broadcasting Inc., HBO, Warner Bros. Entertainment, and New

Line Cinema Corporation

Time Warner should anticipate Time Inc. to shed magazine titles as the market for the

publishing industry is decreasing

Innovation

 

Innovation through technology could be added to its current products from AOL and

 

Time Warner Cable

 

Capitalizing on innovations from small media companies, who’ve had a successful track

 

record or show a promise for increasing growth, can be done by acquisitions,

partnerships, and joint ventures

 

Prioritize on innovations that are in the initial stages of development

Time Warner Cable should implement its successful video on demand feature, interactive

 

TV, and new-value added services for high speed data within the next couple of years

Profit

Continue to decrease costs by $1 billion across businesses in 2006 and 2007 to increase

 

profits

 

Revenues rose 4% over 2005 to $44.2 billion, reflecting increases at the Company’s

 

Cable and Networks segments ; add on to these increases by 5-10% yearly

Societal

Increase its contributions to its employees through workshops and work development

programs

Increase in cash and in-kind contributions to support their community by implementing

socially responsible programming, achieving journalistic integrity, and encouraging

diversity in its investments by 25% within the next 5 years

Human Resources

Reshuffling of employees may be needed if Time Inc. sheds some magazine titles that

would create more jobs in the online industry market

Other online technology jobs for website development, programming, site maintenance,

and support would be created to create online sites

Time Warner, CEO, Dick Parson’s contract will expect on 2008 which spur on rumblings

of his successor, many believe it’s Time Warner’s President and COO, Jeffrey Bewkes

which could change the organization’s structure, somewhat

Financial Resources

Discontinued operations can contribute to Time Warner’s ability to provide cash for other

financing activities. It is recommended for Time Warner to do this in the upcoming years,

mainly in the Time Inc. business

Material Resources

Shedding off material resources from AOL and/or Time Inc. that could gain some capital

should be done to allocate resources elsewhere throughout the company

Time Warner’s film segments will need to deal with the challenges coming from the

evolving environment of digital distribution

Businesses should collaborate with Time Warner Cable to a find more opportunities and

types of entertainment that would be beneficial to its markets

Productivity

Increasing productivity by 15% in the film and television industries would be merited

based on viewership, advertising dollars, and quality not quantity

TWC should aim to increase productivity by spreading to new geographic locations

Time Inc.’s productivity in their online version of its magazines should increase by

having up-to-date information

Efficiency

To address Time Warner’s efficiency standards for its future objectives, Time Warner

should be able to efficiently produce television shows and films, producing more top quality

shows and films, while spending less for its production and marketing. They could decrease the

costs of production and salary expenses and increase the benefits by improving consumer

spending on its products and gaining advertising revenues from those products. In terms of its

future divestitures, they should be able to compute the costs and benefits of them, making sure

those divestitures benefited the company in the long term. This can presently be seen through its

divestitures of AOL accesses in Europe and Asia. While they brought on some losses (of non-

operable expenses) brought on in the short term, the benefits of cutting these and avoiding

expending valuable resources for these products in the long term could greatly outweigh the

costs. Time Warner should continue to efficiently focus its resources and guide them to the right

direction.

SWOT Analysis

Strengths

AOL Advertising

 
 

o

Revenues increased 41% for the year.

o

AOL is transitioning from a subscriber-based revenue model to an advertising-

 

based revenue model.

 

o

Reflected strong growth in display advertising, advertising run on third-party Web

 

sites generated by Advertising.com and paid-search advertising.

Time Warner Cable

 
 

o

Revenues increased 34% ($3.0 billion) for the year.

o

Adelphia Acquisition

 

On July 31, 2006 Time Warner and Comcast completed their acquisitions

 

of the assets of Adelphia Communications Corporation. This transaction

resulted in a net increase of 3.2 million basic video subscribers served by

Time Warner’s cable systems.

 

o

The year-over-year growth reflects the addition of the Acquired Systems, which

 

contributed revenues of 1.7 billion. There was 15% growth in the Legacy

Systems, which are the cable systems that Time Warner owned before the

acquisitions. Subscription revenues rose 34%, led by video revenue growth of

26%. There was also an increase in high-speed data revenues, up 38%, as well as

an increase in Digital Phone revenues of 16.3%.

AOL-Google Alliance

o Google paid $1 billion in cash for a 5% indirect equity interest in AOL. Under

the alliance, Google will continue to provide search services to AOL’s network of

Internet properties worldwide and will provide AOL with a greater share of

revenues generated through searches conducted on the AOL network. The

alliance gives AOL the opportunity to sell search advertising directly to

advertisers on AOL-owned properties.

Diversification of Businesses

o

Time Warner has businesses that can be classified into five different segments:

 

AOL, Cable, Filmed Entertainment, Networks, and Publishing. Through these

different segments they provide internet access, cable television, digital phone, an

online web portal, two movie production companies, multiple cable and pay

television channels, and a wide variety of magazines and publications. What this

diversity in business holdings does for the company is decrease the risk of any

one of their business divisions or businesses in having an overall negative effect

on the company. If for some reason their publishing division took a negative loss,

or the whole publishing industry took a negative loss, Time Warner still has other

various businesses to rely on to make up for those losses.

Digital Phone

o

With the Digital Phone service, Time Warner can offer customers a combined,

easy-to-use package of video, high-speed data and voice services, allowing them

to compete effectively against similarly bundled products offered by competitors.

o

Digital Phone is delivered over the same system facilities used by Time Warner

Cable to provide video and high-speed data service. Unlike internet service

providers, such as Vonage and Lingo, which utilize the Internet to transport

telephone calls, TWC’s Digital Phone service uses only TWC’s managed network

and the public switched telephone network to route calls, which Time Warner

believes allows it to better monitor and maintain call and service quality.

o Time Warner has agreements with Verizon Communications, Inc. and Sprint

Nextel Corporation under which these companies assist it in providing Digital

Phone service, delivering enhanced 911 service and assisting in local number

portability and long distance traffic carriage.

Intellectual Property

o

Labeled as “their most valuable asset”, much of their profit generation comes

from copyrights and ideas rather than physical sales. Because of all the different

media that Time Warner owns and has the rights to, they are able to license this

content to generate revenue.

Weaknesses

AOL Subscription service

 

o

Revenues decreased 14% for the year.

o

AOL is transitioning from a subscriber-based revenue model to an advertising-

 

based revenue model.

 

o

This resulted mainly from a decline in domestic AOL brand subscribers, which

 

related partially to AOL’s strategy, implemented in 2006, of offering its e-mail,

certain software and other products free of charge to internet users.

AOL-Time Warner Merger

o Time Warner is still being affected by the merger between AOL and Time

Warner. Post-merger, a goodwill write down was forced, causing AOL Time

Warner to report a loss of $99 billion in 2002 - at the time, the largest loss ever

reported by a company. Since then, the company has been trying to revive the

AOL brand as well as the company as a whole.

Branding of Cable, Internet, and Digital Phone services

o

Unlike rival Comcast, Time Warner has only begun to offer the three combined

 

services to their customers. They have had little marketing efforts thus far to find

new customers.

Adverse effects resulting from litigation

o During the Summer and Fall of 2002, 30 shareholder class action lawsuits were

filed naming as defendants the Company, and certain current and former

executives of the Company. The complaints alleged that the Company made

material misrepresentations and/or omissions of material fact in violation of the

Securities Exchange Act of 1934 claiming that the company failed to disclose

AOL’s declining advertising revenues and that the Company and AOL

inappropriately inflated advertising revenues in a series of transactions. Also,

certain lawsuits alleged that certain individual insiders at the Company

improperly sold their personal holdings of Time Warner stock, that the company

failed to disclose that the AOL-Time Warner merger was not generating

anticipated synergies, and that the company delayed writing down more than $50

billion of goodwill.

o What this meant for the company thereafter and even today is that there is still a

loss of confidence in the management of the company. If they are able to fail to

disclose information, what else are they capable of doing.

Opportunities

Sell their Internet and Digital Phone services to current Cable customers

 

o

Time Warner has approximately 11 million cable customers. Out of those

 

customers, 5.2 million use their internet service. Also, out of those 11 million

cable subscribers, only 1.4 million use their digital phone service. So as you can

see, there is a real opportunity for growth among current Time Warner cable

customers to sell them these other services.

Time Warner to have New CEO

 

o

This could either be an opportunity or weakness

o

However in the case of Time Warner, it really means that they have an

 

opportunity for change. By replacing Richard Parsons with someone different

who can bring “New Life” so to speak to the company, this person should be able

to make significant changes, which the old CEO could not have made.

New and increased popularity of alternative technologies for the distribution of

news and entertainment

o Internet

With Myspace, Facebook, and Youtube becoming so popular, Time

Warner really as to start developing similar content to stay with the current

trend.

Bring current traditional Time Warner news and entertainment to the

Internet. This will be shown later in our strategies section.

o Mobile Devices

Look to develop partnerships to gain entry into this market.

New and emerging markets

o

Technology

Digital Phone is a new and emerging market with lots of growth

 

opportunity

o

International

International expansion for Time Warner through their many different

publications, movies, and television channels has endless possibilities.

Threats

Comcast

o

Comcast is identified as a threat because of the way they have already branded

 

their three services, cable, internet, and phone, and have had a huge success

selling them. Also, they have advertised well to generate new business.

The Internet and New Technologies

o New websites such as Myspace.com, Youtube.com, and Ziddio.com, just to name

a few, are providing new types of entertainment that were not available before.

This is posing a threat on the traditional types of entertainment, such as print

publications, movies, and television. Time Warner predominantly consists of

traditional media, whereas what is becoming increasingly popular is these new

internet websites.

Copyrights and Piracy Issues

 

o

Because much of Time Warner’s profit generating comes form copyrights and

 

ideas rather than physical sales, they face a large risk of pirating and copyright

infringement issues. Their movie division is a large target and revenue lost due to

piracy issues can have a negative impact on the division’s bottom line.

Pending Securities Litigation and Consent Order with the SEC

 

o

In connection with the Company’s settlement with the SEC, the Company

 

consented to the entry of a Consent Order requiring it to comply with federal

securities laws and regulations and the terms of an earlier order. If the Company

is found to be in violation of the Consent Order, it may be subject to increased

penalties and consequences as a result of the prior actions.

 

o

During 2002 and 2003, many putative class action and shareholder derivative

 

lawsuits alleging violations of federal and state securities laws and ERISA, as

well as purported breaches of fiduciary duties, were filed against Time Warner,

and the results of these lawsuits are still being seen. In 2005, the Company

established a reserve aggregating $3 billion to settle future lawsuits, and of this

amount, only $215 million is left.

Economy with regards to Advertising-based Revenue

o AOL's transition from subscription based revenue to advertising increases their

risk if the online advertising market declines. Expenditures by advertisers tend to

be cyclical, reflecting general economic conditions, as well as budgeting and

buying patterns. If the economy became weak for one reason or another, this

could really threaten AOL’s advertising revenue.

International operations

o Many multinational companies face these same international risk:

Import or export restrictions and changes in trade regulations

Staffing problems

Stringent local labor laws and/or regulations

Political or social unrest

Longer payment cycles

Economic unstability

Seasonal volatility associated with business cycles

Currency exchange rate fluctuations

Porter’s Analysis

Barriers to Entry

In the world of telecommunications, an immense amount of time, capital, and equipment

(among many others) are required to establish a sufficient infrastructure and network. New

entrants can expect long lag times before becoming profitable, as it takes a substantial amount of

time before a subscriber base can be built to offset the costs of building and advertising a new

telecommunications service. Even worse, many non-cable competitors already have their

products installed on personal computers through manufacturer relationships—which makes it

even more difficult to reach the consumer.

Internationally, reduced purchasing power means that hi-tech telecommunications

devices are more impractical, despite the growing use of the internet. Where many countries

have few television sets and stations, it would be hard to imagine consumers paying more for

cable services. In addition, many providers have had extreme difficulties penetrating foreign

markets, as government regulations and a lack of the local knowledge required to launch any

form of media has ultimately caused the competition to pull out of foreign markets.

Despite these unfavorable conditions many firms have experienced success when

entering, mostly in niche markets; this has recently been accomplished through massive

advertising campaigns from companies that traditionally have no physical infrastructures (like a

cell-phone network, or VoIP services) and that compete by offering services or support that

existing competitors are perceived as doing poorly in.

Barriers to Exit

With such massive infrastructures that consist of expensive technological equipment, one

can imagine that this is quite difficult to dispose of. Because this equipment is valuable even if

the company that owns it is failing, many exits are characterized by divisions and/or acquisitions.

Internationally, an exit in one foreign country may have an extremely adverse effect on brand

image and reputation when trying to enter similar neighboring countries.

Rivalry among Competitors

Rivalry in the telecommunications industry is extremely intense and consumer-driven.

However, recent increases in the competitive, regulatory and technological environment have

altered the landscape, especially now that there is an increasingly abundant amount of alternative

and interactive media sources; nowadays the internet isn’t just for computers, the television isn’t

just for watching TV, and phones certainly aren’t just for calling people anymore. While joint

projects between competitors (mainly between cable providers and wireless providers) have

changed rivalry, competition in the industry is still largely dependent on each company’s ability

to develop, adopt, acquire and exploit new and existing technologies—but with the dynamic and

ever-changing environment, there is no guarantee that the invested technology will remain or

become the prevailing standard.

Power of Buyers

Traditionally the power of buyers has been extremely low—few competitors, relatively

high demand, locked-in contracts, and high cancellation and switching costs have all led to

favorable advantages for existing competition. In addition, new technologies have tied-in costs

for consumers—for example if you buy a PC, you probably need the internet; likewise if you buy

and HDTV, you’ll need to buy HD cable. However, buyer options have been expanding though

government deregulation and an increase in competitors throughout all technological industries

and media sources. With consumers and audiences experiencing more leisure and entertainment

time (and have found sources outside a magazine, newspaper, or TV), competitors have had to

alter their strategies to remain competitive and accommodate such changes, which ultimately

boosts buyer power.

Power of Suppliers

As mentioned above, the dominance of a few suppliers in the market has historically

reduced the power of buyers significantly. In addition to the relative control over buyers, few

companies truly have the required and necessary capital, technology, infrastructure and

knowledge to compete, which has strengthened the power of existing media suppliers. However,

several forecasted changes may sway the power into the hands of the buyer: the above-

mentioned changing consumer habits, more demanding customers, the possibility of stricter

regulation, and the perils of piracy and intellectual property infringement.

Availability of Substitutes

The availability of substitutes is extremely high, and will only continue to grow. The

prevalence of alternative media forms has been growing exponentially via the internet and other

digital and interactive media sources. This is even seen in other industry segments, mainly due

to the fact that the internet is becoming accessibly through a growing amount of non-PC devices.

As new technologies enter the market, we can expect to see even more new competitors.

Looking into the cable industry specifically, while there are relatively few competitors,

alternatives such as satellite cable have become more attractive as licensing agreements have

allowed them to offer far more exclusive programming (most notably in sports). But to the cable

companies’ credit, competitive alternatives have remained relatively low due to the face that

most regions only offer one exclusive cable provider.

Government Action

Domestically, the communications industry faces extremely stringent regulations from

the Federal Communications Commission. While local laws are less applicable, franchising fees

and state government also play a large role. While it seems that FCC regulation has been

extremely tight recently, analysts are worried that certain deregulations may completely change

the landscape and open the flood gates for tons of new competition. Internationally, government

action takes on an especially important role as there are varying international standards regarding

media content and free speech, as well as many host governments playing favorites when it

comes to their own domestic providers.

Share Analysis (see appendix A)

Recommendations

Time Warner- Overall Objectives

Maintain or expend the audience to the AOL Network and increase their activity

Increased ad revenues to balance out subscriber losses

Solidify domestic positions before entering to new foreign markets

Identifying prevailing new technology opportunities

Increase revenue by 20% yearly

Increase net income by 10% yearly

Increase profits by 12% yearly

Time Warner- Overall Strategies

These overall strategies could be used by many of its businesses. Some examples are listed

below. Then, specifically we cover strategies for each businesses.

Market Penetration- Time Warner should increase its market share for present products in

present markets through great marketing efforts. An example of this could be sponsoring

some sports celebrities to appear on their behalf.

Market Development- Time Warner should introduce present products or services into

new geographic areas. Its Time Warner Cable businesses should continue to expand to

geographic locations that they have not yet tapped.

Product Development- Time Warner could increase is sales by improving present

products or developing new ones. This could be taken by any of its businesses, mainly

the developing of new products for Time Warner Cable, as well as integrating them with

its AOL, television, and film businesses.

Joint Venture- Time Warner has been known for its joint ventures historically. They

could continue using this strategy in businesses where it’s appropriate.

Divestiture- It already started this strategy with AOL. Time Warner should continue to

use this strategy specifically with its Time Inc. business.

Time Inc.

As mentioned previously, Time Inc. needs to get rid of some of its unfocused and

unsuccessful magazine titles

Those that are in the borderline or are producing so-so numbers could be integrated

online as online magazines

AOL

Leverage and integrate new content from Time Warner’s other segments into the AOL

web portal

o

Integrate current content owned by Time Warner such as movies, print

 

publications, and television into the AOL web portal. By increasing the offerings

of AOL, their main online web presence, an increase in unique visitors as well as

an increase in advertising impressions per visitor should follow.

Transition current AOL subscribers to Time Warner high speed internet

o

As of December 31, 2006 AOL had 13.2 million access subscribers in the U.S.

 

AOL is transitioning from a primarily subscription-based business to an

advertising supported global web services business. This can be seen by their

recent agreements to sell much of their international subscriber businesses. For

this reason AOL should help the transition by offering it’s high speed internet to

current AOL subscribers.

Increase AOL Network’s offerings

o

The AOL Network currently consists of AOL.com, AIM, Mapquest, Moviefone,

 

ICQ, and Netscape. AOL should continue to develop and offer a variety of other

premium content, services and applications that appeal to high-speed and mobile

users. Also, acquisitions of other internet properties that could add value to

AOL’s current content offerings would be a good investment.

Create new partnerships with Computer and Mobile device companies

o Enter into new and extended deals to secure placement of AOL offerings on new

computers and mobile devices to distribute and promote its current products and

services. The new trend is accessing the internet and entertainment through

mobile devices, so AOL has to make sure it stays on top of this.

Increase International Web Presence

o AOL faces much competition from other international web portals. They should

look to acquire internet properties with an international presence to not only

increase their user-base, but also increase AOL brand awareness overseas.

Filmed Entertainment Strategies

Continue to enter into increased film co-financing arrangements

 

o

Of the total 2006 WB films released, four were wholly financed by Warner Bros.

 

and 24 were financed with or by others. By having their films co-financed, they

are alleviating much of the risk involved in the creation of films.

 

o

Also, by having their films co-financed, Warner Bros. has extra money available

 

to create more and larger films.

Continue to pre-sell the international rights to film releases

 

o

New Line Cinema typically does this, but could even pre-sell more of their films

 

to decrease their risk. Also Warner Bros. should look to this strategy in order to

decrease their risk as well.

Continue to find and enter into exclusive distribution arrangements with other film

companies.

o This enables an increase in revenue as well as the ability to provide a wider

variety of movies through its television and home video offerings.

Provide film content as well as television programming content through the AOL web

portal and other online properties.

o

Since the sales of DVD’s have been decreasing, providing their available Filmed

 

Entertainment content through another medium should provide increased revenue.

Continue to look for new licensing agreements for the digital delivery of Time Warner’s

movies and television programming to consumers via online and wireless services.

o

Currently they are seeking agreements with Apple’s iTunes, Wal-Mart, Amazon,

Best Buy, and Microsoft’s Xbox 360 just to name a few.

o

Television and DVD’s are slowly becoming a thing of the past. With the internet

becoming what it is and new entertainment websites becoming available every

day, Time Warner needs to stay competitive by offering it’s content online and

through wireless services.

Time Warner Cable

For Time Warner’s Cable unit as a whole, we have several recommendations that we

beleive will bring substantial growth and profit. While we are making sure we remain the leader

in the nation’s two largest markets (New York and Los Angeles), we strive to be the leader in

every market that we serve. To accomplish this we have proposed three general strategies aside

from those specific to the Video and Data/Voice Units.

To encourage and foster such growth, Time Warner must first increase its branding and

awareness for its Quadruple Play packaging, as competitors such as Comcast have had the first-

mover advantage in terms of advertising. However, we feel that the added services we provide

will set us ahead of the pack, where other competitors advertise a less advanced “Triple Play”

package. Second, our strategy will focus on continuing the development of wireless joint

ventures in entertainment. We see the future of communications as one where consumers use

their cellular phones for much more than talking (same as what has happened in Japan), and we

want to be involved in this phenomenon that has already begun to take off. We can capitalize on

this not only by gaining a new outlet to advertise in and gain advertising revenues from, but by

using these relationships to integrate our other segments’ products (such as popular movies, news

services and TV shows) into mobile technologies as well. Lastly, Time Warner’s cable unit must

reduce the risks and costs involved with the Adelphia/Comcast transaction, as we don’t want to

stumble in the new markets that the acquisition has provided us with. While most of the

acquisition’s problems are in the past, there are still a great deal of Adelphia’s acquired systems

that are not yet up to Time Warner’s technological standards, which will cost a substantial

amount of time and money to revamp.

For Time Warner Cable’s video unit, we have also proposed several strategies to further

promote our growth opportunities. To do this, Time Warner must first increase its product

exposure and presence but capitalizing on wireless, interactive, and Video-On-Demand

promotional tie-ins. This additional roll-out of two-way digital interactive cable services will

help differentiate the firm from competitors, continue to open doors for further promotional

partnerships, as well as further integrate Time Warner’s product profile into a more cohesive and

encompassing package. Most importantly, the Video division plans to change the way viewers

watch TV and use the cable box by getting rid of the box altogether! Currently, no set-top cable

box is capable of providing all of Time Warner Cable’s services on top of other inherent

technological problems that they possess. On top of this, new regulatory legislation in the works

will effect taxation on set-top boxes, making them not only more expensive for Time Warner to

provide, but more expensive for consumers to use. That said, we don’t want to wait for a box

that is capable of all of TWC’s services…we see the future dominated by CableCards, which are

smart-cards that hold all of a customers relevant information that practically eliminate the need

for a box altogether.

Our analysis has also yielded several strategies in regards to Time Warner Cable’s

respective data and voice units. While we have mentioned that we would like to eventually

transfer AOL’s dial-up subscribers to TWC high-speed data services, our primary objective is to

maximize the efficiency of Adelphia’s acquired systems and make sure that the networks are

integrated so that all of our customers have a full array of options and capabilities—and that they

don’t confuse our service in the new region with that of Adelphia’s (possibly a reason why they

are now defunct). We hope we can use the internet and advertising revenue experience (as well

as learn from their mistakes) that AOL, CompuServ and our other past and present online

ventures as leverage into our high-speed data services. For Time Warner Cable’s new voice

services, we should begin to diversify by offering more service and price options—while an all-

inclusive, single rate, low cost voice service is appealing, Time Warner can gain further

penetration by offering different bare-bones packages at bargain prices to gain consumer loyalty

and beat out existing VoIP and even standard phone providers. Lastly, Time Warner Cable’s

voice unit can exploit the success of its data services in the commercial market by launching a

commercial version of its current voice service offering instead of just a residential one.

Networks

Increase number of exclusive contracts with motion picture studios and independent

motion picture distributors in order to gain competitive advantages over other networks.

Utilize the synergies created by the merger of all divisions of the companies better so that

networks would have a competitive advantage when searching for quality producers,

authors, directors and actors.

Increase spending on advertising and improve its quality in order to increase the

likelihood the productions of the networks will be well-accepted by the audience, thus

increasing the likelihood of larger revenues.

Launch local network shows/productions in the foreign markets with highest profit

prospects so that these shows/productions meet the unique needs of the local markets.

Alternative Strategies

Focused Differentiation

o

This strategy would not work because the markets that Time Warner operates in

 

are not narrow market niches where buyer needs and preferences are distinctively

different.

Follow a Global Strategy to Enter and Compete in Foreign Markets

o The reason this strategy will not work is because if Time Warner essentially uses

the same competitive strategy approach in all country markets where the company

has a presence, and doesn’t tailor their strategy to the specific culture and

environment of each individual country, then they will face many hurdles in

entering and sustaining business in these countries. An example of this can be

seen by other companies such as Wal-Mart who tried to use the same strategy in

every country and failed.

Franchising Strategy to Enter and Compete in Foreign Markets

o

This strategy would not work because franchising is often better suited to the

 

global expansion efforts of service and retailing enterprises. In the instance of

Time Warner, they have their cable, Internet, and phone business, which takes a

lot of infrastructure to setup. Also, they have their publishing, television and

movie segments, which require a lot of capital and industry relationships. So

franchising any of their operations really is not a viable option for them.

Pursue Multinational Diversification

o

Even though Time Warner as a company is always looking to expand

 

internationally, we feel that before they begin their full international expansion

plan, Time Warner really needs to have everything within the United States in

order. They have just begun offering and branding their three services, digital

cable, high speed internet, and digital voice. They have a long way to go before

they reach their full potential in this market and should focus domestically before

beginning their international expansion process.

Unrelated Diversification

o Within the last few years Time Warner has been divesting some of its unrelated

businesses, such as the professional wrestling company WCW, and the Atlanta

Hawks basketball team. Going along with this trend, we feel they should

continue to stay with related businesses and focus on their core competencies.

Unrelated diversification for Time Warner would only lead to the increasing of

demanding managerial requirements and limited competitive advantage potential.

Projected Pro Formas

Cash Flow Statement (see appendix B)

Given Time Warner’s recent transactions, estimating future cash flows is an especially

difficult task. That said, changes in capital expenditures and net working capital are near

impossible to calculate on a timely basis, mostly due to timing issues in production and

programming schedules. Interestingly, the only numbers that have stayed constant over time

(and that will continue to do so) are amortization and depreciation.

While cash from operating activities is expected to continue to rise at steady growth rates for

the foreseeable future, the rest of the cash flow sheet has been extremely volatile. Cash losses

from investing activities was at an all time high after 2006 with -$12,472 million due to the

Adelphia acquisition, and it is estimated that these numbers will slowly taper off over the next

five years, eventually returning to their usual numbers. However such cash from investing

activities has historically changed frequently—while acquisition costs have been somewhat

offset as Time Warner sells off most of its less-than-profitable business lines, the company

realistically only has companies to acquire (instead of shed) now that it has “trimmed all the fat”.

While cash from financing activities has traditionally been negative and increasing, 2006 was a

unique year in the fact that Time Warner not only borrowed a large amount in reference to the

Adelphia transaction, but by the fact that it sponsored one of the largest stock buyback programs

in history. So while this year actually showed a positive figure for cash from financing, we can

expect that this number will continue to grow negatively in the near future. While much of this

year’s numbers have been out of the ordinary, our strategies and objectives have positioned Time

Warner in a way that they can recover from such deep investments and return to steady increases

in cash flows in the near future.

Balance Sheet (see appendix C)

Increase in Cash of approximately $2.5 billion in 2007

o

This is due to AOL finalizing the deals for the sale of their overseas subscription

 

Internet businesses.

Number of Shares Outstanding decrease from 2006 to 2007

o The number of Shares Outstanding of Time Warner stock decreased from

3,864,000,000 in 2006, to 3,230,000,000 in 2007. The reason for this decrease is

that Time Warner management agreed to buy back $20 billion stock during 2007.

Income Statement (see appendix D)

Revenue increases 10% yearly

o

This steady increase in revenue is a result of Time Warner’s strategy

implementation. The increase in revenue year-after-year will be attributed to their

increase in sales from their branding and sale of their triple-play package: digital

cable, high-speed internet, and digital voice.

o

Also, increased revenues from their AOL Network will help increase the

companies overall revenue yearly. The AOL segment’s strategies to utilize

current Time Warner content to attract and retain new and current visitors will

increase AOL’s advertising revenue.

o As long as the company continues to expand its operations through its current

business segments, or through acquisitions, this 10% level of yearly growth is

sustainable through our projection period.

Cost of Goods Sold as a percentage of revenue is decreasing by 1% yearly

 

o

This decrease each year by 1% in Cost of Goods Sold is due in part by each of the

 

segments of Time Warner focusing more on their core competencies and really

increasing their revenues without having to expand their cost base.

 

o

Time Warner Cable will use their strategy to focus their sales of digital voice and

 

high-speed Internet on current digital cable customers. Since Time Warner has 11

million cable customers, but only 5.2 million internet customers and 1.4 million

digital phone customers, there is a large opportunity for them to cross-sell their

services. Because the entire infrastructure is already in place for these current

customers using digital cable, this added revenue would come at a cheaper cost.

 

o

As AOL transitions from being primarily subscription-based to advertising-based,

 

this division should see a decrease in overall cost margins dues to the lack of

infrastructure costs associated with running an Internet Service Provider. Also,

the cost of providing advertising versus the cost of Internet service is cheaper.

Operating Margin is increasing at a slightly decreasing rate (around 9%)

o During our projection period, the Operating Margin increases each year by

approximately 9%. Even though the margin is increasing each year, it is

increasing at a decreasing amount. The reason for this slowing down of growth is

because as the company continues to expand and evolve, it needs time to solidify

its different operations and segments. Certain of the company’s segments may be

expanding into new regions and countries, but then take time to fully integrate

them into Time Warner. If different operations of the company might not be fully

integrated into Time Warner, what would follow are increased selling, general,

and administration costs until this integration can be accomplished.

Net income increases 10% yearly

o

The 10% increase yearly of Net Income is a combination of all of Time Warner’s

strategies as well as their effects mentioned above.

o

The 10% increase in revenue yearly really had a large effect on the increase in

Net Income.

o

If Time Warner can continue to grow while keeping costs low with their

economies of scale, they should their Net Income grow year-after-year.

Appendices

Share Analysis (Appendix A)

Share Analysis (Appendix A)
Share Analysis (Appendix A)
 

Number of Shares

Option Shares

% of class

James L. Barksdale

495,619

88,000

*

Jeffrey L. Bewkes

1,045,368

5,193,750

*

Stephen F.

14,224

106,000

*

Bollenbach

Paul T. Cappuccio

96,470

2,793,750

*

Frank J. Caufield

222,507

968,000

*

Robert C. Clark

7,988

4,000

*

Jessica P. Einhorn

0

0

*

Miles R. Gilburne

259,537

2,008,000

*

Carla A. Hills

25,576

110,500

*

Don Logan

425,486

5,283,754

*

Reuben Mark

1,047,776

110,500

*

Michael A. Miles

53,317

110,500

*

Kenneth J. Novack

34,329

5,859,602

*

Wayne H. Pace

173,045

1,416,213

*

Richard D. Parsons

638,742

7,212,500

*

R.E. Turner

32,272,578

8,906,000

*

Francis T Vincent

79,472

101,500

*

Jr.

Deborah C. Wright

1000

0

*

All current Directors

36,628,919

36,949,084

1.63%

and Executive

Officers as a group

(21persons)

Note: * denotes ownership less than once percent of issued and outstanding stock

Price $19.45 Year High $23.15 Year Low $15.70 P/E Ratio 12.39

Price

$19.45

Year High

$23.15

Year Low

$15.70

P/E Ratio

12.39

 

Beta

 

1.36

 

Shares Outs.

 

4,001,800,000

Cash Flow Statement

Market Cap.

 

$86.6 BB

   

EPS

 

1.57

 

(Appendix B)

Cash Flow

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Cash from

                 

Operating

$10,25

$10,70

Activities

$6,618

$4,965

$8,598

 

$8,250

$8,750

$9,300

$9,500

0

0

Cash from

                 

Investing

($7,000

($5,000

($3,000

($1,000

($1,500

($1,500

Activities

($503)

($2,496)

($12,472)

 

)

)

)

)

)

)

Cash from

                 

Financing

($1,250

($3,000

($4,500

($5,000

($6,000

Activities

($3,016)

($4,388)

$1,203

 

($500)

)

)

)

)

)

Net Change

                 

in Cash

$3,099

($1,919)

($2,671)

 

$750

$2,500

$3,300

$4,000

$3,750

$3,200

Balance Sheet (Appendix C)

Time Warner - Balance Sheet (in millions)

 

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

ASSETS

Current Assets

Cash

6,289.00

4,220.00

1,578.00

 

4,029.00

3,275.67

2,960.89

3,421.85

3,219.47

3,200.74

Net Receivables

5,512.00

6,411.00

6,151.00

6,024.67

6,195.56

6,123.74

6,114.65

6,144.65

6,127.68

Inventories

1,737.00

1,806.00

1,913.00

1,818.67

1,845.89

1,859.19

1,841.25

1,848.77

1,849.74

Other Current Assets

1,101.00

1,026.00

1,209.00

1,112.00

1,115.67

1,145.56

1,124.41

1,128.54

1,132.84

Total Current Assets

14,639.00

13,463.00

10,851.00

12,984.33

12,432.78

12,089.37

12,502.16

12,341.44

12,310.99

Net Fixed Assets

17,509.00

13,659.00

22,169.00

17,779.00

17,869.00

19,272.33

18,306.78

18,482.70

18,687.27

Other Noncurrent Assets

91,191.00

95,354.00

98,649.00

95,064.67

96,355.89

96,689.85

96,036.80

96,360.85

96,362.50

Total Assets

123,339.00

122,476.00

131,669.00

125,828.00

126,657.67

128,051.56

126,845.74

127,184.99

127,360.76

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accounts Payable

5,091.00

4,901.00

11,188.00

7,060.00

7,716.33

8,654.78

7,810.37

8,060.49

8,175.21

Short-Term Debt

1,672.00

92.00

64.00

609.33

255.11

309.48

391.31

318.63

339.81

Other Current Liabilities

7,861.00

7,615.00

1,528.00

5,668.00

4,937.00

4,044.33

4,883.11

4,621.48

4,516.31

Total Current Liabilities

14,624.00

12,608.00

12,780.00

13,337.33

12,908.44

13,008.59

13,084.79

13,000.61

13,031.33

Long-Term Debt

20,703.00

20,238.00

34,933.00

25,291.33

26,820.78

29,015.04

27,042.38

27,626.07

27,894.50

Other Noncurrent Liabilities

25,741.00

26,951.00

23,267.00

25,319.67

25,179.22

24,588.63

25,029.17

24,932.34

24,850.05

Total Liabilities

61,068.00

59,797.00

70,980.00

63,948.33

64,908.44

66,612.26

65,156.35

65,559.02

65,775.87

SHAREHOLDERS' EQUITY

Preferred Stock Equity

1,500.00

0.00

300.00

300.00

300.00

300.00

300.00

300.00

300.00

Common Stock Equity

60,771.00

62,679.00

60,389.00

61,579.67

61,449.22

61,139.30

61,389.40

61,325.97

61,284.89

Total Equity

62,271.00

62,679.00

60,689.00

61,879.67

61,749.22

61,439.30

61,689.40

61,625.97

61,584.89

Total Liabilities and Shareholders' Equity

123,339.00

122,476.00

131,669.00

125,828.00

126,657.67

128,051.56

126,845.74

127,184.99

127,360.76