Time Warner ditches troubled AOL unit

Time Warner had been mulling whether to spin off AOL for years

Time Warner will finally rid itself of AOL, its struggling Internet subsidiary, by spinning it off as a publicly traded company.

The move comes as no surprise. Time Warner executives have been considering for years whether and how to dump AOL, whose transformation into an ad-supported business has been a disappointment.

The separation will allow Time Warner to continue "reshaping" itself with a focus on its content business, while AOL will gain more flexibility to seek Internet market success, Time Warner said on Thursday.

To proceed with the separation, Time Warner will first buy the 5 percent of AOL that Google owns, having paid US$1 billion for it in December 2005. That transaction will happen in this year's third quarter. Earlier this year, Google wrote down that investment, acknowledging it has dropped in value.

AOL's spin-off will be contingent on Time Warner obtaining the necessary approvals from its regulatory agencies and its board of directors.

In this year's first quarter, AOL's ad revenue fell 20 percent year-on-year. By comparison, Google, which generates most of its money from online ads, grew its revenue 6 percent in the first quarter.

During the quarter, AOL suffered revenue declines in ad sales on external sites, as well as in display and paid-search ad sales in AOL sites.

Last month, in a US SEC filing (PDF) with the U.S. Securities and Exchange Commission, Time Warner said it was reviewing its "strategic alternatives" regarding AOL, and that it anticipated soon starting a process to spin it off entirely or partially.

Overall, AOL's revenue, which also includes subscription fees, fell 23 percent to $867 million, while operating income tumbled 47 percent to $150 million in the first quarter. Time Warner blamed its first-quarter 7 percent revenue fall partly on AOL's financial performance.

Time Warner booted Randy Falco from his post as AOL CEO in March, replacing him with former Google executive Tim Armstrong.

Under Falco, who took over in November 2006, AOL routinely failed to grow its ad revenue on par with the industry average. Falco's tenure included two major rounds of layoffs: 2,000 employees, or 20 percent of AOL's staff, in October 2007, and 700 employees, about 10 percent of the staff, in January of this year.

AOL has been on a years-long process to transition from a business model based on dial-up Internet access fees to an online advertising supported model. However, since early 2007 AOL has consistently underperformed in online advertising.

For example, in 2008, U.S. online ad spending grew 11 percent, according to the Interactive Advertising Bureau, but AOL's online ad revenue dropped 6 percent.

AOL and Time Warner announced their intention to merge in 2000, saying the deal would create "the world's first fully integrated media and communications company for the Internet Century."

The all-stock deal was valued at $183 billion when it was first announced. By the time the merger closed in early 2001, the decline of the companies' shares brought the value of the deal down to about $100 billion.

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