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Business Analysis & Features

Time seeks closure on the worst deal in history

The media group is desperate to consign its disastrous merger with AOL to history – a boost in profits in its first results since the split suggests it has

It takes a while to get over a bad marriage, but Time Warner appears to be healing. The historic media conglomerate had to endure an unhappy anniversary last month, 10 years since its spectacularly ill-fated decision to merge with internet start-up AOL. Everyone else in the media took the opportunity to reprint the ugly wedding photo of Time Warner boss Jerry Levin and AOL's Steve Case embracing for the cameras. Mr Levin came out of retirement to make a full-throated apology for "the worst deal of the century, apparently". But now that milestone has been passed, investors are refocusing on what Time Warner is today. And that, it turns out, is profitable.

The company, which resisted rebel shareholder calls to break itself up for most of the last decade, enters this one as a leaner machine with some of the best-recognised brands in media. There's Time and Warner Brothers, of course; the former an august news magazine that hopes to capitalise on its heritage in a new media age, and the latter one of the most powerful film and TV producers in Hollywood. Harry Potter, Sherlock Holmes, and Batman are all producing reliable bankers, and the studio is up for Oscars with Invictus.

But there is even more below the surface of this $33bn behemoth. Its stable of cable channels brought in $4.02bn of operating profits last year, with revenues not just from advertising, but also from subscription fees paid by cable TV providers. Those channels include CNN, the news provider, and HBO, the pioneering drama channel that was home to The Wire and The Sopranos. The steady revenues from cable subscriptions have been a godsend during the recession, as advertisers have wobbled.

In publishing, the company owns the gossip rag People and Sports Illustrated, and on the internet it has Hollywood's TMZ.com, which broke the story of Michael Jackson's death.

Content, as content providers are keen on saying, is king. Time Warner has now hived off its Time Warner Cable subsidiary, which ran the wires piping TV into millions of homes in the US North-east. AOL, too, was quietly spun off in the dying days of 2009, so its problems of declining subscribers and lacklustre websites will no longer drag on Time Warner proper. "This is enabling us to focus all our resources on creating and distributing the highest quality and most popular content," said Mr Levin's successor, Jeff Bewkes, yesterday.

It is an unsurprising direction for Mr Bewkes to have taken the company, given that he emerged from HBO, one of the most respected producers of content in the media industry. It is the channel that gave the world Sex and the City and now Big Love, and it has 40 million subscribers across the US, paying a premium for its content on top of the cost of basic cable.

Rupert Murdoch, whose News Corp is an arch-rival of Time Warner, declared this week that "content is not only king, it is emperor of all things electronic", and he has led a charge to wring more money out of individuals and companies that use media content. He is planning to charge for online news and recently won higher fees from Time Warner Cable for piping News Corp's Fox channels into homes.

Mr Bewkes was a little sniffy yesterday about the hopes raised by Mr Murdoch's victory in negotiations with Time Warner Cable, his company's old subsidiary. You've got to look at where they start from, he said. Fox and the other media companies that have been winning higher fees were traditionally not premium channels; cable – and increasingly telecoms firms moving into TV – already pay handsomely for HBO and CNN.

Mr Murdoch was able to do some crowing on Tuesday, after Twentieth Century Fox's Avatar wiped the floor with all the other box office hits coming out of Warner Brothers. Fox News is also way ahead of CNN in the ratings. Mr Bewkes declined to engage in all-out war over cable news, since CNN has dialled back on attempts to compete with shock-jock style programming and is concentrating instead on its independent news mission. "Versus what some of our, quote, cable news competitors, try to do... we are interested in building a strong band for the long term," he said.

After posting a loss of $13.4bn in 2008, a year scarred by writedowns in magazines and in the spun-off businesses, Time Warner posted a 2009 profit of $2.47bn and promised mid-teens percentage earnings growth this year, with advertising growth resuming and subscriber numbers stabilising.

Only the magazine arm, where profits fell 42 per cent last year, is a weak spot. The company says it has cut costs in that business. And a version of how Sports Illustrated might look on a tablet computer has been doing the rounds on the internet, signalling one potential future. Without the distraction of AOL, 10 years on, Time Warner is looking to the future.

Back to black: AOL struggles into profit

AOL's maiden results as a newly independent company showed the group had swung from a $1.9bn loss in the last quarter of 2008 to a profit of $1.4m a year later, but was still haemorrhaging subscibers.

Revenues at the dial-up internet group slid from 17 per cent to $809.7m year on year, after a fall in advertising and subscribers. Its chairman and chief executive Tim Armstrong said the company had made "significant progress in support of the long-term vision we see in the future of AOL, but today's results continue to reflect the need for our focus and execution on the work required in the turnaround of the company".

Between last October and December the number of domestic subscribers plunged 27 per cent to 4.9 million, while advertising revenues fell 8 per cent to $471.6m. The group added that ad revenues were further hit in its international display markets with weakness in the UK, Germany and France.

The profits were favourable in comparison with the end of 2008 because the company had taken a $2.2bn non-cash goodwill impairment charge during the quarter in 2008.

AOL, which is behind Google, Microsoft and Yahoo! in the search market, is slashing costs in a plan to cut $150m out of the business this year. This is part of the strategy to refocus the business on content.

It kicked off a redundancy programme in the US last month, and is cutting back on its international business. It plans to shut offices in Finland, Germany, Spain and Sweden, and is holding talks over the future of its French operations. Michael Steckler, the managing director of AOL UK, has left, and it is still unclear how many British employees will be affected.

Nick Clark