Time Warner's Looming Split: Why TV Holds the Key (Analysis)
This story first appeared in the May 9 issue of The Hollywood Reporter magazine.
When Time Warner spins off its struggling magazine division this spring, it will do so with a board of directors that includes Sony Corp. CEO Howard Stringer, former Tribune CEO Dennis FitzSimons and USA Networks founder Kay Koplovitz. All have extensive experience in the TV business, a sign that Time Warner CEO Jeff Bewkes recognizes that TV and digital content will be as important to the future of the new Time Inc. as they are for the company from which it is being spun off. "Attracting a board of this caliber illustrates the potential of the organization and our brands," Joe Ripp, the CEO and chairman of the soon-to-be stand-alone company, said April 22.
Time Inc. is the country's dominant magazine company, with 96 titles that include People, Time, Fortune, InStyle and Entertainment Weekly. But while it bills itself as "one of the largest branded media companies in the world," it has had only modest success bringing those well-known brands to TV screens, despite synergies it might have enjoyed for more than two decades as part of Time Warner -- a company once primarily known for films (an increasingly risky business that now requires financing deals such as September's $450 million Warner Bros. pact with RatPac-Dune) but nowadays is 80 percent dependent on TV for profits. Sure, Sports Illustrated's Swimsuit Issue has been turned into a reality show and some TV specials, and Entertainment Weekly and Sundance TV followed through with the show The Writer's Room, but on the flip side, a series based on the popular Real Simple magazine -- dubbed Real Simple. Real Life -- was canceled after just 15 episodes on TLC.
A deeper foray into TV would likely come by way of partnerships, such as People's recent pact with NBC and Dick Clark Productions for the People Magazine Awards to air in late 2014. But some observers don't rule out the possibility of Time Inc. acquiring a TV studio or network -- ironic given its impending split from Time Warner. While executives declined comment for this report, they've been hinting in public forums for about a year that TV could be a bigger focus of Time Inc. after the spinout. "We intend to explore strategic alternatives, including internal investments, strategic partnerships, acquisitions and divestitures," one Time Warner filing said. And at a management meeting in September, Ripp, according to Adweek, said: "We can't really consider ourselves a magazine company anymore. We're a media company."
Execs had considered a combination between Time and Meredith, a competitor that owns Family Circle, Better Homes and Gardens and 15 TV stations, and some observers still believe Time will acquire or merge with another company that has at least some TV assets. Potentially hampering any major commitment, though, is Time Inc.'s decision to raise $1.4 billion in debt, which it will use to pay a dividend to Time Warner and to purchase the U.K. publishing business IPC Media.
Meanwhile, Time Inc. also is signaling its allegiance to web video by participating for the first time in the NewFronts, the digital-media version of TV's upfront advertising season known for attracting the likes of Hulu, YouTube and Yahoo rather than 90-year-old magazine companies. On May 1, its sales executives are expected to tout an online video lineup of shows like SI Now and People's Chatter, hoping to grab a slice of what PricewaterhouseCoopers estimates will be a $3.7 billion Internet video advertising market in the U.S. this year, growing to $5.9 billion in 2017. Insiders say Time Inc. also is tinkering with ideas for a few other TV-style shows for the Internet, some online documentaries, red-carpet style video events and several more initiatives focused around SI.
These initiatives have come amid cost-cutting at Time Inc., including a recent round of layoffs that eliminated an estimated 500 jobs. The company ended 2013 with 7,900 employees, according to regulatory filings, down significantly from its heyday.
While executives mostly have been mum on specifics, Ripp wrote in a recent internal memo, "We have a direction, and I am confident we will be positioned to succeed when we become a stand-alone public company."
As TV remains a work in progress for Time Inc., the split will leave behind a company -- which will keep the moniker Time Warner -- more reliant on TV than ever. James Goss of Barrington Research says that Time Warner's business mix after the split "will tilt about 90 percent in favor of television," including Turner nets TBS, TNT and CNN and a Warner Bros. studio that is about evenly split between movie and TV production -- it's behind about 60 series for the 2013-14 season and increasingly is selling to digital outlets like Netflix. Similarly, Wells Fargo analyst Marci Ryvicker predicts 2016 will be a "catalyst year" that should see strong affiliate-fee growth.
And HBO, as Bewkes has noted, remains in "a class by itself." In 2013, the channel generated $4.9 billion in revenue and operating profit that would have equaled 29 percent of the total for Time Warner had it already split from Time Inc. HBO on April 23 scored a $300 million-plus deal to stream old shows like The Sopranos and Deadwood on Amazon.com.
Investors seem conflicted by the prospect of the spinoff, judging from the performance of the stock. Time Warner shares are up 20 percent from March 6, 2013, the day it said it would split, in line with the S&P 500's 21 percent gain since then. Analysts are more confident, with 22 of 32 polled by Yahoo Finance rating the stock a "buy" or "strong buy."
But MoffettNathanson analyst Michael Nathanson says Time Warner stock, while up 75 percent in two years, has stagnated because of uninspiring ratings at some networks and the rising costs of original TV content. Still, the assets should be enough to propel Time Warner's value 25 percent higher within 12 months, some analysts say, given that Time Inc.'s magazines have been a drag on revenue and profit growth.
In 2013, Turner, HBO and Warner Bros. all posted record adjusted operating profits of $3.5 billion, $1.7 billion and $1.3 billion, respectively. DC Entertainment continues to be an IP farm (The CW's Arrow and in-the-works iZombie, Fox's upcoming Gotham), and J.P. Morgan analyst Alexia Quadrani says DC is among the conglomerate's "strongest opportunities" because of the potential for TV and video games based on the brand's heroes.
The TV assets still face challenges, of course. HBO has a tough competitor in Netflix, which acts like a premium cable outlet with prestige programming (House of Cards); The CW, which Time Warner co-owns with CBS, likely will never command the sort of retransmission fees enjoyed by CBS, Fox, NBC and ABC; and Bewkes has acknowledged that TNT ratings have hit a "soft patch." Plus, truTV and HLN have experienced ratings declines, and, while CNN's ratings passed MSNBC's thanks to its Malaysian plane coverage, CNN has "a lot of work to do," says Bewkes.
Another challenge involves Turner Sports potentially losing rights to NBA games after the 2015-16 season, given that Fox's new Fox Sports 1 is expected to be an aggressive bidder. But the NBA is likely to spread the rights around, albeit at a higher rate that could see Turner paying about $260 million more in year one, says Ryvicker. The analyst, though, figures that rising affiliate fees should more than make up the difference.
Morgan Stanley analyst Benjamin Swinburne writes that the post-split, the 26,000-employee Time Warner will be "a lean, mean TV machine." The question is whether Time Inc. can achieve a similar goal.