AOLTW giant struggles to avoid hard fall

AOL Time Warner Inc. (AOLTW) just can't seem to get a break. On top of an advertising slump, a plummeting stock price, an executive shakeup and reported financial shenanigans, arch rival Microsoft Corp. is planning an all-out assault in one of the company's key markets.

With so many challenges facing the world's largest media and entertainment company, one can't help but recall the saying "the bigger they are, the harder they fall." But as the company prepares to reveal its second-quarter results Wednesday, analysts say that all may not be lost for AOLTW, which still has some strong assets under its command.

For one thing, the company is expected to come in on-target with its second-quarter results, despite a rough-and-tumble economic climate. Analysts surveyed by Thomson Financial/First Call forecast pro forma earnings of US$0.22 cents per share, with revenue slightly over $1 billion (last year's second quarter saw earnings per share of $0.32). What's more, the company's flailing stock price, which has dropped nearly 60 percent so far this year, actually makes the stock a steal for some analysts. JP Morgan Chase & Co., for one, reaffirmed its "buy" rating on AOLTW shares Thursday.

The New York-based brokerage, like many others, are viewing Thursday's executive reshuffling as a positive sign. In a widely anticipated move, AOLTW announced the resignation of Robert Pittman, the company's chief operating officer and interim head of the America Online Inc. (AOL) Internet division.

At the same time, the company said that Don Logan, former chairman and chief executive officer (CEO) of Time Inc., will become chairman of the new Media & Communications Group, which includes AOL, and Jeff Bewkes, formerly chairman and CEO of HBO, has been tapped as chairman of the new Entertainment & Networks Group.

The elevation of Logan and Bewkes is viewed as a clear victory for the company's Time Warner Inc. contingent. Former executives of Time Warner and AOL had reportedly been brawling for control of AOLTW since the two companies merged 18 months ago. The Time Warner executives' old media experience and preference for business decentralization comes as a switch from the new media thrust of Pittman, an AOL veteran known for citing AOLTW's ability to leverage the combined strength of its various media holdings as its greatest asset.

In the end, even Pittman had to concede that this strategy wasn't working, however, as units within the company continued to bicker and compete over advertising deals.

"The old company is regaining control," said Michael Gartenberg research director at Jupiter Media Metrix Inc.

"When AOL took over Time Warner ... people said, 'Why is this great new media company bothering with this dinosaur'. A couple of years later it's, 'Why is this great media company screwing around with this new media company'," Gartenberg said.

The promotion of Logan and Bewkes is seen as a positive step forward for the company, however, according to Kaufman Brothers LP analyst Paul Kim.

"From an investor standpoint and internally it raises the level of confidence. These are veterans and they are very good at what they do," Kim said.

While the old guard's return to power signals a solid restructuring, it also means AOL will be moved out of the spotlight, the analysts said.

"This does not give AOL the most favored nation status in the AOLTW family, which was what it had," Kim said.

This could be a good development, however, given that many analysts felt that the company previously promised too much of its Internet unit without being able to deliver, Kim said. What's more, pressure to produce strong results may have led company executives to fudge their numbers so as not to risk disappointing investors, Kim said, referring to a newspaper report last week.

The Washington Post reported Thursday that the company boosted AOL's revenues through a series of "unconventional deals," including shifting revenue from one division to another and selling ads on behalf of eBay Inc. and then booking the revenue as its own. A diminishment of AOL's role under the new structure may actually ensure more transparency about the struggling unit, according to Kim.

"All the silliness that the company went through, all the little tricks they used to prop [AOL] up will be gone," Kim said. He, like many other analysts, do not feel that AOLTW's alleged financial transgressions are serious.

"I don't think they did anything improper," said Kim, who characterized the company's financial reporting as "aggressive accounting."

"It's an example of what the company did to try to make AOL look better than it was," Kim said.

But even so, reports of financial irregularities, ever if innocuous, could not come at a worse time for the company.

"No company wants to hear the words 'accounting irregularities' associated with its name these days," said Gartenberg.

The market responded swiftly to the Post report Thursday, sinking AOLTW's stock (AOL) five percent. After digesting news of the executive reshuffling, the company's stock took an even harder hit Friday, closing down 6.99 percent to $11.58 a share.

Assuming that AOLTW overcomes the stock setback fueled by last week's events and begins to get its house in order, another threat looms on the horizon. Microsoft announced last week that the upcoming version of its MSN Internet access software, MSN 8.0, will come at a price, positioning it to directly compete with AOL.

"When they launch the new version of MSN they are going to go full court press, possibly stronger than they normally would because they perceive weakness (at AOL)," Gartenberg said.

While AOL has a strong brand name, Microsoft will have an edge in the number of integrated services it will be able to provide with MSN 8.0, such as photo and wallet features, Gartenberg said.

Although AOLTW is working hard to get on solid footing, its current vulnerability could make it even more susceptible to serious competition. The company's outlook in the near term will depend on how quickly the new power structure can implement the necessary changes to spur a turnaround, analysts say.

"They are in a turmoil situation," said Gartenberg.

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