Bewkes: AOL Facing Another "Flat" Quarter

Time Warner CEO Jeff Bewkes said AOL has another quarter of "flat" ad growth ahead of it as more of its users go straight to Google for search rather than searching within AOL. Bewkes said he wants to operate the access and advertising ends of the business separately, and would entertain a sale or combination for either side that made sense. "Would something added to AOL make it more viable? We can't rule it out," he said at Bear Stearns media conference in Palm Beach, Fla.

Despite low cable-company valuations, Bewkes said he still believes a spin-off of Time Warner Cable could benefit Time Warner by creating more of a pure-play content company consisting of fast-growing cable networks and filmed entertainment. He said that while Time Warner "looks at everything" including The Weather Channel and Cablevision's Rainbow Networks, the company doesn't need an acquisition to grow.

Notes from Time Warner CEO Jeff Bewkes' keynote Q&A:

Question: Do the ad networks and the portal (AOL) business have to stay together?
Bewkes: They really help each other and in the forseeable future there is an advantage to operating together. The networks get scale from the owned-and-operated traffic from AOL. The bigger the networks are, the better they perform.

Question: If cable capital spending over 2008-2009 can be reduced, does it make sense to get rid of a business that could drive cash for you in years to come?
Bewkes: That is something we're taking about. We are not trying to get rid of or sell the cable company. Our cable company is going to be a very good investment and good business. We just don't necessarily think you need to own it locked to the rest of our businesses in one stock. There may be advantages to have it separate. There is a difference in the character between cable vs a movie company or a TV network. We may be able to get more value with the two sides apart.

Question: What is your position on retransmission fees for broadcast networks?
Bewkes: Our cable company is interested in not overpaying for whatever retransmission CBS wants. On the cable side, we don't care about retransmission fees--we don't need them. We only need the brands--Cartoon Network, TNT, etc--to perform the way they do.

Question: The Time Warner that after the spin of cable would be less debt-leveraged. Given that the networks are the true growth businesses, is it fair to say you would be looking to build the business quickly? Would you buy Weather Channel or Rainbow Networks?
Bewkes: We can't comment other than that we have to look at everything. I don't think its right to assume the company would be less-than-optimally leveraged. We want to have the right structure with the right capital design. And optimize returns for shareholders. We dont need to acquire anything--we would only do it if we knew we could take it and make it more profitable than who's selling it.

Question: Can you discuss Advertising.com and how it is integrated into display ads?
Bewkes: One key would be to get more owned-and-operated activity and run it through Advertising.com. We've been working hard to integrate the pieces. The have shown good growth. The challenge is to get the users on the other side and bring them through (the ad platform). The advertisers are trying to move as much as they can to efficiency and performance-based ads. The true premium inventory is going up in value. Low-end inventory--that stuff can theoretically become more valueable if you can put contextual and behavioral data towards it.

Question: AOL's ad growth over the last 12 months? Search and display slowed.
Bewkes: Ads slowed down in both areas toward the end of the year. As you move volume from paid subs to free registrants they don't use the search as much and tend to use Google directly. That's what was going on at search. We do think we can return to growth in ad revenue. We think we have one more quarter of flat ad growth.

Question: Should AOL be broken up?
Bewkes: Access and audience, traffic and advertising are very different. We want to operate them separately. It gives you more flexibility so if there is a better combination they would have more flexibility to do it.

Question: Does it make sense for AOL to be part of someone else to get scale?
Bewkes: What weve been doing is build scale and excellence in what we've got. In the portal, that we've been working hard at. Some is working and weve had breakthroughs. Others is less clear. That's where we have our scale problem. Would something added to AOL make it more viable? We can't rule it out.

Question: If the Microsoft and Yahoo combo goes through is that good or bad for AOL?
Bewkes: The good effects are the validation of the scarcity of building an at-scale ad platform like Platform A, which is a chief reason Microsoft wants Yahoo. On the search side it will make several large bidders for our search traffic. Those are the benefits. Challenges? It gives our competition more scale. We have good scale domestically but less-so internationally. We would have to compete agasint scale in our competition.

Question: Can you give more detail on the folding of New Line into Warner Bros.? How do you preserve the culture of New Line?
Bewkes: The reason we did it is most of the majors has moved their title volume down. Three years ago we were releasing 30 films a year. Everyone is moving to smaller, more focused slates. We decided to cut the slate and it was far more profitable to put that through one distribution system. Overseas box office is now the majority of film revenue. New Line was advance-selling films abroad to finance them. That didn't make sense. Bewkes says he'd prefer to keep foreign box office reciepts. You dont want to have a separate corporation (New Line). How do we keep the virtues of New Line? We will keep a New Line label and team, like Picturehouse.

Question: If you do shed cable, you are a pure-play content company with mature businesses. How do you grow?
Bewkes: We don't think our content businesses are mature. I don't think content businesses on the planet are ever mature. We have to figure out how to take HBO, CNN, People and make them growth businesses. Take the networks: we've had doubling of earnings at CNN. That's a very high rate of growth in a business everyone thought was mature.
Bewkes continues: The next step is targeted internet-like ads on television will be the next growth area.

Question: Spinning off the cable unit will make Time Warner much smaller. Is that better?
Bewkes: We don't care as much about scale as returns. Some businesses need scale, like cable networks or in films. There are a lot of cost efficiencies in having that kind of scale. It doesn't matter whether Time Warner as a conglomerate of holdings is larger or smaller, just if the return on capital is high.

Question: If you think cable is such a great business why would you spin it at current valuations?
Bewkes: I wouldn't sell it at this rate. Its really the question of the value of it, or strategic options open to it might be more easily accompllished it wee a separate piece of paper that you owned outside of Time Warner.

Question: When will Time Warner Cable be spun off?
Jeff Bewkes: Says the business might do better if it were independently-traded. Says we think its likely we'll be able to achieve those benefits throught a spin-off. Does not give any timing for a potential spin-off.