Ever since its disastrous 2000 merger with America Online, Time Warner has been playing defense. Outside agitators like Carl Icahn have called on the media behemoth to sell or spin off units that generate cash reliably but don't offer much in the way of growth, notably AOL and the company's vast cable holdings. CEO Richard Parsons, refusing to budge from the company's conglomeration strategy, has politely demurred.
But recent events suggest that Icahn and the professional noodges have focused on the wrong corporate assets. What if Time Warner sold off Time Inc., the company's mammoth magazine business? Home to such powerhouses as Time, Sports Illustrated, People, Fortune, and InStyle, Time Inc. has always been regarded as a corporate crown jewel and probably America's greatest magazine publisher. But, while I can't claim inside knowledge, there are signs that the empire founded by Henry Luce—which began in 1923 as just a single magazine, Time—isn't exactly pinning its future on the periodicals business.
Time Warner is composed of five broad units, in descending order of size: cable, networks, filmed entertainment, AOL, and publishing. In a few of these units, the company has recently made bold long-term investments. The cable unit recently spent several billion dollars to acquire the assets and subscribers of bankrupt Adelphia. In early August, AOL announced it would offer free subscriptions to broadband users, sacrificing short-term cash flow from the dwindling core of dial-up customers in favor of potentially larger advertising revenues. Meanwhile, the networks business (TNT, HBO, etc.) in May spent $735 million to buy the half of CourtTV it didn't already own.
But publishing? That's another story. As the most recent earnings release shows, the magazine business accounts for less than 13 percent of revenues and operating income. In the first half of 2006, magazine revenues fell about 1.3 percent, while operating income fell 9.6 percent. Time Inc. is a monster business with truly impressive numbers. Its Web site notes that last year it had three of the top four grossing magazines, and seven of the top 25. Time Inc.'s properties (at least 145 magazines) alone account for about 23 percent of U.S. magazine advertising. Which is precisely the problem. The economy is slowing: Advertising for mass-market print publications is not going to soar in the coming year.
Yes, the company has made significant efforts to take its magazines online, where advertising is growing fast. It has built up CNNMoney.com, hired Ana Marie Cox (the original Wonkette), and added bloggers like Andrew Sullivan to Time.com. But when you have a giant base of revenues, as Time Inc. does, such moves make little bottom-line difference. Other media companies have sought to boost online revenues through significant acquisitions: Dow Jones bought Marketwatch; the New York Times Co. bought About.com. But what bold moves is Time Inc. undertaking to position itself for the evolving media world? Earlier this year, with much fanfare, it started OfficePirates.com, an irreverent site geared at male cubicle workers. After six months, it shut down.
The company may be preparing for lean times in print, too. On July 26, it was reported that TeenPeople magazine was going to shut down, although the Web site remains. And flagship Time recently announced its intention to defy demographic, technological, and cultural trends by publishing on Friday instead of Monday. As Time'sreadership slowly ages and becomes less desirable to advertisers, the magazine becomes increasingly irrelevant. While it can make eminently respectable profits for some time, it won't provide the kind of growth demanded by public shareholders.
And Time Warner has already proved its willingness to shed a stagnanting print division. Time Inc. sold its book-publishing unit in February to Lagardere of France for about $537.5 million.
The coming turnover at Time Warner headquarters is another reason to suspect Time Inc. could be sold. New York last week suggested that Parsons, whose contract runs through 2008, is seriously considering running for mayor of New York City in 2009. That makes Jeffrey Bewkes, who was named president and chief operating officer last December, the likely successor. Bewkes came up through the entertainment division and is not likely to have much patience for a unit that is shrinking in real terms and as a percentage of the company's overall business.
The big question, of course, is who would want to buy all those magazines. Clearly, there are still investors who love magazines. Condé Nast is plowing lots of cash into its new business magazine, Conde Nast Portfolio. Earlier this month, Elevation Partners, the private equity firm whose partners include venerable technology investors Roger McNamee and venerable rock star Bono, bought a big stake in Forbes, paying between $200 million and $300 million for a 40 percent stake, as Geraldine Fabrikant reported in the New York Times. If the Forbes family'scollection of magazines is worth between $500 million to $800 million, TimeInc. is worth many, many times that amount. Swing a stick on Park Avenue—or, this week, in the Hamptons—and you'll hit a half-dozen private equity honchos from firms like the Blackstone Group or Kohlberg, Kravis & Roberts who have the cash and the temperament to make such an investment.
And here's a leading indicator. The Carlyle Group, the huge private-equity firm that constantly scours the marketplace for multibillion-dollar deals, last month added a new senior adviser to its media and telecommunications team: Norman Pearlstine, the former editor-in-chief of Time Inc. Pearlstine's new job? He's supposed to tell Carlyle which huge media companies it should buy.
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