- The Washington Times - Thursday, February 1, 2001

Newly formed AOL Time Warner Inc. yesterday said it lost $1.09 billion for the fourth quarter, the first time the company has reported combined earnings since AOL bought the media and entertainment company for $124 billion last month.

The loss, partly from merger-related restructuring costs and taxes, didn't overshadow the high expectations that AOL Time Warner executives exhibited during a daylong conference for investors and analysts in New York.

"The soul of this new machine it is a monetizing machine," Chief Executive Gerald Levin told a group assembled at the company's headquarters.

Mr. Levin, Chairman Steve Case, and Robert Pittman and Richard Parsons, co-chief operating officers, outlined the new company's plans yesterday to merge operations and "cross-promote" its many products as it plugs all of Time Warner's operations into AOL.

Executives also described a new company that has become a "laboratory" where workers are researching new services including interactive television, interactive advertising, video on demand and Internet calling.

The confident new company will deliver those services to consumers through Time Warner Cable's connections to homes.

AOL Time Warner's report of quarterly revenue shows that pre-tax earnings increased substantially. Earnings before interest, taxes, depreciation and amortization increased to $2.4 billion, compared with $2.1 billion a year ago. Including those items, the company lost $1.09 billion compared with $194 billion a year ago. Revenue rose 8 percent to $10.2 billion, up from $9.46 billion a year ago.

The company, created Jan. 11 when the federal government approved AOL's purchase of Time Warner, still predicts it will earn $40 billion this year.

Mr. Levin and Chief Financial Officer J. Michael Kelly credited AOL's strong performance for boosting the combined company's final quarter.

AOL's revenue increased 28 percent from $1.6 billion a year ago to $2.06 billion.

By contrast, Time Warner's revenue fell from $848 million to $206 million because of lower-than-expected advertising sales at cable networks and sluggish music sales.

Time Warner said Dec. 18 that fourth-quarter revenue would fall short of expectations.

But AOL surged in the fourth quarter by adding 2.1 million new subscribers. The Sterling, Va.-based division of AOL Time Warner and the world's largest Internet-service provider now has 26.7 million subscribers.

"Let me declare affirmatively that AOL … is the crown jewel [of the new company]. I say that without qualification," said Mr. Levin, who was Time Warner's chairman before AOL bought the media and entertainment company.

Mr. Levin said the new company will leverage AOL's reach to market Time Warner's cable TV service to its own Internet customers. AOL Time Warner will bludgeon consumers with more than 400 cross-company promotions. As an example, through AOL's Internet site, the company sold 750,000 subscriptions to Time Magazine, which has a U.S. circulation of 4 million.

The company already has 130 million customers consumers subscribing to AOL, Time Warner Cable, magazines from Time to People to Sports Illustrated, and the massive company's other properties.

As important as the company's subscriber base is the wealth of information it can market to subscribers.

Mr. Parsons said the company aggressively will market movies, books and music, and he predicted AOL Time Warner will deliver more content digitally to save money. AOL Time Warner owns 1 million music copyrights, 7,000 films, 32,000 television titles and 4,000 book titles.

"We are convinced, particularly as broadband is introduced … that this is going to become the new medium for marketing movies and music," he said. "As we think about the future, as we're beginning to explore and experiment in this new laboratory called AOL Time Warner, we think there are tremendous opportunities for savings in distribution, in marketing and even production," Mr. Parsons said.

Mindful that analysts are watching the new company closely, AOL Time Warner executives yesterday said they are taking more steps to cut costs.

The layoff of an estimated 2,000 workers will save about $200 million. But a restructuring charge related to the merger will cost the AOL division, since it is the buyer, about $50 million in the first quarter because of layoffs. The new company, which has about 80,000 workers, doesn't expect to add workers quickly, Mr. Levin said.

Analysts said the company could substantially increase revenue by boosting AOL's $21.95 per month subscription fee. Mr. Levin and Mr. Pittman declined to say whether AOL Time Warner will increase the fee.

But Mr. Case said the company likely will boost the charge, but not soon.

"If you take a longer-term view, you'd probably have to conclude that it would be unwise, within days of getting a merger closed … to do anything on pricing. That would be not smart," he said. But "a price increase at some point would probably be in the cards."

Executives also said yesterday that it will cost the company $41 million to end its exclusive contract with Roadrunner, the Reston, Va.-based company co-owned by AOL Time Warner that markets a connection to the Internet over high-speed cable lines.

Mr. Case also said he is searching for ways to increase revenue to $100 billion a year.

"The promised land is well beyond 40 billion [dollars]," he said.

Shares of AOL Time Warner closed lower yesterday on the New York Stock Exchange, falling $1.75 to $52.56 a share.

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