- The Washington Times - Wednesday, April 24, 2002

Shares of AOL Time Warner Inc. are trading below $20 as the company prepares to announce its first-quarter earnings today. Observers say the stock price may go even lower because of pessimism about the media giant's prospects.
The stock closed on the New York Stock Exchange yesterday at $19.11 $11 lower than a week ago and way off its year high of $58.51 in May.
Several issues have clouded AOL stock, but analysts say the primary problem stems from perception.
"To a great extent, it's been what I think could be an overreaction, but some of the pressure is warranted because some of the issues are real," said James Goss, analyst with Barrington Research.
The outlook for the merger of AOL and Time Warner in January 2001 was success, rising Internet service subscriptions and endless media partnership opportunities. But after the dot-com bubble burst and the economy went into recession, the company's business slowed considerably.
Earlier this month, AOL Time Warner said it would take a $54 billion write-off, mostly to reflect that AOL paid far more for Time Warner than its publishing, music, movie, television and cable businesses were worth.
At the same time, advertising sales remained sluggish. In the fourth quarter of last year, ad revenue for the company fell 7 percent from the same period in 2000.
Subscriber growth also has slowed, despite an aggressive marketing and pricing campaign. Analysts estimate that as much as a quarter of America Online's 34 million subscribers are receiving the service at a discount.
Subscriptions are lagging partly because 60 percent of U.S. households already are hooked up to the Internet, so the number of potential new AOL customers is dwindling. Although AOL is a major provider, it faces competition from small companies that charge as much as $10 less for monthly Web access.
By comparison, fast connections such as cable and DSL (digital subscriber lines), which AOL Time Warner also offers, cost between $40 and $50. Services like cable are key to the company's long-term success because it will allow AOL Time Warner to market add-ons such as digital music subscriptions and movie downloads.
AOL's cable system, the nation's second-largest, also may lose a sizable chunk of its 13 million subscribers. The Newhouse family, which publishes newspapers and magazines, has said it is considering withdrawing from a partnership with AOL and taking 2.3 million cable subscribers with it.
Before AOL and Time Warner merged, each had financed its growth through partnerships. Most of those partnerships now are in various stages of restructuring, adding uncertainty to the united company's future.
AOL had a deal with German media giant Bertelsmann AG to start AOL Europe, but Bertelsmann backed out and AOL was forced in January to buy the half of the venture, which was losing money.
Another factor dragging down AOL Time Warner's shares is that big investors are fleeing the company. A week ago, Janus Funds sold some 18.4 million shares priced at $20 each. Janus had been AOL Time Warner's largest shareholder.
"A lot of issues related to the company are very convoluted and simplification is needed," said Daniel Peris, analyst with Argus Research. "But the real issue is the economy."
Mr. Peris compared AOL Time Warner today to Phillip Morris in late 1999, when the cigarette maker was drowning in a sea of lawsuits and its stock was trading low based on the perception that the company was in trouble.
Phillip Morris has turned around and its stock now trades in the mid-$50s.
"It's completely different business issues, but with both the shares were driven by perception," Mr. Peris said. "It's exaggerated and wrong, but that's the market."


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