Drowned World.
That's the fitting name for pop maven Madonna's World Tour, sponsored by AOL Time Warner (NYSE: AOL). The symbolism works. Here you have a plumped-up company trying to doggie paddle through icy conglomerate depths it had no business being a part of, and it's going under. Fast. Good-bye, material world. Hello, concrete shoes.
From glib to glub, AOL is no longer that edgy growth stock investors so openly embraced in the 1990s. This is a stodgy ho-hum corporate block only now coming to the self-realization that it is overvalued.
The June quarter financials reveal plenty. Revenues were up a scant 3%, which turned out to be $500 million less than analysts were expecting. That's half a billion dollars, folks! Where'd the money go?
What? Jeff didn't harp on this top-line brake pull? I figured as much. He probably glossed over it by pointing out how margins widened during the period, producing solid profit growth on a cash basis and juicy free cash flow. In other words, AOL is doing great because it was able to cut costs by laying people off, giving consumers less bang for their buck, and taking in that one-time cost reduction pop through trimming operating redundancies post-merger.
You'd have to ask yourself what AOL will do for an encore, only judging by its tanking popularity in its many subsidiaries, a better question might be if there's anyone calling for an encore in the first place. Let's break the company down.
America Online
If this is the crown jewel of AOL Time Warner, I think it needs to have its headpiece examined. Hey, I was one of the service's earliest subscribers and I continue to be, but it's definitely a subsidiary that has lapped its growth cycle. Revenue growth continues to slow here, as the abysmal 13% year-over-year growth indicates. The company's Internet division had to nickel and dime its way to the 30-million subscriber mark, growing its flagship subscriber base a measly 4.5% sequentially. Since the online ad market has gone Weeki Wachee without the air tubes, AOL is down to hawking a lot of its own goods with its once-billable-to-outsiders ad space.
Now, you're bound to hear how AOL is so happy about the concept of cross-promotion. You'll hear how America Online promo is generating 100,000 print magazine subscriptions a month, a 54% uptick in traffic at the old Time Warner sites. Thumb through one of the many Time magazine lines, and you're bound to see a print ad for AOL's summer release Swordfish. If you stepped into a movie theater to catch Swordfish, odds are you had plenty of room to stretch. The movie tanked.
But this is AOL, today. It has become the kid at the prom who brags about bringing his sister as a date because no one else accepted the offer. What's even more ominous is that when the ad market does bounce back, AOL's self-serving ways are going to scare away a lot of entertainment marketing dollars the company used to rely on in its many different mediums from its competition.
That's why AOL is taking the very risky move of upping its monthly subscription for the first time in three years. It's not a sign of health. It's a sign of incestuous surrender. You're already seeing the cross-currents of an online service running out of new members to sign up. Those free 30-day trials are suddenly 45-day freebies.
Retailers that used to give away AOL discs are now paying you -- like Target (NYSE: TGT) doling out $60 and 10% discounts to those who sign up at any of its stores. Circuit City (NYSE: CC) will give you $75 if you sign up through them. You have Gateway (NYSE: GTW) giving you a year of AOL with a new computer purchase, for free. Meanwhile, the competition is armed to liberate more AOL users as Microsoft (Nasdaq: MSFT) and Earthlink (Nasdaq: ELNK) smell blood in the water. Keep in mind that while America Online grew sales by a paltry 13% over the past year, Earthlink has managed 32% top-line growth.
Cable
Quarterly revenues were up 14%, EBITDA was up 13%. But AOL's best revenue grower was also one of the few segments to slip in operating margins. Coincidence? Digital cable and broadband are growth industries, but they are growing at the expense of the company's established cable and Internet dial-up base.
Networks
Even with HBO's "The Sopranos" giving cable watchers an offer they couldn't refuse, AOL's network revenues inched up by just 2% for the June quarter. That's pretty sad when one considers that gains in AOL's cable business should have helped ram more of the old Turner and Time Warner content down viewer's couch potato eyes. Yes, this is the real battleground for the sluggish ad market, but as solid as a CNN or HBO or Cartoon Network might be, why is The WB duking it out with UPN for fifth place in a six-horse race?
Music
Napster is dead and people still don't want to pay up for what AOL is spinning. After complaining that MP3 file sharing on Napster was crippling the recording industry, and helping shut the popular peer-to-peer site down, why did sales fall by 11% this past quarter? I'll go out on a limb here and say that during Napster's trial proceedings, AOL was busy sketching Shawn Fanning as a scruffy scapegoat. Now Warner is teaming up with other struggling labels to create the subscription-based MusicNet. See the fallacy? If Warner can't even sell music offline the way it used to, how can it expect to succeed online when the consumer is still fresh with the memories of getting it for free?
Publishing
Are paper cuts becoming a national phobia? While AOL is so proud of the fact that it's now able to push more subscriptions through its obtrusive online ads, publishing revenues were down for the second quarter.
Filmed Entertainment
The fact that AOL is down to banking on holiday releases of Harry Potter and The Lord of the Rings to save the year is telling. Are movies like Proof of Life and Exit Wounds simply box office bombs or should we take them literally?
The woe runs deep at the once unsinkable AOL. I'll be back with a box of pins for Jeff's inflatable lifeboat.
Rick Aristotle Munarriz is online right now. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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