I've got a lot of things to cope with. First on the list is that A.I.: Artificial Intelligence is going to arrive in theatres this week. Second is that it's being distributed in the U.S. by AOL Time Warner (NYSE: AOL), and it's high time that I came to terms with the non-America Online portion of this company, which happens to make up 43% of our portfolio.

A.I. is a Steven Spielberg film, but it was the brainchild of his longtime friend Stanley Kubrick. To me, Kubrick was perhaps the greatest director of the past century, because his films were clever, understated, and dark. Spielberg, whom some would call the greatest but whose films I find bombastic, manipulative, and sappier than the most giving sugar maple tree, could not be more different from Kubrick. I only go to Spielberg's films when I want someone to try to make me cry by beating me over the head with a wet fish for four hours -- which is probably more often than you'd think, but that's another issue.

So I'll go to A.I., but grudgingly. You can bet that I'll moan about how much better Stanley would have done it.

An inscrutable business
Warner Bros. is putting out 28 movies this year, including Harry Potter and Lord of the Rings. Those and A.I. will probably be hits, but in this industry that doesn't matter necessarily. The question is: Will they be profitable? Filmed entertainment was AOL Time Warner's biggest revenue producer in the first quarter, bringing in $2.2 billion compared to America Online's $2.1 billion, but its earnings before interest, taxes, depreciation, and amortization (EBITDA), the standard metric of profitability in the media industry, came in at just $113 million, compared to America Online's $684 million. And that was without any big flops.

The big budget and erratic performance of Warner Bros. is just one of the factors that makes AOL Time Warner difficult to understand. It's not like the old days, when America Online was all about subscription revenue from online access. Back then, we could project its share of the market, estimate its pricing power, and be able to make a decent guess about the company's value. It wasn't simple or certain, but it was doable.

Now that business has become one of many. Last quarter, its first as part of AOL Time Warner, America Online accounted for only 23% of the company's revenue and 31% of EBITDA. Still, CEO Gerald Levin, a veteran of Time Inc., talks about America Online as the key to his company's future. At the recent annual shareholder's meeting, Levin said that America Online "is a transforming catalyst that immeasurably strengthens all our businesses... it will become the largest aggregating mass medium in history."

Dreams of the future
Levin's dream is that HBO and Time magazine subscribers will sign up for America Online, and vice versa. He sees cross-promotion and streaming media flying along Time Warner Cable's high-speed Internet service, Road Runner. He sees all media converging in his company, and the linchpin is America Online's loyal customer base.

Of course, Microsoft (Nasdaq: MSFT) stands in the way. Last week saw talks between the companies over America Online's place in Microsoft's new Window XP break down. Jeff Fischer thinks that Microsoft has the upper hand in the negotiations, which means that America Online could be taken off the desktop and relegated to the back office.

I agree with Levin, though. It won't help AOL that Microsoft will promote its own online services instead of America Online, but AOL Time Warner has myriad other marketing opportunities. It has 100 million subscribers between cable and publishing services. That's a pretty big reach. America Online is already known as the easy-to-use master of the Internet, and it still controls Instant Messaging, which is another powerful marketing tool. AOL could use Microsoft, but it won't stand in its way.

The market value of dreams
Levin paints a pretty picture of media domination creating the most valuable company in the world, but does the market believe it? It doesn't seem that it does. Wall Street continues to be more concerned by the weak advertising market than world domination. Goldman Sachs cited that when it reduced cash flow estimates to $10.8 billion from $11 billion last week. It is right to be concerned; AOL Time Warner has a great deal of exposure to advertising in its Network and Publishing divisions. Even 34% of America Online's revenue came from advertising and commerce, two areas where companies have found lots of problems recently.

The result is that AOL, despite being up 52% for the year, isn't trading at a substantial premium to its media peers. It's difficult to find companies to compare with AOL, since it has so many different business segments. Let's look at it from a forward 2001 EBITDA perspective with respect to its media competition Disney (NYSE: DIS), News Corp. (NYSE: NWS), Vivendi (NYSE: V), and Viacom (NYSE: VIA.b):

(all numbers in millions of dollars, except for EV/EBIDTA)

      EV    2001 EBITDA  EV/EBITDA
AOL $244.4     $11.0       22.2
DIS   71.0       5.1       13.9
NWS   46.0       2.1       21.9
V     65.3       8.5        7.7
VIAb 106.9       6.2       17.2

EV = Enterprise Value, or market cap plus debt minus cash

This is a simplistic valuation, of course. AOL has the advantage in this comparison, since America Online and Time Warner Cable are relatively high-EBITDA businesses, and the other companies on the list don't participate in them significantly (though they are in various other businesses more lucrative than media). Nevertheless, for a company with AOL's dreams, it's not outrageously priced.

There's a lot more to learn about this company. Many aspects of it defy analysis and prediction. While I'm much less clear about its future now, I'm proud of our Rule-Breaker-turned-Rule-Maker America Online. It's the crown jewel, as Levin says, of an enormous media conglomerate. It has come farther faster than any other business in history, and it hasn't quit yet. Maybe, just maybe, it will rule the world.

Brian Lund loves the sap of Acer saccharum on French toast and buckwheat pancakes; he just doesn't like it in movies. He does not own any of the companies mentioned in this article. The Motley Fool is investors writing for investors.