What Caused Time Warner's $25 Billion Loss?

When Time Warner's veteran publishing unit began laying off employees in large numbers in 2005, it allowed the company to clear out several floors of space at the storied Time-Life headquarters on Manhattan's Sixth Avenue. Prudent managers came up with a great solution: lease the space out to a no-brainer, blue-chip tenant with its own overflowing headquarters nearby.

This morning, Time Warner announced that it will need to take a charge against earnings of between $50 million and $60 million for the "restructuring of a lease for space in the Time & Life building held by a lessee who recently declared bankruptcy." That unnamed tenant? Lehman Bros.

You can almost hear Time Warner management saying, "It seemed like a good idea at the time."

The trouble is, that's what Time Warner management has been saying about too many things for too long. The aborted Lehman lease is the least of the company's problems; it is also taking an "impairment charge" of some $25 billion, essentially arguing that its cable, publishing, and AOL businesses are not worth what the company was claiming they were worth as recently as November. The company also disclosed that lower advertising revenues at its publishing and AOL divisions would contribute to a 2008 loss and that it would be increasing its reserves by $40 million to protect itself against cash-strapped cable customers who fail to make their payments.

What is so shocking about Time Warner's fourth-quarter loss is that it's being presented to the market as a shock. It's been eight years since the failed marriage of AOL and Time Warner, and despite repeated efforts at therapy, the union is still broken. None of these problems are new. In fact, the current crisis at Time Warner was set in motion years ago.

When Dick Parsons handed the reins to current Chairman and CEO Jeff Bewkes last January, there was wide speculation in Manhattan media circles that the detail-focused Bewkes would (finally!) wrangle Time Warner into a media company that makes sense and perhaps deliver the vaunted "synergies" promised so many times in the past by management. The first step for Bewkes was to spin off the cable unit to get Wall Street to look at the company as something other than a utility. Granted, cable stocks had something of a renaissance in the 2006-07 time frame as broadband expanded and triple-play came into its own. But, again, having made the decision to spin off the cable business, why did Time Warner leave themselves holding 83 percent of the bag while Time Warner Cable's stock lost a huge chunk of its value?

Still, by spinning off the cable unit, the thinking went, Bewkes would fashion Time Warner into a pure-play content provider comprised of its Time Inc. publishing arm, AOL, and its movie and television studios. The streamlined revenue model would be a mix of subscription and advertising that Wall Street could understand. But going the content route still didn't address the fact that the media business remains deeply troubled as digital forces continue to erode consumers' willingness to pay for magazines, movies, and generally all forms of entertainment. It's becoming increasingly harder and harder to make a business out of producing and selling content. And yet that's the business Time Warner has now doubled down on.

Take Time Inc., the publisher of Time, Sports Illustrated, Fortune, and People, among other titles. The division continues to be battered by the decline of print advertising and the unimpeded migration of readers to the Web. The cratering of the U.S. auto industry has been particularly painful to Time Inc., as automakers have slashed ad spending in unison. But despite the recent economic meltdown, these forces were set in motion years ago. Time Inc. CEO Ann Moore was a late convert to the Web. In 2005, the company finally adopted a strategy to focus on its core magazine brands and build robust Web sites around them. But with revenue of $5 billion, it's unclear if Time Inc. could ever scale a Web business to the point where it could sustain a well-staffed enterprise of writers and editors producing professional content.

And how can anyone be surprised that AOL is worth less than the company was saying? Google's investment in it implies a $20 billion valuation, which is obviously absurd. But, more importantly, AOL has been an obvious, stinking albatross for years. They even took AOL out of the company's name a couple of years back. Why were Parsons and company so reluctant to pull the trigger on this?

There have been some bright spots in the past year. Warner Bros.' The Dark Knight earned more than $500 million at the domestic box office, and the epic presidential election pushed CNN ratings to new records. But amid the deepest economic recession in 70 years, Time Warner can't delay confronting the reckoning that faces the media business. It is a company where it's very easy to see where the blood is flowing. But for whatever reason, it can't find the bandages or the scalpel. For an unpleasant reminder of one possible future outcome, Time Warner executives need only to look at the empty space in the Time-Life building.

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