Time Warner's decision to spin off AOL bodes well for the Internet company as well as Time Warner, according to industry analysts, writes Mohan Kakanadan

US media and entertainment giant Time Warner's decision to spin off AOL bodes well for the internet company as well as Time Warner, according to industry analysts.

Time Warner yesterday revealed its plan saying that the separation will enable them to focus to an even greater degree on the core content businesses. (See: Time Warner to spin off AOL as an independent company). ''After the proposed separation is complete, AOL will compete as a standalone company, focused on growing its Web brands and services,'' chairman and CEO Jeff Bewkes said. 

The new AOL will include the web access business, web publishing and social networking including Bebo, and the Platform-A advertising programme, while Time Warner will focus on TV including HBO and CNN, Warner films and its magazine publishing business.

According to comScore Media Metrix, AOL's Web sites, which include celebrity gossip site TMZ and tech blog Engadget, averaged 106 million unique US visitors each month during the first quarter - a drop from 110 million visitors in the first three months of 2008.

The company ranks fourth for traffic, with Google, Yahoo Inc. and Microsoft Corp. claiming the first three spots.

''At least the demerger gives AOL some independence from a bad situation,'' technology analyst Rob Enderle was quoted as saying in the Washington Post on Thursday.

''Where right now is purgatory, right now they're stuck,'' he said. ''With Time Warner putting them on their own, there's a chance that they'll be able to rebuild a business.''

 The spin off proposal is the final admission of failure of the original dot-com dream, says Shane Schick in his IT World Canada blog.

''The merger was seen as the ultimate convergence of content with distribution,'' he said about the much hyped deal between the two companies in 2001.

''In those days, we saw a lot of brochureware portals, with little more than a marketing message attached to a URL. With a lot of Web design work, creative approaches to content management, e-commerce and making use of public networks and search engines, many organisations grew their own Internet identity rather than glom on to an already-established online presence,'' Schick said.

It was hard to imagine how it couldn't work.

The AOL-Time Warner deal reflected an oversimplified understanding of how the internet works,'' he added.

After the demerger, AOL will hold the internet access business. Despite seeing subscriber numbers fall from 26 million at its peak to 6 million this year, this unit is seen as the most reliable one inside the whole group, analysts say.

According to them, AOL may be able to pull along on its own, but the slimmer Times Warner may become an easy prey for cash-rich predators.

AOL's valuation plunged drastically during the years, forcing AOL Time Warner to report a loss of $99 billion for 2001 -  the largest ever reported by a company in the US. To put it in perspective, AOL Time Warner's $99-billion loss in 2001 is only $300 million short of AIG's loss of $99.29 billion in 2008.

Worse, AOL lost 20 million of its 26 million paid subscribers. The whopping loss foced Time Warner to drop AOL from its corporate name.

AOL co-founder Steve Case, one of the main architects of the 2001 deal, wrote Thursday on the short-messaging site Twitter that he was glad to see the breakup.
''It has been a long, tortuous journey" and now is "time to open a new chapter," he wrote.

 Early last year, Time Warner spun off its cable division, Time Warner Cable, though it accounted for about half of Time Warner's market capitalisation of over $40 billion. (See: Time Warner spins off cable unit, gets $9.25 billion windfall).

The demerger strengthened Time Warner by substantially reducing its leverage. At the closing in March,  Time Warner Cable paid Time Warner a $9.25-billion cash dividend, which helped the company reduce its net debt from $20 billion in late 2008 to $10 billion.

Bewkes is focused on producing content rather than delivering it. However, unlike the cable business, AOL has been a major contributor to Time Warner 's cash flow. Its current share is around 20 per cent. This means cash flow will now fall to around $4 billion, one analyst said.

The spun off will have some negative impact on Time Warner, he pointed out.

 The company itself said on Wednesday that it expects a fourth-quarter charge of $25 billion to write down the value of its cable, publishing and AOL assets, leading to a loss for the year.

There has been speculation that Time Inc., the division that publishes Fortune, dozens of other magazines, may be the next to be spun off, he added.

However, investors are enthusiastic about the development. Time Warner shares  gained 2.39 per cent in New York on Thursday to close at $23.55.