January 17, 2001 9:30 PM PST
AOL Time Warner plans to close Entertaindom
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The shuttering of Entertaindom is the second time the media giant will cut costs at its Web properties since the completion of its historic merger last week. Its operations will be rolled into the larger Warner Bros. Online Web site, which has about 200 employees, said well-placed sources familiar with the company's integration plans.
"Entertaindom is going away," a source said. "Time Warner is no longer making a play to become an entertainment portal because it flat out didn't work."
The move may provide an important indication of how the company will operate as it bridges the gap between old and new media. Though Internet companies such as America Online have had to move quickly and innovatively to survive their hypercompetitive markets, traditional empires like Time Warner and Walt Disney have often lagged behind in the digital world.
Entertaindom was Time Warner's first foray into creating a series of Web destinations, or hubs, focusing on specific topics. The hub strategy and the creation of Time Warner Digital Media were the company's attempts to develop Internet businesses in the wake of its defunct Pathfinder site, often criticized as one of the largest Internet debacles of any media company.
Although AOL Time Warner Chairman Steve Case said the combined company "will lead the convergence of the media, entertainment, communications and Internet industries," analysts have said cost cutting rather than revenue growth will provide much of the predicted synergies from the deal.
The combined company faces a much harsher climate today than when it was announced a year ago. Online advertising has been particularly hard hit as cash-strapped dot-coms have cut back on marketing budgets, putting a brake on potential revenue growth.
A Warner Bros. representative said some potential cuts are under review but that no final decisions have been made.
"We're not looking at major cutbacks," said Warner Bros. spokeswoman Barbara Brogliatti. "We're looking at what makes sense for the long term. We don't want to make a short-term mistake."
She declined to comment on the future of Entertaindom.
Analysts and insiders have speculated about Entertaindom's demise since the AOL merger was first announced and Time Warner's online strategy abruptly changed. Signs of trouble have included the departure of top executives last year from Time Warner's Digital Media division, as well as derailed plans to spin off the division as a separate company with a tracking stock.
The belt-tightening at Warner Bros. comes amid larger cutbacks across the company.
Cuts Wednesday hit cable news channel CNN, which announced it would lay off 400 employees, or 10 percent of its staff. CNN's interactive division will account for a third of the cuts, the company said in a statement.
Driving AOL Time Warner's cost-cutting measures, analysts said, are its earnings growth estimates made last year when the deal was cut. Despite darkening skies over the Internet economy, the company has stood by its original predictions of 30 percent earnings growth (excluding certain costs) in the first year of the merger.
Phil Leigh, a digital media analyst at Raymond James, said the company is unlikely to revise those expectations soon.
"They've consistently stood by those numbers," he said. "But it will be harder to hit those numbers through revenue growth...Whether they hit will depend on how harsh the advertising downturn gets."
The deal closed in a climate where many media companies are choosing to cut back on Web operations rather than continue to fund money-losing businesses.
News Corp. shuttered its Digital Media Division earlier this month, and The New York Times Co. quickly followed with layoffs in its Internet business. Knight-Ridder has also put its online operations under the knife.
Meanwhile, employees at AOL Time Warner are wondering how deeply management is prepared to cut.
According to one source within the company, AOL Time Warner plans "massive layoffs, cutting really deep through Warner and Time Warner." The source added that some executives fear the cuts may go too deep, potentially limiting the entertainment unit's offline production operations.
"What's ironic is it's affecting areas that AOL can't take over. AOL employees aren't going to walk in and start shooting television shows," the source said.