Business Tech

Time Warner reported on Wednesday lower sales and earnings for its third quarter, with a drop in revenue across virtually all segments, including AOL.

Sales for the quarter dropped 6 percent to $7.1 billion from $7.5 billion in the year-ago quarter. Earnings fell to $661 million, or 55 cents a share, compared with $1.1 billion a year ago. Adjusted earnings per share was 61 cents, compared with analyst expectations of 53 cents, according to Thomson Reuters.

Time Warner also increased its full-year earnings per share outlook to at least $2.05. Previously, Reuters reported, the company had said the full-year figure would be similar to last year's $1.98 a share.

The company saw growth in its Networks unit, which includes Turner Broadcasting and HBO, with revenue climbing 5 percent to $2.9 billion. But sales fell in all other segments.

Lower movie ticket sales brought down revenue by 4 percent in the Filmed Entertainment division, while a decline in magazine subscriptions cut revenue by 18 percent in the Publishing segment.

Results were also weak at struggling AOL. The number of subscribers fleeing the service increased, while ad revenue decreased, contributing to a 23 percent drop in quarterly sales.

Time Warner sales fall in the third quarter. The figures above are in millions of dollars.

(Credit: Time Warner)

Back in May, Time Warner announced that it would jettison AOL by the end of the year, a goal that Time Warner CEO Jeff Bewkes reiterated Wednesday. AOL will spin off into a separate company led by former Google ad exec Tim Armstrong, who was appointed AOL's CEO in March.

The 2001 union between Time Warner and AOL never quite coalesced. AOL was supposed to be the high-tech jolt that would transform Time Warner. But almost from the start, AOL underperformed, running into financial setbacks less than a year after the merger.

As the Internet continued to take off, subscribers realized they didn't need AOL to hop onto the information superhighway. By the end of 2003, losses had mounted, many of the key players in the deal had left, and Time Warner had dropped AOL from its name.

Though Time Warner has been dragged down by most of its underperforming segments, especially its publishing division, the company is still hoping for a brighter future without AOL.

Credit: Stephen Shankland/CNET

Brad Garlinghouse

AOL announced Tuesday that it has appointed former Yahoo executive Brad Garlinghouse, famed for his "Peanut Butter Manifesto" at that company, as the new president of its Internet and Mobile Communications segment.

Garlinghouse also will run AOL's Silicon Valley operations from its Mountain View, Calif., headquarters and serve as the West Coast lead for AOL Ventures, the company's venture capital arm. He will report directly to AOL Chairman and CEO Tim Armstrong, who was named to those posts in April.

Garlinghouse's most recent position was as an in-house senior adviser for Silver Lake Partners.

"In addition to leading our efforts to grow our communications products, Brad will be bringing his global leadership and business experience as a key member of our company's executive leadership team," said Armstrong. "He will also be a major force for AOL in Silicon Valley, working to expand our presence there and in the tech community in general."

A former Google executive, Armstrong faces the daunting task of reviving AOL, a company once nearly synonymous with the Internet for many people but which, in recent years, has strugged with fleeing subscribers and declining sales. AOL's blockbuster marriage with Time Warner never worked out, leading inexorably to the announcement in May that AOL would once again become a separate company.

At his recent 100-days-at-AOL strategy summit, Armstrong identified communications as one of AOL's five key focus areas.

Garlinghouse knows all too well what a lack of focus can to do a business. In his Peanut Butter Manifesto in late 2006, he complained of Yahoo--which has gone through its own series of troubles and reorganizations: "We want to do everything and be everything--to everyone...The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

Starting in 2003 as vice president of communication products for Yahoo, Garlinghouse climbed the ladder to become a senior vice president for two other communications segments. He has also overseen the company's Flickr photo-sharing service and Yahoo Groups.

Garlinghouse left Yahoo in June 2008, at a time when the company was shedding executives at a rapid rate.

No doubt, it's been a doozy of a year for Jerry Yang & co.

Yahoo could have been sold for $33 per share to Microsoft back in the spring; now it's trading at less than $12. Internet advertising may be in for a rough patch, along with the rest of the economy. And morale at the Internet pioneer, well, just isn't what it used to be.

With that in mind, we thought it would be helpful to create a handy list for Yahoo watchers to keep in mind as Yahoo struggles to right its ship in the face of federal scrutiny, investor wrath, and impending earnings in the middle of scary economic conditions.

The amazing, shrinking stock price
Yahoo's shares closed in the $11-a-share range Wednesday, setting a new 52-week low and tagging a new psychological watermark for investors. No doubt, most tech companies are getting pummeled on Wall Street, but Yahoo's drop has to be particularly galling, given how much more Microsoft was willing to pay for the company.

Yahoo closed at $11.75 a share, down 7.1 percent, during regular trading. That gave the Internet search pioneer a market capitalization of roughly $16.3 billion. For those of you still keeping track, that's less than half of what Microsoft offered in its initial $44.6 billion unsolicited bid for Yahoo at the start of the year.

Never mind the earnings, worry about the forecast
Yahoo's third-quarter earnings are set to be released Tuesday, and Wall Street is bracing for rough times ahead. Several analysts on Wednesday cut their earnings estimates for Yahoo and other Internet players, who rely on advertising as their main source of revenue, a challenge in this struggling economy.

According to a research report by Sanford Bernstein & Co:

Yahoo reports 3Q:08 results on Tuesday. We expect a poor performance, with net revenues of $1.39B (9 percent year-over-year growth) vs. consensus of $1.37B (7 percent growth) and pro-forma EPS of $0.07 vs. consensus of $0.09, largely because of the weak advertising environment.

Yahoo's U.S. search share declined again in 3Q:08 to 14.5 percent of all searches, down from 15.5 percent in 2Q:08 and 18.3 percent in 3Q:07. Yahoo's annual growth of 1.5 percent is much lower than the 28.2 percent growth in U.S. searches overall, implying further share loss to Google.

Those pesky feds
Yahoo is slated to hear from the Department of Justice next Wednesday on whether it will get a thumbs-up or thumbs-down on their search-advertising partnership with Google.

A number of advertisers and trade groups, competitors like Microsoft, and politicians have weighed in on the controversial deal, which calls for Yahoo to use Google's ads on its own search pages.

The Justice Department has expressed concerns that it could raise prices for advertisers and potentially lead to Yahoo exiting the search-advertising business. According to published reports, Yahoo and Google are in settlement talks with the Justice Department to avoid a legal challenge to its deal, which Yahoo has previously said could generate as much as $800 million in revenues in its first year and an additional $250 million to $450 million to its operating cash flow in the same period.

It's hard to say which way the feds will go on this, but there's little question over whether Yahoo's executives have a lot of revenue potential--and credibility--riding on the Google deal going through.

AOL: Ties that don't make sense?
Former Sun Microsystems CEO Scott McNealy, back when he was still the chief executive and a Silicon Valley soothsayer of sorts, had a brutal description of the planned merger of Hewlett-Packard and Compaq: it's like two garbage trucks backing into each other in slow motion.

That brings us to the most recent reports (and we're not counting Henry Blodget's weird whipsaw reporting Monday) that Yahoo may be looking into acquiring long-troubled AOL. Yahoo's new board has reportedly given executives its blessing to sit down with Time Warner's AOL to strike a deal.

And in the past two weeks, more reports have surfaced that a deal may be had sometime this month, with Yahoo snapping up AOL's content business.

But Sanford C. Bernstein analysts panned the prospect of Yahoo and AOL synching up in a deal. The Wall Street firm said the potential size of an AOL acquisition would be dilutive to Yahoo shareholders, who have already suffered through a tremendous stock drop in the Internet search pioneer. And Bernstein analysts noted that combining AOL's Advertising.com with Yahoo's Right Media Exchange would not drive short-term incremental revenues.

Oh yeah: Wall Street typically gags when a company announces a big acquisition, and traders often end up dumping a lot of shares of the acquirer. Shareholders won't be happy if that does happen. But they should hope that McNealy's description of the HP-Compaq merger, which turned out to be inaccurate, also misses the mark if Yahoo and AOL do a deal.

Those interlopers in Redmond
With the prospect of Yahoo's shares dropping even further after its earnings announcement, and that of a walk-away from the Google deal due to regulatory pressures, Yahoo may find its market capitalization hovering near the levels that Microsoft offered to buy out just its search business, following the collapse in talks to buy out the entire company at $33 a share.

With its initial offer to acquire just Yahoo's search business for more than $9 billion at the time of its offer earlier this year, Microsoft could be looking at throwing a few more billion-dollar bones on the deal to snap the entire company.

That is, of course, if Microsoft CEO Steve Ballmer still cares.

A federal court on Tuesday sentenced a New York man to a 30-month prison term for sending unsolicited marketing e-mail to 1.2 million AOL subscribers, according to a Reuters report.

The court ordered Adam Vitale, 27, to also pay restitution of $180,000 to the Time Warner unit for violating federal antispam laws.

In 2005, Brooklyn resident Vitale and another man, Todd Moeller of New Jersey, cut a deal with a government informant to send junk e-mails that advertised a security computer program to nearly 1.3 million AOL subscriber addresses. Under that deal, the two men were to receive 50 percent of the product's proceeds.

The two men avoided detection of AOL's spam filter system through the use of several servers to relay and change the e-mail header information.

Moeller was sentenced to 27 months in jail last November.