Digital Media

This was originally posted at ZDNet's Between the Lines.

Time Warner's first quarter was weighed down by its AOL unit, which saw revenue fall 23 percent. Time Warner CEO Jeff Bewkes reiterated that the company is looking for "the right ownership structure for AOL."

Here's why: AOL reported first-quarter revenue of $867 million, down 23 percent from a year ago. Subscription (dial-up) revenue fell 27 percent, and advertising sales declined 20 percent. Both declines were expected, and AOL noted that ad sales were weak in all categories (ad networks, display, and search).

Operating income for AOL fell 47 percent to $150 million, which included restructuring costs of $58 million. AOL also ended the quarter with 106 million average U.S. unique users. AOL's dial-up business had 6.3 million subscribers, down 2.4 million from a year ago and 570,000 from the fourth quarter.

Time Warner has been trying to unload AOL and reportedly may attempt a spin-off. AOL recently named former Google exec Tim Armstrong as its CEO to right the ship. There are options: Time Warner could spin off AOL or sell its dial-up business to an outfit like EarthLink.

A closer look at Time Warner's business units.

(Credit: Larry Dignan/ZDNet)

Simply put, AOL and Time Warner's publishing unit, which had an operating loss of $32 million, are dead weights on the company's overall earnings. Time Warner reported first-quarter net income of $661 million, or 55 cents a share, compared to $771 million, or 64 cents a share, a year ago.

Adjusting for investment gains and charges, Time Warner reported earnings of 45 cents a share on revenue of $6.9 billion, down 7 percent. The media giant had a bevy of moving parts--1 for 3 reverse stock split and Time Warner Cable dividend. Wall Street was expecting earnings of 38 cents a share.

Time Warner also reaffirmed its 2009 outlook of flat adjusted earnings of $1.98 a share relative to 2008.

AUSTIN, Texas--With panels and discussions every year about social engineering, hacking, remixing, and culture jamming, South by Southwest Interactive is the must-attend conference for geeks who want to shake things up.

Maybe that's why the many panels at the conference about the future of media--from print to broadcast to music to film--were tinged with the message that fast, often radical change is necessary. With panel topics like "How Copyright Law Failed The Digital Age," "New Think for Old Publishers," and "Old Media Finds New Voice Through Twitter," this year's SXSWi promised to offer a blunt take on some longstanding stalwarts of the media industry that now lie in states ranging from evolutionary flux to full-out crisis mode. The Austin Convention Center was buzzing with talk of the future, but there was no denying the upheaval going on outside.

The short version of the long version we all know: Traditional moneymaking strategies across the media landscape are losing steam. While solutions from interactive ads to subscriptions to micropayments to social-network "app-vertising" to all sorts of digital sales models have been pitched and put into effect in this new world of iPods and Kindles and YouTube and a dozen different streaming media services, the digital revenues aren't keeping pace with what's being lost. A nasty recession just throws a big, costly fork into the equation.

"I should set up, like, a little picture of me (on my Web site) with a picture of a pirate eye patch on, saying 'Arrrr, give me five dollars!'" said documentarian Morgan Spurlock in a panel called "The Future of the DVD and Digital Distribution," when the topic shifted to the long-shot possibility of asking for donations to combat piracy.

He was joking, obviously. But SXSWi panelists as a whole seemed to indicate that struggling media companies shouldn't just embrace the cutting edge, they should more or less dive off it headlong.

"There is no low-risk solution to innovation. When times are tough, brands and agencies and everyone has a tendency to say, 'Well I don't want to experiment,'" said Patrick Moorhead, director of emerging media at the Microsoft-owned ad firm Razorfish, in a panel discussion on Saturday morning about innovation during a recession. "Our belief is that if you stick with what you've got, that's a bigger risk than taking a risk on emerging media and testing something new that could potentially teach you something."

Moorhead showed off "NewsBreaker Live," an ad campaign created for MSNBC in which motion sensors in participating movie theaters let the audience play a full-body version of a "Pong"-like game to capture real news headlines. It certainly livened up the panel, even though no one could really see closely enough to read the actual headlines.

"South by Southwest, from what I can tell, it's very much end-filtered," said Eric Feng, chief technology officer at Hulu, the joint video venture between News Corp. and NBC Universal. "I think it really prides itself on a free spirit, and you're going to get honest feedback from real people, real users, real companies, a lot more so than some of the other conferences you might go to."

So you'd think that this is the sort of place where the old media's struggling elite might show up in search of a few answers, however out of left field they might be.

But they're hard to find. Wander the halls of the Austin Convention Center during SXSWi, and you'll run into loads of start-up entrepreneurs, digital marketers, and representatives from both traditional and outside-the-box advertising agencies. Traditional media companies on both the print and broadcast fronts, however, are tougher to track down. It's unclear as to just how much of a presence the likes of a major broadcast player or a national newspaper has at SXSWi--it's easy to get lost in the hordes of developers and designers.

"I assume they're here," said Avner Ronen, CEO of the video software start-up Boxee, which has made waves recently for offering a well-received product and getting into a sort of content feud with Hulu and its video partners. "I haven't run into them."

Kevin Marks, a Google product manager who has been working on its Friend Connect product and marketing it to some traditional media properties, thought differently. He pointed to panels like "Designing the Future of the New York Times," in which designers from the struggling newspaper talked about their attempts to propel it into the digital world. "I was very impressed with the (traditional) news people here who say, 'We have this problem and we're finding ways to work through it. We're going to work with the Web,'" Marks said in an interview.

On the other hand, there are dangers in listening too closely to the digerati. SXSWi attracts a self-selecting crowd of well-educated futurists who live primarily in major cities or academic hubs, a good number of whom are probably quite confident that the digital revolution is in full force just about everywhere. It's a truism best personified by the fact that the concentration of Apple's iPhone, the quintessential gadget of the tech-savvy and hyperconnected, was so high in Austin during SXSWi that carrier AT&T had to boost its infrastructure for the week. Attendees are invariably in the company of very bright people on the bleeding edge of digital media. But this can be a myopic bunch.

Ricky Van Veen, co-founder of entertainment brand CollegeHumor, pointed out in a Saturday panel called "Comedy on Television and the Web" that even though canceling cable subscriptions and even ditching TVs altogether is trendy among young people in cities like New York and San Francisco, a recent study showed that the trend nationwide is very different. A start-up like Boxee or even Hulu doesn't have the "wow" factor in a suburban household that watches "Dancing With The Stars" on TV in the evenings as it does in a city apartment where the broadcast airing of "The Office" conflicts with happy hour. "The average American watches 151 hours of television per month," Van Veen said, citing Nielsen statistics from last month. "That's an all-time high."

In an interview with CNET News on Monday, Hulu's Eric Feng concurred. "For the Super Bowl you had a hundred million people tune into one event. You still can't amass that type of audience in an online environment."

But however edgy some of the thinking may be at SXSWi, and however much its demographic may deviate from the U.S. population as a whole, the revenue crisis is real, and this is one of the places where it takes center stage. According to Avner Ronen, the sense of uncertainty over profits is what's holding back some of the innovation that SXSWi's masses are so eager to set in motion.

"That's what's scary for the media companies dealing with Boxee," he said. "They saw what happened with newspapers. It's unlike the record industry, it's not like they fought it. They endorsed it, they executed very well against it, it's just...the analog dollars to digital pennies thing."

Right now, many of them are at the point where they could use some insight--even the wacky kind with eye patches.

The Kindle 2 could generate revenue of $305 million and gross profit of up to $70 million for Amazon this year, according to estimates made by investment bank Collins Stewart.

The estimates are just the latest heady Wall Street predictions for the Kindle 2, Amazon's digital book reader. Last month, a Citigroup analyst published a report that predicted the Kindle 2 would generate $1.2 billion in revenue by 2010.

Amazon hasn't broken out financial numbers for the Kindle 2, which made its debut last month.

Collins Stewart estimates that the device will see sales of $1.6 billion and $400 million in gross profit by the 2012.

"Kindle not only removes multiple costs and inefficiencies from the current value-chain for books (print & fulfillment cost, backorder risk, and inventory management)," the bank wrote, "but also increases propensity to buy more books/content and other adjacent products."

Collins Stewart also compared the Kindle 2 to the Sony eBook Reader in 13 different parameters and concluded: "Except for (the) touch-screen and built-in reading light offered by Sony, the Kindle is a much better device. More importantly, due to Amazon's focus/expertise in books/content, Kindle provides not only the largest repository of eBooks/content but also dozens of user-friendly features/functionality."

RealNetworks said Tuesday that it now expects fourth-quarter revenue of between $151 million and $153 million.

In October, RealNetworks had said it expected fourth-quarter revenue in the range of $150 million to $157 million. Analysts on average have been expecting revenue of about $153.8 million, according to Yahoo Finance.

The revised figure compares with the $157 million in revenue that the digital music company reported in the year-earlier period and would be roughly even with the $152 million logged in the third quarter of 2008.

RealNetworks also expects to report fourth-quarter charges of $227 million to $249 million, about $6 million of which is related to a workforce reduction and plans to spin off a games company. In December, Real said it would lay off about 130 employees, or 7.5 percent of its staff, along with cutting 30 contract positions.

Regarding the games spin-off, the company said Tuesday: "While Real still intends to create a separate games company, there is no visibility as to when conditions will support separation. As a result, the company has postponed work with outside advisors, has stopped external spending on the transaction and will write off the capitalized costs in the fourth quarter."

The bulk of the fourth-quarter charges--$185 million to $200 million--reflect the impairment of goodwill and acquired intangible assets, Real said.

RealNetworks plans to report actual fourth-quarter earnings February 12.

Online auction giant eBay lowered its fourth-quarter revenue expectations and reported third-quarter numbers that met analyst forecasts.

Company executives said Wednesday that it expected fourth-quarter profit to come in between 25 cents to 27 cents per share, compared with the 39 cents it reported during the same period in 2007.

For the third quarter, eBay's earnings came in at the low end of Wall Street expectations with revenues of $2.12 billion, up $228 million from the third quarter of 2007. Net profit was $492 million, or 38 cents per share. Analysts predicted that eBay's earnings for the quarter would be between $2.1 billion and $2.15 billion.

The company's shares fell 13.6 percent, or $2.41, to close trading Wednesday at $15.33. In after hours, shares of eBay were trading at 14.22, down $1.11 or 7 percent. The markets, however, suffered another bloodbath and eBay was in no way the only tech stock that was punished. The CNET Tech Index closed down 7.9 percent at 1,131.56.

The Nasdaq fell 247.45 points or 6.8 percent. Shares of Apple dropped more than 5 percent to close at $97.95, and eBay rival Amazon finished the day at $48.72, down 12 percent. Microsoft shares fell nearly 6 percent to $22.66.

San Jose, Calif.-based eBay warned last week that the ailing economy was hampering efforts to spur growth in auctions. The company also told investors that it was planning a 10 percent staff reduction.

(Credit: Susan Dove/CNET News)

Maybe it's advice he heard from a career counselor at Harvard and took to heart: Do what you love, and the money will follow. For now, what Mark Zuckerberg wants most for Facebook is to see it grow and grow and grow some more, without too much fretting over the bottom line.

In an interview with a blogger for the German newspaper Frankfurter Allgemeine Zeitung, Facebook's co-founder and CEO minced no words on the matter: "Growth is primary, revenue is secondary."

Mark Zuckerberg and Sheryl Sandberg at the D6 conference in May.

(Credit: Dan Farber/CNET News)

Of course, it could be less a philosophical matter than a practical one for a site that's still sketching out its plans for making money to match its popularity. And bless his heart, even in a tanking global economy, Zuckerberg suggests there's plenty of time for that. He elaborates:

But what every great Internet company has done is to figure out a way to make money that has to match to what they are doing on the site. I don't think social networks can be monetized in the same way that search did. But on both sites people find information valuable. I'm pretty sure that we will find an analogous business model. But we are experimenting already. One group is very focused on targeting; another part is focused on social recommendation from your friends. In three years from now we have to figure out what the optimum model is.

Sheryl Sandberg, Facebook's chief operating officer, said essentially the same thing over the summer--the social network's focus is on growth.

How do the two executives divvy up their responsibilities? Zuckerberg said of Sandberg, who joined Facebook about six months ago:

She is an excellent manager. She is very good in building our international organization. I'm focused on the direction of the company, especially of the product development, and the overall strategy. I spend a lot of time working with engineers and product developers. We work together hand in hand.

He also made it clear who's boss: "Me!"

On Friday, Zuckerberg will be taking part in a "fireside chat" at the Future of Web Apps conference in London.

For the full interview, including Zuckerberg's take on Facebook's Windows Live Search deal, its international growth, and the possibility of an IPO, see " Facebook CEO Mark Zuckerberg: Our focus is growth, not revenue."

SAN FRANCISCO--If the $1 billion Web video advertising market is to reach the level of television's estimated $50 billion, it ironically won't be thanks to YouTube, the Internet's most popular spot for watching clips.

That's at least the read from Internet video executives here Thursday at the RBC Capital conference. Executives from popular video search and ad companies said that so-called user-generated videos like those on YouTube aren't drawing any significant dollars from advertisers or agencies. Advertisers need to control their brand, and it's seen as too risky to give up that control on a network with home videos or potentially pirated broadcasts.

One executive went so far as to say that user-generated videos will never make money.

"It will be like instant messaging. It's ubiquitous but no one makes money on it," said Thomas Wilde, CEO of Everyzing, which hosts digital audio and video for major broadcasters such as Fox Sports and Cox Radio.

Of course, he has a stake in supporting professional content. But that's still a controversial idea, given that Google spent $1.6 billion to buy YouTube two years ago. Despite the site's enormous popularity--it's the no. 5 Web site--YouTube has yet to make money from the massive video inventory it produces. Industry insiders have even estimated that it costs Google as much as $1 million a day in bandwidth fees to serve hundreds of millions of videos, according to Fortune.

Suranga Chandratillake, CEO and founder of video search service Blinkx, speculated that Google didn't really care about the costs when it bought YouTube. The acquisition, he said, was likely about acquiring those millions of people who visit YouTube every day--the same rationale behind Microsoft's interest in Facebook. (That said, YouTube has sought to form partnerships for professional videos.)

He disagreed with Wolfe that user-generated content will never make money.

"It will have to be a very different kind of advertising. If someone does figure it out, then Google will be in a good position," he said.

So when and for whom will the money start rolling in? Video ad executives said that while YouTube has a lot of inventory that's hard to monetize, sites with professional content such as Hulu.com don't have enough inventory to serve demand from brand advertisers.

Jayant Kadambi, CEO of video ad network YUME, said that in February, a major auto manufacturer called him and asked to spend $2 million on online video broadcasts the day before the Super Bowl. "I couldn't take it," Kadambi said, clarifying that he didn't have enough inventory. (His company now runs a piece of Microsoft's video ad platform.)

He said only recently has there been enough video to start targeting ads to people's demographics, location and age. That has kept the cost of video ads relatively high--between $10 cost per thousand impressions and $20 cost per thousand.

Video executives also said that they're getting higher rates of response on video ads than typical online display ads, which can command as low as 0.1 percent click through rates. They said that the more popular pre-roll video ads--or ads that play before a broadcast--are getting anywhere from 2 percent to 6 percent response rates.

Still, Blinkx's Chandratillake said hosting and streaming video is expensive, particularly compared with a text page. "If you are a publisher you're paying for this expense and you're trying to figure out how ad revenue will offset that expense," he said.

"What we've found is that advertisers and agencies are only interested in professional media, so professional content providers are having a good time finding extremely high demand because they have a lack of video views," he said.

He said his company has had some success creating a program to place sponsored videos next to searched-for broadcasts.

As for getting to TV-like spending, advertising executives said that that likely won't happen soon, if ever.

"I don't think it's going to be a $50 billion business, but it's going to be a more efficient business, one that's targeted and relevant," said Brandon Berger, an executive at MDC Partners, a holding company for several digital advertising agencies.