AOL Steals the Limelight

Time Warner (TWX) has tried everything short of giving away a free set of Ginsu knives to lure people to its AOL Internet unit. Now, it's going to see if free content will help.

The largest media company wants to lessen AOL's reliance on its faltering dial-up business so it can focus on gaining more Internet advertising revenue, according to media reports. AOL will have to trim thousands of jobs to acheive this.

Time Warner plans to disclose its new AOL strategy on Wednesday, when it issues second-quarter results. Shares of Time Warner have been weighed down by investors' worries about AOL, which accounts for about 19% of its revenue. This year, Time Warner shares have dropped 7%, while rivals News Corp. (NWS) and Walt Disney(DIS) have both surged about 20%.

"People are worried about it dying a slow, slow death," says Victor Hawley, who manages more than $1 billion in assets for Reed Conner & Birdwell, including shares of Time Warner, referring to AOL. "In a perfect world, if you didn't have to worry about subscription revenue, you would have converted years ago."

AOL has long been a source of concern for Wall Street. It is a reminder of the failed Time Warner-AOL merger, which is considered among the worse deals in history. In fact, Steve Case, one of the merger's architects, recently apologized for it in an interview with PBS' Charlie Rose.

Earlier this month, The Wall Street Journal said that Time Warner was willing to sacrifice $1 billion in AOL's operating profit through 2009 in order to make the changes.

But in a recent note to clients, Credit Suisse analyst William Drewry cautions investors against making assumptions on the impact of the changes at AOL before details are announced by Time Warner.