AOL Steals the Limelight

"There is a lot of 'make-believe' math in the media estimating the forward impact of AOL's restructuring plan which we have refrained from participating in," writes Drewry, who rates the shares outperform, in a recent note to clients.

In order to be successful, AOL will have to lure users away from Yahoo! (YHOO) and Microsoft's(MSFT) MSN service, both of which have more unique visitors, according to comScore Networks. That data also shows that News Corp.'s popular MySpace site, which trails AOL, saw a 150% gain in traffic in June, larger than any of the portals.

To be sure, AOL has been remaking itself in the image of the larger sites by putting content on its free site, AOL.com, that had only been available to subscribers.

AOL can't continue operating as it has been. Gains in advertising revenue haven't been enough to offset declines in dial-up subscribers. This quarter will be no exception.

Prudential Equity analyst Katherine Styponias, who has a neutral-weight rating on Time Warner, is forecasting that AOL's revenue will drop 8% from a year ago to $1.94 billion, while operating income before depreciation will tumble 13% to $459 million. She estimates that AOL lost 1 million net subscribers in the same period.

In a note to clients, she argues that "the transformation of the division's business model is the appropriate course of action in light of the continued subscriber migration to broadband."

Investors will have to wait until Wednesday to see if their long-term worries about AOL have been addressed.

"It will be a successful strategy, and over time it will boost the stock," says Peter Jankovskis, director of research of OakBrook Investments, which owns Time Warner shares among its $1 billion in assets under management. "Whether it's fast enough for some investors, I cannot say."

Shares of Time Warner rose 13 cents Friday to $16.34.

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