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AOL Clouds Icahn Battle

He demands a cable spinoff, but broadband pipes could be the only way to revive struggling AOL.

With Carl Icahn turning up the pressure on

Time Warner's

(TWX)

bosses, the AOL division looms as a bigger question mark than ever.

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Icahn has said repeatedly in recent weeks that he wants the New York media titan to wake up its long-slumbering stock with shareholder-friendly moves like massive stock buybacks and a cable spinoff. Though Icahn has indicated he isn't purely unhappy with management, it's clear that he wants more out of the company than the legal settlements that have recently been trumpeted as a sort of progress.

Given the hideous performance of Time Warner stock since the AOL merger debacle, few observers have questioned the need for action. But CEO Dick Parsons has stopped far short of pointing toward the kind of sweeping gesture that Icahn and his allies want. And it could be that Parsons has been tight-lipped in part because he knows Time Warner needs to keep the cable systems to have any hope of reviving the flagging America Online business.

Time Warner's "conglomerate structure obfuscates value and complicates the investment thesis," Icahn has complained. In response, Icahn has advocated a complete spinoff of the company's cable operation as well as a stock buyback in the $20 billion range, which is four times as big as Time Warner has planned. In addition to making himself available for meetings, Icahn has recently indicated that he will seek a board seat in an effort to bend management's ear.

Considering the deep pockets of his group -- Jana Partners, Franklin Mutual and SAC Capital are in the process of acquiring 2.6% of Time Warner's stock -- that's no idle threat. But larger strategic issues may cloud the matter.

While it was AOL's hot performance throughout the 1990s that spurred the 2001 linkup with Time Warner, the online property has been a much less stellar performer since then. AOL has been losing subscribers, and with consumers moving en masse to broadband Internet connections from the dial-up service that was prevalent a decade ago, the business of competing with rivals ranging from

Yahoo!

(YHOO)

and

Google

(GOOG) - Get Report

to

Microsoft

(MSFT) - Get Report

has only grown more pressing.

Jeffrey Bewkes, Time Warner's Entertainment & Networks Group chairman, acknowledged this week at a Merrill Lynch media conference that online platforms such as AOL are in some ways competitive with the cable business. But at the same time, he said, having the infrastructure to deliver broadband video content is a boon for the cable operator as well as for Time Warner's content side.

In other words: Time Warner wants AOL broadband content delivered through Time Warner Cable's pipes, not through someone else's. According to Bewkes, this setup "supports the operating structure" on all sides.

And while AOL has been struggling, its possible contributions to Time Warner still loom large in a digital age. AOL has 110 million unique visitors per month, according to the company.

As new broadband services materialize and evolve, Parsons doesn't want AOL hung out to dry. Instead, he is looking for Time Warner Cable subs to grow AOL broadband and bolster other aligned services. That's one synergy gamble Parsons wants to go the right way.

Parsons has been very quiet about Icahn's maneuvers, choosing instead to speak through representatives. The official response this week came from a spokesperson, who said, "Our board and management are, of course, committed to creating long-term value for all Time Warner shareholders."

"To that end, we have in place a process through which we are carefully reviewing a range of options to increase the value of our company, including those proposed by Mr. Icahn and his group. Investors should rest assured that this evaluation is being done in a prudent and deliberate manner with an eye towards creating sustainable value for all of our shareholders," the spokesperson said.

And to be sure, there are plenty of reasons to believe that the combination of content assets and distribution assets across all media companies have not lived up to their joint billing. But where others such as

Viacom

(VIA.B)

,

Emmis

(EMMS) - Get Report

,

Disney

(DIS) - Get Report

and

Clear Channel

(CCU) - Get Report

have found a clear path to dividing their assets in this age of disassembly, AOL gives Parsons a more complicated problem.

So Icahn logically asks why Time Warner's studios and networks, having produced so much great content, have suffered under the weight of a complicated conglomerate and notions of synergies that never existed. In other words, how can you produce

Lord of the Rings

,

Harry Potter

, a slew of hyper-successful HBO shows, New Line films, have great cable networks, successful magazines -- and not move your share price in the right direction?

Until Time Warner figures out how to either wake up AOL or get out of it, the company appears doomed to keep asking that question.