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.
"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.