Time Warner Inc.

views updated

Time Warner Inc.

75 Rockefeller Plaza
New York, New York 10019
U.S.A.
(212) 484-8000
Fax: (212) 522-0907

Public Company
Incorporated: 1990
Employees: 41,000
Sales: $11.52 billion
Stock Exchanges: New York Pacific

From its inception as the thinly capitalized passion of two young men in 1923 through its 1990 merger with Warner Communications, Time Inc. has been a steady, guiding force in U.S. media. As the world’s largest media concern, Time Warner’s mandate is to expand its global reach and transfer more of its communications arts from print to electronic form. In the process, Time Warner is on its way to becoming the quintessential self-marketing media producer, due in large part to the cultivation of synergies between Time and Warner assets.

The magazine that launched Time Inc. was conceived by Yale University sophomores Briton Hadden and Henry Robinson Luce during officers’ training at South Carolina’s Camp Jackson during World War I. “The paper,” as they referred to it, was a dream they put on hold for three years, until February 1922, when they resigned their reporting jobs at the Baltimore News. With $86,000 of borrowed capital, Haddon and Luce moved to New York and prepared to launch the weekly news magazine Time. The magazine’s initial mandate eventually became that of the entire company: to keep the public informed. Haddon and Luce spent a year organizing investors, staff, and tradesmen and collecting criticism and advice. The first issue of Time was dated March 3, 1923. It was 32 pages long. Haddon was Time’s editor; Luce its business manager.

Just as impressive as Time’s expansive editorial content was Hadden and Luce’s then-novel approach to marketing the publication, which included postcard inserts soliciting subscribers and circulation of lists of prominent charter subscribers. The magazine was developed by a lean staff, who doubled as clerks. Luce’s and Hadden’s own salaries were at subsistence level.

For its first year, Time prospered modestly. When Time was just over a year old, it had 30,000 paid subscribers. On August 2, 1924, Luce and Hadden launched a second publication, the Saturday Review of Literature. Hadden, who served as editor, determined that everything printed had to be either directly attributable to a person or to the publication’s own authority. Other of Time’s early journalistic innovations included the use of historical background in stories.

In 1925 Luce insisted that Time’s operations be moved to less-expensive facilities in Cleveland, Ohio—a move that Hadden and much of the publication’s staff bitterly but unsuccessfully fought. Three years later, printing of the magazine was moved to R.R. Donnelley, in Chicago, while Time’s editorial office was moved back to New York. Hadden and Luce opted at the same time to switch titles and functions temporarily. Hadden became Time’s business manager, overseeing the publication’s daily operation, while Luce took command of Time’s journalistic direction.

By 1928 Time Inc. posted a net profit, after tax, of $125,788 on revenues of $1.3 million. Making Time a lucrative proposition had taken its toll on Hadden, however, who began the new year fighting off a steptococcus virus. Hadden died at age 31 on February 27, 1929, six years after the first issue of Time was put to press.

To protect the ownership of the company, Luce and other Time staffers and directors bought 2,828.5 of Hadden’s 3,361 Time shares at $360 a share. Hadden’s family retained the remaining 532.5 shares. Within two years, Time Inc. stock peaked at $1,000 a share, and was split 20-to-l. In the meantime, Luce proposed to launch a new weekly magazine catering to business managers, called Fortune. With the Time Inc. board’s approval, Luce set out to launch Fortune, on the eve of the Great Depression. Fortune’s first issue, in February 1930, won satisfying acceptance among its targeted audience. In September 1931 Parker Lloyd-Smith, Fortune’s managing editor and with Luce, co-developer, committed suicide.

Also in 1931, Time was making its controversial transition to radio. Time Inc.’s “The March of Time” radio show featured re-enactments of historical events. The show though popular, was a limited run promotion, which some felt threatened Time’s journalistic integrity. In 1935 the “March of Time” format reappeared, as a motion picture series of short subjects.

In April 1932 Time Inc. acquired 75% of Architectural Forum. Time completed its acquisition of that professional journal for builders the following year. Luce’s personal interest in architecture had spurred Time’s acquisition of Architectural Forum, which he reshaped throughout the 1930s to reflect the monumental socio-political events of the day. When New Deal legislation made $3.3 billion available for construction projects Forum editors rushed to press an 18-page guide explaining how builders could benefit. Forum editor Howard Nyers cultivated young architects; and, in 1938, Frank Lloyd Wright traveled to New York and produced an issue of Forum devoted to the subject of his works. Although Forum expanded its circulation from 5,500 to almost 40,000 in the decade following Time’s acquisition of the publication in 1932, it posted only one year of profit. Luce resisted Time Inc.’s attempts to sell the publication. In 1936 Luce began to explore the concept of a weekly photo magazine, and Time brought pictures to print with the publication of Life, which first appeared in November 1936.

In 1937 Luce created Time Inc.’s, divisional system, the corporate organization that defined Time’s operations for decades. Each of the company’s three fundamental publications—Time, Fortune, and Life— was assigned its own publisher, managing editor, and advertising director. Although a huge circulation success, Life was a major financial drain due to the unexpectedly high cost of producing the magazine. The explosive popularity of Life propelled Time Inc. into increasing circulation, and thus costs, pushing losses on the picture magazine into the millions. Life continued to lose money, a total of about $5 million, until January 1939, when the magazine turned its first profit.

While Life continued to lose money for Time directly, it was also the indirect cause of losses for the company as some readers of Time switched to Life. In May 1938 the company sought to relieve Time’s circulation problems with the $25,000 acquisition of Literary Digest. About 60% of Literary Digest’s 250,000 subscribers chose to transfer their subscriptions to Time, bolstering that magazine’s sagging circulation.

In 1938, on the news that Time Inc.’s earnings were forecasted to drop a record $2 million, Time’s publisher, Ralph Ingersoll, and Luce became embroiled in a fierce argument over the company’s earnings. Ingersoll felt that Luce had diluted Time’s earning potential by siphoning off Time’s profits to start up and maintain publications such as Fortune and Architectural Forum. Ingersoll and Luce disagreed on editorial issues as well. In April 1939 Ingersoll took a leave of absence from Time, and did not return. Following Ingersoll’s departure, Luce appointed himself Time’s publisher and editor-in-chief.

Luce, who had strong ideas about how events in Europe lead to World War II should be reported, decided later in 1939 to devote more time to the editorial direction of Time Inc.’s magazines. Thus, in September 1939, Luce resigned as president and CEO of Time Inc., remaining editor-in-chief, and chairman Roy E. Larsen was elected to the posts Luce vacated. Like most other key top Time Inc. executives, Larsen was younger than many of his industry peers. Time enjoyed steady success during World War II, as its national magazines chronicled the war. Time Inc.’s publications dominated the newsstands. In 1941 Time’s circulation was rapidly approaching one million. Life had weekly sales of 3.3 million magazines, and readership many times that. Fortune had a small but influential 160,000 readers. The organization of 2,500 full-time employees would grow to 5,500 over the next two decades of continued expansion.

Time assumed a prominent role reporting most major news events, including World War II and the McCarthy era. There were times when the magazine clashed openly with major decision-makers; President Franklin Roosevelt and Time criticized one another openly during the war. During the winter of 1941-1942, also in the name of covering the war, Luce and his wife, Clare Boothe Luce, reported on the state of world affairs from England and the Far East, respectively; he for Time, she for Life.

In the fall of 1942 Clare Boothe Luce won election to Congress from the Connecticut district that her stepfather, Dr. Albert E. Austin, had represented from 1938 to 1940. Her position in national politics raised the dilemma of how Time’s magazines should cover the wife of their editor-in-chief. Eventually, Luce called for a blackout on the coverage of his wife in all of Time’s magazines.

In 1945 Time redirected the energies of its pool of wartime correspondents and photographers, organizing them into an international reporting operation under the command of C.D. Jackson. Luce simultaneously redefined the job of publisher of Time, and appointed James A. Linen III to that position. Linen was the first of a generation of younger managers who came up through Time’s editorial and sales ranks. Edward K. Thompson came up through the ranks to serve as managing editor of Life beginning in 1949.

Given more of a free hand than his predecessors, Thompson dismantled the periodical’s divisional structure and launched the publication on its most successful decade. Soon afterward, the financially troubled Fortune was the subject of what Time Inc. executives referred to as a “re-think.” Also in the postwar years, Luce adapted to technological advances that helped offset increases in the price of materials and wages. Despite reporting a 10% operating profit on a record high $120 million in revenues in 1947, Luce, ever the conservative manager, abandoned several projects including the construction of a New York skyscraper, due to the cost.

During the mid-1950s Time undertook to widen the appeal of long-time money-loser Architectural Forum. Although the company was successful in boosting circulation, the magazine continued to run at a loss. Forum was spun off to an existing nonprofit group in 1964. House & Home, a magazine Time had formed to complement Forum in 1952, was sold to McGraw-Hill, in 1964 as well. In 1953 Time launched Life en Español, a companion to Life International. Life en Español was suspended in 1969, however, and Ufe International was eliminated the following year.

In 1952 the company founded its Time-Life Broadcast subsidiary with a 50% interest in KOB and KOB-TV in Albuquerque, New Mexico. In a second bid for broadcast experience, Time acquired a majority interest in the Intermountain Broadcasting and Television Corporation of Salt Lake City, Utah, operators of the KDYL stations. Time acquired its first wholly owned and operated stations, KLZ-AM and KLZ-TV of Denver, Colorado, in 1954. Three years later, Time acquired the Bitner television and radio properties—WOOD in Grand Rapids, Michigan, WFBM in Indianapolis, Indiana; and WTCN in Minneapolis, Minnesota, for the then-record sum of $16 million. Eventually, Time sold its Salt Lake City and Minneapolis broadcast properties to acquire KOGO-TV in San Diego, California, and KERO-TV in Bakersfield, California.

In October 1970 the company announced plans to sell its broadcast properties to concentrate solely on cable television— a segment of the electronic media in which it already had amassed a considerable interest. By that time, Time had created East Texas Pulp and Paper Company, a joint enterprise with the Houston Oil Company, as its own source of paper. It also had erected a new Manhattan skyscraper at Rockefeller Center and successfully fended off competition from magazines like Look and the Saturday Evening Post. The company continued to operate under the watchful eye of its founder, Luce.

Arguably, Time’s most important and lucrative long-term decision to diversify was the launch of Sports Illustrated in 1954. Sports in the United States then still tended to be seasonal, and sports marketing was relatively primitive. Despite the fact that Sports Illustrated did not turn its first profit for a decade, the magazine became very profitable.

In 1959, after recovering from his first heart attack, Luce began preparing to pass the title of editor-in-chief-to Hedley Donovan, who then was managing editor of Fortune. Although Luce did not finally surrender the title until 1964, in 1959 he set in motion a management reorganization that put a new generation of Time Inc. managers in control. The company prospered under its new leadership. From 1960 to 1964, net revenues jumped from $287.12 million to $412.51 million, and net income increased from $9.30 million to $26.53 million, due to sales expansion and tighter cost controls. This profitability had been enhanced by the 1961 creation of Time-Life Books, an extension of Time’s already profitable book publishing operation. Time’s new management initiated explosive growth. Time continued to expand overseas offices throughout the decade, and in 1962 Time acquired textbook publisher Silver Burdett in a $6 million stock swap. In 1964 Hedley Donovan was appointed to succeed Luce as editor-in-chief. In January 1968 Time bought book publisher Little, Brown and Company, for $17 million worth of Time stock. In 1966 Time initiated a joint venture with General Electric, General Learning Corporation. The venture was to sell a variety of learning tools, and was sold in 1974 at a loss.

Luce died February 28, 1967. Even after his death, Luce’s influence was felt at the company where separation of editorial and publishing interests was considered sacrosanct. Time’s new leadership continued to guide the company profitably. In December 1972, however, Time announced it would cease publication of Life, which had faced soaring production costs, shrinking advertising sales and circulation, and postal rate increases. Life had lost $30 million between 1969 and 1972. Throughout the 1960s and 1970s Time Inc. acquired a number of large and small enterprises in a continuing bid to diversify. Perhaps Time Inc.’s most costly and controversial acquisition at the time was its $129 million merger in 1973 with Temple Industries, a producer of lumber, plywood, and other building materials. Time took another step toward diversification in 1978 when it acquired Inland Container Corporation for $272 million.

In November 1972 Time’s J. Richard Munro, who eventually became Time Inc.’s chairman and chief executive officer, through the Time subsidiary Sterling Information Services, Ltd., launched the pay-TV service Home Box Office (HBO). HBO was one of Time’s few commercial successes. Even after Time-Life Films was phased out in the early 1980s, HBO itself continued to finance major films, invested in a movie distribution company, and joined Columbia Pictures and CBS in a studio venture.

HBO; Money, launched in 1972; and People, launched in 1974, emerged as Time’s new profit centers during the 1970s and 1980s. Nicholas J. Nicholas Jr., who had risen through Time’s corporate finance ranks and would later become its president and chief operating officer in 1986, recommended that Time divest its sluggish forest-products interests to concentrate on its video and print businesses, where future growth would be focused. Consequently, Temple-Inland was formed and spun off to Time shareholders in 1983. Time Inc. was left to focus on its seven magazines and their foreign-language equivalents, American Television and Communications Corporation, one of the country’s largest cable companies, which is 82%-owned by Time Inc.; HBO and Cinemax, two of the country’s most successful pay TV services begun in 1972 and 1980, respectively; and Time-Life Books.

Time added four new magazine titles in 1988, bringing its total number of published magazines to 24. It paid $185 million for a 50% interest in Whittle Communications, which provided satellite public affairs and news programming direct to classrooms. It was involved in international publishing ventures with foreign-based companies like Hachette, Arnoldo Mondadori, and Seibu. Time’s growth continued through the 1980s, culminating in the 1989 agreement to acquire Warner Communications Inc. for $14 billion, creating the world’s largest entertainment and media concern. Time itself had become an attractive takeover target in an era of unprecedented leveraging and hostile bids, and thus had accepted Warner’s invitation to merge.

The proposed Time-Warner combination was nearly thwarted by an unsolicited takeover bid for Time from Paramount of $175 cash per share, or $10.7 billion. The raid proved unsuccessful, and cost Paramount $80 million. It also required Time to rework the logistics of its merger with Warner, burdening itself with $12 billion in debt. Time and Warner had also engaged in a swap of each other’s stock early in the merger process, in an additional defensive move.

Although strategically driven, not all of Time Inc.’s board members, especially Henry Luce III and Arthur Temple, were convinced that the merger was wise. Munro and Nicholas engaged in one-on-one consultation with each director to secure unanimous approval for the January 1990 transaction. The merger created a vertically integrated company.

At the first annual shareholders meeting of Time Warner, in spring 1990, Munro did as expected and announced he would step down as co-chairman and co-chief executive officer of Time Warner Inc. but would remain chairman of the board’s executive committee. Nicholas assumed the co-chief executive title while retaining the job of president. The merger agreement called for Nicholas to succeed Time Warner chairman and co-chief executive Steven Ross as the company’s sole chief executive in mid-1994.

Time Warner claims that all of its media and entertainment franchises rank first or second in their categories. Time Warner’s cable pay-television services, Home Box Office and Cinemax, posted record performances. Pay-TV revenues from Home Box Office and programming continued to grow, 7.6% in 1990. Time combined its Time-Life Books and Book-of-the-Month-Club operations. Its American Television and Communications Corporation achieved record revenues and earnings on four million basic cable and three million premium subscriptions. Time also sold off Scott, Foresman, its textbook publisher, in December 1989, for $455 million because it no longer fit into its core businesses.

The first year as a merged entity, Time Warner created Time Warner Publishing to oversee all of the company’s book and magazine publishing activities, which account for $3 billion of its annual combined revenues. The new unit launched such new magazines as Martha Stewart Living and acquired the 50% interest in In Health that it did not already own. Time Warner made a small effort to begin tapping the synergies of their combined assets when, in February 1990, Time launched Entertainment Weekly using Warner’s tape and book subscription lists. Time Warner revealed plans to open a nationwide chain of retail stores, like those operated by The Walt Disney Company, to sell merchandise that features Bugs Bunny and other of Warner Brothers’s Looney Times characters or products related to other of the company’s vast operations. Time Warner also began taking a more creative approach to cross marketing its products and publications. For instance, in November 1990, Time Warner signed an unprecedented agreement with Chrysler for advertising in seven of Time Warner’s national magazines and cable group, and to make product placements in selected Warner Brothers film releases.

To the surprise of many, within months of the merger, the highly leveraged Time Warner announced the acquisition of Lane Publishing Company, publisher of Sunset magazine for $225 million—$80 million in cash and $145 million in preferred stock. In another surprising but savvy move, Time Warner in April 1990 offered to provide a $650 million bridge loan to Pathe Communications Company to help with its $1.4 billion acquisition of MGM/UA Communications Company in exchange for certain valuable MGM/UA assets including the United Artists film library. However, Time Warner withdrew its offer, and Time Warner and Pathe eventually sued each other over the aborted agreement. In October 1990, the companies opted to settle their differences out of court when Time Warner agreed to pay $125 million for the international home video rights to 1,700 titles in the United Artists and Pathe/ Cannon film libraries for more than 12 years.

By late 1990, the newly merged Time Warner still was struggling with ways to establish joint ventures with various international concerns that would bring much needed new development funds into its operations while offering special expertise and foreign business connections. Management continued to promise shareholders a reduction and financial restructuring of Time Warner’s nearly $11 billion debt. With more than $2.5 billion in bank loans due in early 1993, one option the company had was to sell its partial stakes in businesses like Atari, Hasbro, the Franklin Mint, Six Flags Corporation, record clubs like Columbia House, Cineamerica theaters, and Turner Broadcasting System Inc. A weak economy in 1990 kept Time Warner from resorting to such a move since it could not command a premium for its business interests in a sluggish marketplace.

In the meantime, the company worked diligently to keep Wall Street at bay. Although initially supportive of the transaction, some Wall Street analysts soured on Time Warner six months after the merger. In late May 1991 Time Warner announced an unorthodox rights offering. The company planned to issue 34.5 million shares at between $63 and $105 per share, priced according to how many shareholders participated. In July, following vigorous objections from the Securities and Exchange Commission and many powerful investors, Time Warner replaced the plan with a traditional $80-per-share offering. Citing the unpredicted softness of media advertising, tight financing and an uncertain economy, Time Warner officials conceded it would take them longer than expected to arrange the joint ventures and limited equity placements that would launch the merged company back into a development mode.

Principal Subsidiaries

American Television and Communications Corporation (82%); Asiaweek Limited (Hong Kong, 84%) 541 Fairbanks Corp.; Hankook Ilbo Time-Life Ltd. (Korea, 50%); Home Box Office Inc.; Sunset Publishing Corporation; Time Australia Magazine Pty. Ltd.; Time Canada Ltd.; The Time Inc. Book Company; The Time Inc. Magazine Company; Time Information Services, Inc.; Time Internaltional Inc.; Time-Life Books (Australia) Pty. Ltd.; Time-Life International B.V. (Netherlands); Time-Life Libraries Inc.; Time-Life Pictures, Inc.; Time-Life Video Inc.; Time Life International do Brasil Ltda. (Brazil); Time Overseas Ventures, Inc.; Time TBS Holdings, Inc.; Time-T.I. Communications Co., Ltd. (Japan, 10%); Time Video Holdings Inc.; Time Warner Cable Inc.; Time Warner Foundation Inc.; Time Warner Telecommunications Inc.; TPS Acquisiton Inc.; The Washington Star Company; Warner Communications, Inc.