Time Warner Inc.

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Time Warner Inc.

founded: 1989

Contact Information:

headquarters: 75 rockefeller plz.
new york, ny 10019 phone: (212)484-8000 fax: (212)956-2847 url: http://www.timewarner.com

OVERVIEW

Time Warner stands as the largest entertainment and information company in the world. Based in New York, the company has a hand in everything from marketing books, magazines, music, and videos through Time Inc., to the television production business. It also has interests in the Atlanta Braves professional baseball team and the Atlanta Hawks professional basketball team.

While sales continue to grow, Time Warner has been burdened by a heavy debt load. Large cash flow is an encouraging sign, as the company begins to pay down the debt at a fast pace. A large portion of the company's cash flow is from cable operations, an industry experiencing tremendous growth. As long as growth continues and law-makers don't over-regulate, Time Warner's debt should continue to dwindle and its stock continue to climb.

Due to its cable operations, cost cutting measures, and the worth of its stock, analysts are cheering the company it once scorned. As long as the economy and cable industry stayed healthy, most analysts were saying in the late 1990s that the future looked bright for Time Warner.

Time Warner has produced innumerable products. Its major industries are publishing books and magazines; direct marketing, such as the Book-of-the-Month Club; music, including Warner Brothers and Atlantic; and cable, with Time Warner Cable and networks CNN and HBO.

COMPANY FINANCES

Time Warner posted combined revenues of $24.6 billion, including the Entertainment Group, which is accounted separately. Time Warner's regular revenues were $13.3 billion for 1997, up 32.1 percent over 1996's $10.1 billion. For the first time since 1992, the company reported a gain in profits, $246 million, compared to a loss of $191 million in 1996. The biggest factor holding the company from substantial profits is its heavy debt load. Time Warner took on massive debt to hold off a takeover from Paramount in 1989 and added more debt when purchasing Turner Broadcasting in 1996. At the end of 1997, long-term debt stood at $12.6 million, for a debt ratio of 52.4 percent.

Time Warner generates most of its revenues, 41 percent, in the United States, followed by the United Kingdom, Germany, and Japan, at 2 percent each. Not counting the Entertainment Group, publishing concerns recorded the most sales at 17 percent, followed by music at 15 percent, and cable networks at 12 percent.

While earnings prospects have looked dim over a 10-year period, the company points out that its stock price has risen and has had good cash flow. Time Warner's goal is to grow cash flow by 16 percent per year, which will aid in paying down its debt. By doing that, the company hopes to raise the rating of its bonds from "junk" to "BBB." Time Warner stock hit a high of $62 and a low of $36 during 1997.

ANALYSTS' OPINIONS

Much of the controversy surrounding Time Warner Inc. stems from the company's outstanding debt and its merger with Turner Broadcasting. In fact, many analysts have been in doubt of the company's debt-reduction efforts. For example, CEO Levin issued a large amount of expensive preferred stock, convertible into 74 million shares. There are analysts who claim this move has threatened shareholders and has not reduced the company's debt.

In 1998, the pounding Levin had taken from analysts and Wall Street turned to praise. Many analysts shook their heads at Levin's accumulation of debt, its acquisitions, and the fact that its accounting was a nightmare for analysts trying to crunch the numbers. From December 1993 to December 1996, Time Warner's stock had fallen 15 percent, while the Standard & Poor's 500 rose 59 percent. From December 1996 to March of 1998, the stock jumped almost 84 percent, from $38 to nearly $70. There are some analysts who think the stock will be in the mid-$80s by the end of 1998 and at least one who is predicting a high near $90 by the end of 1999.

The new exuberance by analysts toward Time Warner stems from several factors. Some say Levin, a quiet man, has shown he is in charge of the massive company; it hasn't hurt that the rambunctious Ted Turner has backed him all the way. Congress has relaxed cable regulations, paving the way for more joint ventures and higher cable fees. As Time Warner derives about 40 percent of its cash flow from cable operations, a predicted 11 to 13 percent rise in cash flow for the cable industry is welcome news. More cash flow means more money to pay down debt, which Time Warner did in 1997 to the tune of $850 million. Some analysts expect the debt to be further reduced by $1.5 billion by the end of 1999.

Time Warner also joined the expense-trimming craze, much to Wall Street's delight. The company sold an art collection, outsourced some of its auditing, and switched from 30-second commercials to 15-second commercials for its movies. Levin predicted the company will save $700 million per year very soon with all of its cost cutting measures.

There is still reason for cautious concern, however. The music division continues to perform poorly. Time Warner also issued millions in new stock, diluting shareholder's equity. Levin hopes to buy back shares with the extra cash flow. If growth in cable earnings slow or Congress decides to tighten regulation, the abundance of cable cash for Time Warner could slow dramatically. Whether Time Warner will ever be able to coordinate all of the parts of its empire to work together remains a cause for concern. At the end of the 1990s, some of the divisions within the company were yet to be coordinated with each other.

HISTORY

Time Inc. and Warner Communications merged in 1989 to become Time Warner Inc. Time Inc. had founded such magazines as Time, Fortune, Life, and People. Time Inc. also brought its cable TV venture, HBO, to the merger table. Warner Brothers brought along its reputation as one of Hollywood's largest movie studios. Bought by United Artists in 1969, its name changed to Warner Communications Inc. Warner was well-known for its successful video game subsidiary, Atari, in the late 1970s.

Big changes took place during the late 1980s and 1990s. Paramount, another movie studio, put in a bid for Time Inc. in 1989 when the merger was taking place. In an effort to fend off Paramount, the new company, Time Warner, accumulated $14 billion worth of debt. By the 1990s, Time Warner introduced magazines such as Entertainment Weekly and launched Court TV and Time Warner Entertainment, an alliance for its film, music, and TV production businesses.

Other changes during that decade involved the company's introduction of the WB television network, the 51 percent sale of Six Flags Entertainment, and the sale of its Interscope Records, which received controversial attention due to its distribution of music characterized by violent and sexually degrading lyrics. Time Warner also obtained 3 million cable subscribers in 1995 and 1996 by purchasing several cable operators. It then bought the remaining 80 percent of Turner Broadcasting.

In 1998, Warner did further trimming. The remaining 49 percent of its stake in Six Flags was sold. More cash flow was generated when the television network NBC paid $850 million to Warner Brothers for the continuing rights to air the hit show ER. Time Warner also signed an agreement with TCI cable, whereby TCI would carry the company's WB network on 90 cable stations in small markets. It was an important deal for Time Warner, which resulted in the WB reaching about 90 percent of the country, double its previous scope.

STRATEGY

With the core businesses of publishing, entertainment, cable networks, and cable systems, Time Warner focused on consolidating its businesses while simultaneously growing at a fast enough pace to increase its return on capital. The company claimed that by increasing its cash flow, it would, in turn, grow more rapidly, reduce debt, and buy back stock. Time Warner made investments and acquisitions that created an elite combination of journalistic franchises coupled with unbeatable global distribution networks. The company, however, shifted its focus away from further acquisitions to focus on forming partnerships through its existing divisions. Its successful cross-promotion of the 1996 movie Space Jam and the Space Jam movie soundtrack has been an example of the internal corporate partnerships the company has entertained. Time Warner also initiated a cost-cutting program due to its increasing debt.

INFLUENCES

Time Warner CEO Gerald M. Levin launched the idea to distribute HBO in 1975 using satellites. The company continued to purchase cable companies as it saw opportunities for growth. After the company merged with Turner Broadcasting, a $7.6 billion investment, its cable business had become an expensive one to operate. In fact, the company sold a portion of the E! Entertainment network and dumped its Interactive-TV Network in 1997. Previously held high hopes for the company's dominant presence in the information field vanished. High-tech costs to implement such cable systems ended up being more than the company was willing to invest after the merger with Turner.

Time Warner has appeared to hold to a defined strategy by merging with Turner Broadcasting. In doing so, Time Warner was able to acquire powerful assets like CNN, TNT, and New Line Cinema. Wall Street even predicted the company's growth to hit double digits by 1999 after the merger took place.

CURRENT TRENDS

With the cable industry exploding, and the potential of cable modems to carry Internet access growing, Time Warner was stepping to the forefront of the industry. Cable modems are hundreds of times faster than conventional modems. The company has introduced a cable access system, called Road Runner. It was predicted that Time Warner could generate a billion dollars in sales in as little as five years as a result of this innovation.

FAST FACTS: About Time Warner Inc.

Ownership: Time Warner is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: TWX

Officers: Gerald M. Levin, Chmn. & CEO, 1997 salary $7,550,000; Robert E. "Ted" Turner III, Vice-Chmn., 1997 salary $6,050,000; Richard D. Parsons, Pres., 1997 salary $3,650,000; Richard J. Bressler, Sr. VP & CFO, 1997 salary $1,725,000

Employees: 67,900

Principal Subsidiary Companies: Time Warner, Inc. owns hundreds of companies, including: Book-ofthe-Month-Club; Cable News Network; Cartoon Network; Castle Rock Entertainment; HBO; Little, Brown (book publishers); New Line Cinema; Time, Inc. (magazine publishing); Time Life; Time Warner Cable; Time Warner Communications; Turner Broadcasting System; Warner Books; Warner Brothers; and Warner Music Group.

Chief Competitors: Time Warner, Inc. competes against almost every company in the entertainment field: book publishers, cable systems, magazine publishers, movie and television production companies, pay cable stations, and record companies. Some competitors include: Advance Publications; Cable-vision Systems; Direct TV; Dow Jones; EMI Group; Forbes; MGM; Sony; TCI; Times Mirror; Viacom; and Washington Post.

PRODUCTS

Time Warner, as the largest entertainment and information conglomerate in the world, has influence in the business of media and entertainment. Through Little, Brown, Time Life, Time Inc., and Warner Books, the company publishes books and magazines. It produces films for television and theatrical release under the studio brands of New Line Cinema, Warner Brothers, Turner Broadcasting, Castle Rock Entertainment, and HBO. The cable television news and entertainment industry is carried through Time Warner Cable, and other movie and cartoon networks. Countless other smaller companies operate, as well, under its banner.

In addition to its many media companies, Time Warner owns two professional sports teams, the Atlanta Braves baseball organization and the Atlanta Hawks basketball team. Both of these acquisitions came from the merger with Turner.

CORPORATE CITIZENSHIP

Time Warner's corporate citizenship has provided a host of educational services. The company pledged $5 million to New York Networks for School Renewal, a program centered on public-school improvement in the city of New York. Time Warner's contribution was used to help implement school practices that have been proven successful. Publishing African Americans: Voices of Triumph, Time-Life Education has honored the achievements and contributions of African Americans to U.S. and world culture. The company has donated this three-volume set along with teacher's guides to every public high school and main branch library in the United States.

Other classroom contributions have included the company's educational and informational cable programming and literacy efforts. Time Warner financially supports Cable in the Classroom, a public service offering commercial-free educational programming. The cable companies owned by Time Warner have offered monitors, video cassette recorders, and teacher-in-service workshops. The company has also launched a nationwide literacy program, Time to Read. Using DC Comics and open-captioned music videos, the program has been aimed at borderline readers who, with assistance, enhance their reading and writing abilities.

Time Warner has been involved in and has encouraged its employees to participate in community services. The company annually honors employees who have volunteered their services with the Andrew Heiskell Community Service Award. Co-workers nominate employees for these awards, and Time Warner issues each winner a cash reward.

CHRONOLOGY: Key Dates for Time Warner Inc.

1917:: The Warner brothers—Jack, Albert, Harry, and Sam—begin making films
1923:: Two reporters from the Boston News launch a weekly news magazine called Time; Warner Brothers is incorporated
1927:: Warner Bros. releases the first talking film to reach a wide audience
1936:: Time Inc. introduces a weekly picture magazine called Life
1949:: A government antitrust suit makes Warner Bros. give up its theater chain
1952:: Time-Life Broadcast subsidiary is founded
1954:: Time diversifies its line by publishing Sports Illustrated
1966:: Warner is sold to Seven Arts Productions
1971:: Steven Ross buys Warner Bros. and renames it Warner Communications
1972:: Due to production costs, Time ceases publication of Life magazine; a Time subsidiary launches Home Box Office
1986:: Warner purchases Warner Amex Cable from American Express
1989:: Warner Communications and Time Inc. merge to form Time Warner
1991:: Time Warner goes public by issuing shares whose price was based on the number of shareholders who participated
1996:: Time Warner purchases Turner Broadcasting
1998:: TCI Cable and Time Warner sign an agreement for TCI to carry the WB network

GLOBAL PRESENCE

With sales in the United States, Europe, the Pacific Rim, and other regions, Time Warner Inc. has become a media and entertainment company dominant in the industry. With the majority of its sales in the United States (75 percent in 1996), the company has stopped its merger efforts in order to concentrate on its many existing businesses. The company operates in over 100 countries.