Wednesday, April 18, 2007

Time Warner's Big Cable Decision

Yesterday's Wall Street Journal featured an article in its Marketplace section which reported that Time Warner is seriously considering unloading its cable holdings. CNBC, as it often does, due to its alliance with the newspaper, featured a discussion of the article. At least one fairly on-air-headed anchorperson wagged her tongue about the 'fat cash flows' from Time Warner's cable businesses.

That, of course, misses the point. Public companies are not run for cash flows, because, in a capital market which is liquid, cash can be borrowed. Shareholders rarely seem to buy stocks for dividends, as they did thirty years ago, when transaction costs were exhorbitant. Instead, stocks are viewed with an eye to total returns.

There was one key passage in the Journal article that says it all about Time Warner's situation,

"For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks- primarily its cable operation- as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV."

In prior posts, here, and here, plus a handful of others you can find by searching my blog for the term 'Time Warner,' I have argued that old media, as represented by Time Warner and the networks, have ignored the coming, now at hand, disintermediation of broadcast and cable channels by direct URL access.

My post yesterday concerning H-P's entry into the hardware product/market space for this missing link portends just how broad this disintermediation is likely to become- quickly.

Taking all of this into account, I can only marvel that Time Warner has dawdled as long as it has to come to the realization that its cable assets are about to become as 'valuable' as the old Bell System's local copper loops and land lines. Being a common carrier is simply not likely to earn consistently superior returns in the future of direct video content access from URLs on the internet to a TV.
Beyond that, Time Warner's strategy of attempting to own both the distribution and the content was never fated to work well. It never has, and never will. I've written about this as recently as February of this year, here. Essentially, superior content will always find a market. Superior carriage will always command a premium and have supply. Owning a mediocre combination of both assures that, in time, both will fail to provide consistently superior returns.
I've included a Yahoo-sourced chart of Time Warner's past five-year stock price performance, compared with the S&P500. It's pathetic. The firm's stock price has ended up essentially flat, having plunged early on, plateaued, then rose, and now sunk again. It has woefully underperformed the index over the period. It's hard to believe the firm's senior management and/or board has been attentive to its long term prospects.
The Journal article alleges that the two-pronged strategy involving holding cable assets is CEO Parson's preference. That figures, since Parson's has pretty much bumbled the management of the combined Time Warner-AOL since he took over from Gerald Levin. Parsons is a lawyer with no evident grasp of business strategy.
Thus, it's no surprise that Time Warner might be as much as five years too late in exiting cable systems and using the resulting funds to buy into online properties at lower prices than today's.

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