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Movies Can't Offset Time Warner Q4 Profit Decline

6 Feb, 2008 By: Erik Gruenwedel

In his first financial call as CEO, Jeff Bewkes said Time Warner Inc. would immediately implement 15% across-the-board cost cuts, beginning with the elimination of 100 jobs at the corporate level, which he said would save $50 million annually.

The cuts come as Time Warner reported a 42% drop in fourth-quarter (which ended Dec. 31) net income to $1 billion, from $1.7 billion during the same period last year. Revenues increased almost 2.5%, to $12.6 billion, from $12.3 billion.

Specifically, Bewkes said there would be significant cuts at New Line Cinema, whose success he said with largely independent films was not a prerequisite in the financial 'sweet spot' of large studios.

He said the recent studio trend of releasing fewer movies per year and the greater importance of foreign revenue brought into question the value of having two completely separate studio infrastructures at Warner and New Line.

'We are reviewing how to operate New Line more efficiently and we expect to take action here fairly soon,' Bewkes told investors. 'The danger of prior success for us is complacency. We can't afford that.'

He didn't elaborate how changes at New Line would affect New Line Home Entertainment or president Stephen Einhorn.

'Managing costs is not a one-time initiative, it's a way of doing business,' he said.

He said future success at Time Warner, including filmed entertainment, hinged on the company's ability to deliver content across multiple platforms.

'We see all these new forms of digital distribution as great opportunities for these content businesses,' he said.

He cited as examples video-on-demand (VOD) success at HBO and on-demand programming at subsidiary Time Warner Cable Inc. Bewkes said Time Warner was in negotiations with the cable provider, of which Time Warner owns 84% of the stock, to assume total control of it.

The CEO said going forward, all linear ad-supported networks would make their programming available on-demand — not just online but on the TV as well.

'We and others in the industry need to be a bit more revolutionary than evolutionary in this area,' Bewkes said. 'It is a win-win for networks and consumers alike.'

He said the company will aggressively pursue making available all network programming for VOD. Bewkes said he didn't view digital distribution of content as cannibalistic. Rather, he said VOD supported viewership at the TV networks while increasing value for advertisers.

'We think it is a triple win,' the executive said.

Bewkes is a strong proponent of offering new-release movies on demand the same day as DVD, which Time Warner Cable is increasing in 2008. He said ongoing tests in Pittsburgh and Denver were working and thus far indicated no drop in sellthrough for DVD. The CEO said future synergies included reduced global marketing required for new releases.

'The rental shift from physical to digital moves us to 70% margin instead of a 30% margin,' Bewkes said. 'We believe it will cement the long-term prospects of these businesses.'

Theatrical and DVD sales combined to boost Time Warner Inc. fourth-quarter (which ended Dec. 31) filmed-entertainment operating income 63% to $253 million, up from $155 million during the same period last year.

Filmed entertainment, which includes Warner Home Video, saw a 13% increase in revenue (an increase of $415 million) to $3.5 billion, compared to $3 billion last year.

Top DVD sellers included Happy Feet, 300 and Harry Potter and the Order of the Phoenix.

The studio's international operations in 2007 set an all-time industry record with $2.2 billion in foreign box office receipts, which included the theatrical release I Am Legend.

The results reversed a trend this week among other studios' financials, including The Walt Disney Co. and News Corp., which both saw declines in filmed entertainment.

Indeed, Warner Bros. said that in celebration of 85 years in business it will release more than 50 remastered classic films on DVD, including a documentary on the studio narrated by screen icon Clint Eastwood.

Notable underperformer AOL saw revenue tumble 32%, to $1.2 billion, from $1.8 billion, while adjusted operating income rose 29%, to $381 million, from $295 million last year. That division also is being restructured.

Time Warner is planning to sell the dial-up business of AOL, which lost more than 700,000 subscribers, to focus on the ad-supported side of the business.

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