Filed by Time Warner Inc.
Pursuant to Rule 425 under the
Securities Act of 1933
Subject Company: AOL Time Warner Inc.
Commission File Number: 333-30184
The following communications include certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. Actual results
may vary materially from the expectations contained herein. The forward-looking
statements herein include statements about the proposed Time Warner Inc./America
Online, Inc. merger. The following factors, among others, could cause actual
results to differ materially from those described herein: failure of the Time
Warner or America Online stockholders to approve the merger; the risk that the
Time Warner and America Online businesses will not be integrated successfully;
the costs related to the merger; inability to obtain, or meet conditions imposed
for, governmental approvals for the merger; and other economic, business,
competitive and/or regulatory factors affecting America Online's and Time
Warner's businesses generally. More detailed information about those factors is
set forth in filings by Time Warner, AOL Time Warner Inc. and America Online
with the Securities and Exchange Commission, including Time Warner's most recent
Annual Report on Form 10-K and Current Reports on Form 8-K. Time Warner is under
no obligation to (and expressly disclaims any such obligation to) update or
alter its forward-looking statements whether as a result of new information,
future events or otherwise.
**********************************
AOL Time Warner Inc., together with Time Warner Inc. and America Online,
Inc., filed with the Securities and Exchange Commission a preliminary joint
proxy statement/ prospectus regarding the proposed business combination
transaction referenced in the following information. In addition, AOL Time
Warner, Time Warner and America Online will prepare and file with the Commission
a definitive joint proxy statement/prospectus and other documents regarding the
proposed transaction. Investors and security holders are urged to read the
definitive joint proxy statement/prospectus, when it becomes available, because
it will contain important information. The definitive joint proxy
statement/prospectus will be sent to stockholders of Time Warner and America
Online seeking their approval of the proposed transaction. Investors and
security holders may obtain a free copy of the definitive joint proxy
statement/prospectus (when it is available) and other documents filed with the
Commission by AOL Time Warner Inc. and Time Warner (as well as America Online)
at the Commission's web site at www.sec.gov. The definitive joint proxy
statement/prospectus and other documents filed by Time Warner with the
Commission may also be obtained for free from Time Warner by directing a request
to Time Warner Inc., 75 Rockefeller Plaza, New York, New York 10019, Attention:
Shareholder Relations, telephone: (212) 484-6971, e-mail: [email protected].
SET FORTH BELOW IS THE TRANSCRIPT OF A PRESENTATION BY GERALD M. LEVIN,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF TIME WARNER INC., TO, AND PORTIONS OF A
QUESTION AND ANSWER SESSION WITH, ANALYSTS ON APRIL 12, 2000 IN CONNECTION WITH
THE RELEASE OF TIME WARNER'S FIRST QUARTER 2000 EARNINGS:
GERALD M. LEVIN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME WARNER INC.:
Good morning. I'm Jerry Levin, CEO of Time Warner. Let me welcome all of you,
those of you who are in the room today at the Time & Life Building, those who
are on the telephone, and those around the world who are participating in our
web cast.
The materials that we made available this morning, I just want to emphasize, are
available on-line so that the press release, the earnings presentation, the
first quarter trending schedule, and then one presentation that we will be
making today on AOL Time Warner initiatives is also available on-line. So those
of you who are not in the room and didn't pick up the hard copy, have all of the
materials available so that you can follow the presentation. I will outline the
order of the agenda.
I am very pleased with how we are starting off the year 2000 both from a
short-term and a long- term perspective because we continue on our consistent
path of delivering solid ongoing operating results while at the same time we are
executing on our game plan of digitally transforming the company as it relates
to the AOL transaction.
And so today the way that we've lined up the meeting, we will cover both of
those issues and give you an update. So this will be the agenda. After I make a
few opening remarks, I will ask Dick Parsons and Rich Bressler to give you the
highlights that we are making on the progress of the merger between AOL and Time
Warner. That is the initiatives presentation which, I think, will be helpful to
you. Then, Joan will take us through the quarter. The numbers are solid, and she
will give you the details on how we normalize the numbers so that we can reflect
fully the operating dynamic. Then we will open it to Q&A.
In addition to Dick and Rich, Joan Sumner and myself, also available to answer
your questions are Joe Collins, CEO of our cable company, Joe Ripp our CFO, Tim
Boggs,our regulatory guru, Chris Bogart, our General Counsel.
I also want to invite all of you here in the room and on-line to experience our
annual report, because this year I think that we have done something different.
It is very much a multi-media annual report because in addition to the more
simplified printed copy, if you log onto timewarner-2000.com you can not only
get more extensive material, but you can get, instead of having a normal picture
of an annual report, we have video interviews with all of our senior executives.
And then we actually have nice video snippets of the range of things that they
are talking about. So it really blends very nicely with the normal concept of an
annual report. It has been up and running since we've been distributing the
annual report. For those of you who didn't have a chance coming in here, we've
set up a number of PC's so that after the meeting if you would like to do it or
haven't already done it or for some reason it is prohibited in your workplace
from doing it.
I should give the initial caution, it is in all of the materials. We will be
making forward-looking statements, naturally such statements are subject to
uncertainty and changed circumstances. I won't read all of the language, but
everything we say is qualified by that necessary, but liberating, caution.
And so, let's go to the number I think that you've all been waiting for.
Sopranos-- at 9:00 on Sunday night had a rating of 17.6, a 23 share, beat every
other program including Millionaire or Fail Safe in HBO homes. It is the highest
score that we've had for any form of programming since Titanic. And what is
really remarkable about this, the previous episode for those who are following
very closely, the one where Janice shot Richie, the way that we look at it and
evaluate it there are four showings. And that penultimate episode had a
cumulative rating of 39 for four episodes which is truly remarkable. Even the
highest grossing film in the history of Warner Brothers, "The Matrix", which
played on Saturday night at 9:00 did a very good 13.3 rating, 22 share, but the
Sopranos ....topped even that. And so, again, we are a creative company as well
as a distribution company.
We've made a very solid start to the year. I think that those of you who know
the rhythm of our businesses, the first quarter is always the smallest and
usually the slowest. But this is a very solid start. On a normalized basis,
growth was 13%. Even the revenue growth, which normalizes at 8%, was higher than
the last two years. The stength, from my operating perspective, was across the
board because all of the divisions posted records, with the exception of music.
And interestingly, another way that I look at the numbers, if you look at cable
growth rate and the growth rate of everything else which I will call content,
each came in at the 13% growth rate, which is a very healthy sign. Based on the
continuing performance that we see, it is my view that we remain on target for
Time Warner to deliver the normalized growth of 13 to 15% and that is the zone
that we've said to you, for the full year of 2000. As a matter of fact, as you
go through each of the businesses you will see that even their first quarter
performance is right in line with the zones that we've been giving you. Cable
networks, 15 to 20%, cable 13 to 15%, publishing 12 to 14%, and it is
interesting.
I want to just focus for a second on one statistic, and that is advertising.
Because in its broadest definition it is a very important growth catalyst for
the company. I just will mention again why I think it is for the new company.
The total advertising in the first quarter which, again, is a slow quarter,
increased more than 20% to $1.2 billion. Advertising represented in the quarter
nearly 20% of our total revenues. For the year, it is clearly going to be around
20%.
When you look at our publishing and cable networks, obviously they represent the
bulk of our advertising revenues for the quarter, a little more than
three-quarters of our overall ad revenues. But even those two are growing at the
very high teens. But the fastest area of our growth is coming from our cable
systems--33%, from barter syndication which is well in excess of 50%, as well as
revenues from the WB. So if I just added those three together they are growing
on a combined basis at 37%. The reason that I am emphasizing this is that I know
that when we laid out the snapshot dynamic of AOL Time Warner, 40% subscription,
20% advertising and e-commerce, and 40% content. I said that the growth engine
was going to be the central core. And I hesitate to even call it advertising
e-commerce, because what it really represents is in its broadest sense, the
third party financing of a footprint or content. And that is a part of the
dynamism that we will have in the new company. But you can see it already in
Time Warner.
Now, just a little progress report on AOL Time Warner. It should be clear to you
that both companies remain focused on business today, while at the same time
planning for our merger. We are quite capable of multi-tasking. AOL will be
putting out its first quarter results next Tuesday. I have to say to you that I
like the continuing strong trends at AOL. And over the last few months, both
companies have been developing their businesses.
Last week, for example, at Internet World, Steve Case and Barry Schuler,
together with Jim Martin, made several announcements about the next generation
of Netscape which is Netscape 6, very interesting digital dashboard with side
bar information panel with compelling skins, what is known as a persistent
presence tool. And then at the same time they talk about with Gateway some
specialized internet appliances which have the characteristic of instant AOL.
One of them in the kitchen, and another wireless, which again underscores the
focus on just making all of this easy to use and really understanding the
consumer's behavior and implementing a very simple strategy of AOL Anywhere.
Whether it is in the kitchen, wireless, on the television set, AOL Europe.
While that is taking place we also, since we last met, announced an MOU between
Time Warner and AOL for the concept of multiple ISPs over the Time Warner high
speed cable infrastructure. I consider this to be quite significant, not only
because there were some elements in there that went beyond the prior positioning
in the cable industry. For example, that we would allow ISPs to have a direct
relationship with the customer, that we would really take the limitations off of
video streaming, and we would like to drive this change, and, in fact, offer
multiple ISPs even faster than our current contractual arrangements would
suggest.
I say that not because of any regulatory issue, and frankly not because of the
AOL transaction, but because of my strong business belief that now that we know
what the capacity is, we know how to manage it and deploy it. It is very similar
in my mind to the early development of pay television which was exclusive for a
while in the 70's to particular cable systems, and then as we developed capacity
and the ability to manage it and there was consumer demand for more choice, we
had multi pay. And what is always illustrative of the cable industry is the
ability to develop affiliation agreements that make the appropriate splits,
whether it is for subscription fees or advertising. The industry blossomed with
multi pay, and it is my view that the cable broadband infrastructure will
flourish with multiple ISPs. That will be very good business, giving the
consumer not only that choice, but when you have multiple parties marketing your
systems, and I think that you have a built-in advantage in the ability to
deliver video streaming, this is good for the cable industry. And obviously, I
think that it is good for the ISPs including AOL, including Road Runner,
including Excite At Home. I think the recent restructuring of Excite At Home is
another indication of the drive towards non-exclusive multiple ISPs. It is my
expectation that we will have terms between Time Warner Cable and AOL done
before the conclusion of this quarter.
Now, in terms of the merger itself, we are on track from every aspect. With
respect to the regulatory process, we don't see anything that should slow down
our game plan to close some time in the fall. On the integration side, the
four-man team of Bob Pittman, Ken Novack, Dick Parsons, and Rich Bressler are
effectively operating 24 x 7, and that is all of the time. They are focused on
developing the new company's strategic and operating game plan, and we are using
these months well before the close of the transaction really to put the right
plans in place. And we want to be bold about that.
That group working with me and with Steve Case, they are spearheading a number
of working teams who are focused on an array of new businesses. You will hear
some of that in their presentation. But a lot of the business activities and a
lot of the business successes, while some individually might be modest they are
beginning to set the tone for the new company. And probably most importantly
people are working naturally together. They are excited. There is what I would
call a rolling thunder, and that is, the more ideas, the more meetings, the more
excitement, the more that people are developing ideas and possibilities that we
couldn't have thought of on January 10th of this year.
QUESTION AND ANSWER PORTION
RICHARD BILOTTI: Good morning. Your cable performance has been significantly
better than the rest of the industry, both in terms of the fact that your EBITDA
growth is stronger than the typical range and you're showing margin improvement
which is unique I think. I don't think there is another cable company that is
showing that. Could you discuss, one, what your pricing strategy is across all
of your product and how that influences this performance? And two, is there
something unique in the fact that Time Warner is an integrated company that
allows it to have more efficient costs, for instance, in the marketing side,
than some of its peers that would suggest why the margin direction is different
for you all from the industry as a whole?
LEVIN: Probably I should start and then ask Joe. It would be self-serving for
Joe to start. You know, first of all, I've said many times, and your question of
increased margins illustrates it, that not all cable companies are the same, not
all companies are the same. Time Warner Cable is really an amalgam of six or
seven major MSO's over a course of 25 to 30 years. Fortunately the two of us
have been there that entire time. Obviously there is a process of Darwinian
natural selection. And so what you end up with is an amazing management group,
and so that is point number one. It does matter.
Secondly, we were the first to cluster. I remember making the decision to go
from centralized to decentralized in 1981 and to start clustering. And what that
meant was that we would get the marketing efficiencies. But also we cared about
demographics. Not all cable systems are the same because they are in different
communities, and you know this from the broadcasting business, the newspaper
business. And so we have actually specialized, if you look at the geography of
Time Warner Cable, it is in very good demographic areas. Carolinas, Florida,
Texas, and, we happen to be sunbelt related. That is not an accident.
And then I'd have to say that we've been on a very steady program. You might say
that we were late to put digital boxes in, that we only now really have high
speed cable modems up and running. We've spent a fair amount of time waiting
because we wanted to build in the capability to do video on demand, which we
also now have up and running actually in a couple of systems.
So there is a very methodical game plan here, and I think that it has paid off.
Because what we've done is that while others were upgrading in a certain way, we
were upgrading in a very consistent way. And we held back even though there
might have been an advance of DBS during this period. Even though others were
selling a form of digital box, so that now we are at the point where the
products that we have to offer are, I can tell you from the consumer demand, are
highly competitive as against DBS, as against DSL, as against forms of fixed
wireless, because it has now been brought together.
And then before I mention the pricing question, the last thing is that we now
feel comfortable that our management, our management in the field, because if
you have ever visited a cable system it looks nothing like what a cable system
looked like 25 years ago or 5 years ago. It is a major multi-media player in its
community. And that management, and I saw this when we had our annual management
meeting, they are up and ready for digital television, video on demand, multiple
ISPs. Again, the reason that I've embraced multiple ISPs is because the
management is in effect saying that we can do it. As a matter of fact, all of
these things tend to increase the perception of the cable system.
Now, two last things. On pricing, we've decided on basic pricing and to keep
within this 5% zone. But what that masks is the fact that we are constantly
offering new services. That the relief in deregulation enabled us to now price
all of these additional services, and the consumer demand for digital set top
boxes, and we believe for video on demand, and for high speed cable modems, is
as strong as anything that we have ever seen in the cable industry. So, in fact,
the increase in unit growth for the first time is going to occur this year. The
first time in five years. And so we want to keep basic charge fairly stable and
generate our high returns, and that is why you are seeing margin increase,
because the returns on digital boxes, we've said this before, and cable modems,
the return on our capital, is on an after tax basis higher than 30%. You've
never had that in the cable industry.
And lastly, I will give you a generalization. Because it will now apply not only
to the cable company, but to AOL Time Warner. And that is the ability to go into
the interstices and make cash out of places that no one else seems to be able to
do. And that is the skill in the cable company. It has to do with the kind of
not only day-to-day management decisions but the affiliation agreements you
make, and it is just to be able to go in there and find cash, cash driven. And
so this whole concept of monetizing footprint, that is essentially what the
cable company does. That is what AOL Time Warner wants to do.
Joe, do you want to pick up on that?
JOSEPH J. COLLINS, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME WARNER CABLE:
Well, like he said, I think that we've said it every time that we've been asked
a similar question, is that we do have a great inventory and we've been working
on them for a long time on a pretty consistent plan. And so we are now at the
point where we are in the last year of the major rebuild of these systems. The
architecture is basically done, it is there. So our people can focus on selling
the people these new products. And the people love these new products. They are
literally jumping out the door, and that generates a lot of enthusiasm on the
part of our people. Right now it is all working very well.
JILL KRUTICK: Thank you. Good morning. Three unrelated questions. First, I would
be curious about getting an update on the EMI/Warner transaction, how that is
progressing? And if you anticipate any regulatory hurdles emerging from that
deal? Secondly, on the up front market, if you are still confident in the $1
billion shift for the Turner Network. And finally, on AOL TV, how that is all
coming together from a content perspective in integrating the Time Warner
content and any other content?
LEVIN: All right, well let me start, and then everyone can add to it. An update
on Warner EMI Music--we are where we thought we would be at this point in terms
of the regulatory process that is necessary. We are shooting for a year-end
close, and so that is that. On the up front, we are very comfortable. Recently
you had the advantage of the presentation from Steve Heyer. We like not only the
concept of the billion dollar shift, but we are really moving, as he indicated,
past the notion that there is a cable marketplace and there is a television
marketplace. It is about as bold as anything that I've seen. You know that it is
just clear that people have to advertise, as Joan mentioned, our four networks
there. TBS, TNT, CNN, and Cartoon. And so we feel good about that.
On AOL TV--I will just say a word. Obviously this is another case where there
will be a mutual benefit because in fact Time Warner Cable has been working both
on the technology, as well as the consumer demand characteristic for all forms
of interactive television. AOL, of course, has been working on it.
Interestingly, Barry Schuler who is leading the charge worked on, and I
mentioned this before, he did one of the navigators for our interactive
television activity in Orlando five years ago. He is quite familiar with the
process. I think that the benefit of the impending merger is the fact that AOL
can now get the benefit of the evolution of the digital set top box in cable.
And Time Warner Cable can get the benefit of the power of the AOL brand and the
power of the easy to use concept.
And so let me ask Dick and Rich, or Joe, if they want to add something.
RICHARD D. PARSONS, PRESIDENT, TIME WARNER INC.: I would only add on EMI and
remind the group that because we are market competitors, there is only so much
that we can do together. And so we can't give you the kind of report that we
gave on AOL. But we do have teams working on the parts that we can, and we
remain very confident. We've got teams working on it. It is, actually, a more
complex transaction even than AOL because it truly is global. But we are moving
along, and we are confident that we will get it done by, at or around, year end.
LEVIN: Joe, do you want to add anything on AOL TV?
COLLINS: Well, I think that when we talked before about the advantages of what
is happening as these digital boxes are rolling out into the environment, what
we are doing is essentially laying another set of tracks to bring more product.
And so we talked about the ones that we knew about, and we knew that consumers
wanted like Video On Demand which is going to be able to ride on that platform.
AOL TV is going to be another product that will be able to ride on that digital
platform that we are putting in place. The cost of which is being carried by
these other services. And this will be, we think, a very exciting, incremental
business.
JORDAN ROHAN: All right, thank you. Before the merger is finalized, how are you
going to account for the incremental promotions on the AOL properties? Will it
show up on your income statements? And then finally, given the increased
promotion, are you comfortable predicting accelerating growth at publishing,
music, filmed entertainment, cable networks, beyond what you set forth in your
five-year plan?
JOAN N. SUMNER, SENIOR VICE PRESIDENT, TIME WARNER INC.: I was just going to
answer mechanically the first part of the question. We are doing business today
on commercial terms. And so accounting-wise you will see it represented the way
that two stand-alone companies transact business with each other.
LEVIN: That is why we are calling them commercial arrangements. Your second
question is a good segue for me because I'm not looking at AOL Time Warner as
simple mathematical increases in the subscription dynamic, the publishing, the
transformation of the marketing of movies, the addition of the upside of a
digital management system for music rights, and an SDMI secured digital
distribution system. And therefore, a new form of revenue generation.
I'm stepping back and saying that this is not just collapsing these things and
now let's do a calculation of increased growth rates at each pre-existing
business. I want a bold restatement of what AOL Time Warner is. And that is why
the last time I indicated that it is better to look at the levers that drive the
growth of the company. And so instead of looking at how the AOL member service
can be benefited, and the Time Inc. magazines can be benefited, think about
subscriptions. Think about the power of subscriptions. They are going to be 40%
on snapshot taken right now of the company. And think of the dynamism that comes
from changing the acquisition metrics, increasing the retention characteristics,
and then applying that subtle chemistry as to how you price and increase
subscription pricing. When do you do it? How much more value do you have to
give? But think of it in that sense.
And then, when I talked about advertising e-commerce, I didn't want to talk
about measured media advertising, or promotional spending, or direct marketing.
But all budgets, coming from everybody, all third parties, as to how they move
goods and services. That is enormous. And I think that we are positioned. And so
I can't say "well, let's look at barter syndication, or Bob Pittman and Myer
Berlow, what Steve Heyer is doing, or Don Logan". But let's look at it much more
broadly because that central core, when I get to content which is kind of 40% of
the company, this content is going to pour over into this central core. Not just
because of digital downloading, but the whole financing just broadly speaking.
The financing of material through third party activity is going to change. That
is going to apply to music, movies, and I don't mean to be generic or mysterious
about it. But that is the way that I look at it.
And so if you look at it that way, then you should look at a business plan for
AOL Time Warner the way that we are now looking at it. We've put some metrics
out since we didn't have any comparable real estate transactions for people to
latch on to, you know you needed to get some bearings. And so we put metrics
out. We talked about what the year 2001 might look like, $40 billion north in
revenues and $11 billion EBITDA. We talked about a free cash flow growth rate
number. And a lot of that came from taking the pre-existing plans and work that
Mike Kelly and Joe Ripp have done.
But now what we are doing is putting a plan together that isn't kind of simple
math, the way and I respect the question that you've asked. Now let's take a
look at what is the dynamic of this new company. What levers do you press? And
therefore we don't just look at it in terms of cost management, there will be
that. Or revenue enhancement, and there will certainly be that. But really about
a new opportunity to deliver what ultimately is really free cash flow growth.
And I will go back to an earlier statement. All, this is connected in my mind
and it may not be in yours yet. The question on cable, and I said the ability to
go into the interstices and pull cash out because it is just smart. And whether
you want to use the euphemism of first mover, getting out there first, we have
an open ball field here. Because I know that when you do your metrics many are
taking a little haircut called execution risk. I don't mind that. I'm not
defensive about that, because in fact it is quite the opposite. We are the only
ones on this playing field. And so anything that could be characterized as a
mistake is actually an advance.
And so that is the kind of thinking about this, just the ability. And by the
way, it ultimately gets down to not just the asset base, which is pretty
substantial here, it is all about smart people being able to go in there, get
there first, take cash out. That is what the business is about. Kind of a long
answer, but that is the way I look at the company. This is going to be a growth
company. But it is going to have to be dramatically organized in a way to
deliver that growth, and not in a conventional way.
KATHY STYPONIAS: Jerry, I have two questions. The first is regarding your
digital EBITDA losses for this year, $250 million is the guidance that we were
given before the AOL transaction was announced. And that was going to be
revisited after some point afterwards with the AOL team. I'm just wondering
whether that is still the right number? Whether we could potentially see that
come down? Or will there just be a redistribution and potentially reinvesting in
areas other than you initially thought of?
And then my second question is with respect to your advertising numbers. Could
you tell us what percent are coming from dot com's? And could you look into your
crystal ball and tell us what you sort of see that, what sort of trend do you
see for dot com advertising sort of playing into traditional media companies in
the near term, over the next twelve months or so?
LEVIN: First, with respect to digital media spending, Rich Bressler and his team
together with around the Time Warner company and AOL, are essentially doing what
you would expect. And that is revisiting all of the plans. I think that the one
general statement that we will make is that the number will definitely come
down.
On the other hand, what I would also say, and there are just obvious areas where
that is the case in terms of infrastructure, etc. But there are also several
areas of continuing spending that enhance or supplement, or do things that AOL
doesn't do. And so it is a very constructive process. But the number won't be
$250 million.
With respect to dot com advertising, I don't have the statistic. It is not as
large a percentage as you would think. And essentially what is happening now,
there are a couple of trends. A, the non, if you want to call them that, the non
dot com companies have increased their advertising essentially because the world
is shifting to such a great extent. I believe that that is a permanent change.
Not in the more traditional sense that brand image advertising is going to be
the only benchmark, but more in the sense that it is just more competitive out
there, but more efficient. And you now have the ability to take, instead of just
more traditional advertising, measured media advertising, but take all of your
spending and lead from image to information, to transaction.
So, in fact, I don't think it is because of the venture capital money going to
dot com which is then all flowing into advertising. If you look at the Time
Warner advertiser list it is still very similar to what it has always been. It
is a very small percentage.
SUMNER: The statistic on that, I can give you for the two big advertising
businesses that Jerry has highlighted at our company is our publishing and our
Turner operations. And so take those two combined which is the lion's share of
our advertising. Dot com companies last year represented less than 5% of the
total, to Jerry's point.
LEVIN: And actually what will be interesting, again I will use the word
advertising but remember my central core is a much broader definition. But just
staying with advertising, the influx of the Time Warner advertising psyche into
the AOL advertising activity will be a big boost also. Just in a conventional
sense, before we get to monetizing some really interesting reach characteristics
that we have.
I believe, and it is not just because of dot com, business is really
transforming itself. And we are not, I don't think that we are the old time
cycle where based on where the GNP is going, the general economy, that you can
kind of test where advertising is going. I think that we really are, because
companies are now managing themselves in a very different way. And we are not
back to well, the first thing to go is advertising. You can't afford to cut back
on this broader definition of spending money for the marketing of your goods and
services. That is the change that has occurred. And so this definition of
advertising, I think is going to be the driver not only for our company, but you
will see a lot of other companies, who as media companies are going to benefit
from it.
DENNIS LEIBOWITZ: On both digital video and video on demand, can you talk about
what the incremental revenue per subscriber is? What proportion of the
subscriber base will it be available to by the end of the year? And secondly,
could you talk about whether there has been any progress on the subject of
telephony on cable?
LEVIN: We will let Joe actually answer it. Because digital services, we've given
a per sub number and he can talk about availability. But I think that by the end
of this year that we pretty much will have the digital set top box available in
almost all of our systems.
With respect to video on demand, I will be interested to hear Joe's answer to
what the number is. We believe that the manipulation of full motion video which
is essentially what video on demand is. We know that it is a multiplier affect
on the delivery of movies. And so the next big assignment for our cable company
will be to work with the movie studios to deal with the window, and to get that
window co-extensive with the video cassette window. Now, we are on the other
side of that issue which is a great thing again because we will make money on
every part of the stream. But that is the issue. And we pretty much know that
even as against near video on demand that this is why we've been driven for five
years to build the capability. That you get a multiplier affect on the pay per
view purchases. Because the ability to kind of get this movie, and stop and
start it, and go backwards and forwards is a wonderful convenience.
What we don't know, and why I don't know what the number will be, is that while
we can talk about video on demand for movies, now we are into a new zone. So now
let's apply AOL's knowledge, where the world has gone, the ability to manipulate
video. Let's expose that to a lot of dynamic people and see really what the
capacity is because to me it was the ultimate goal, that everything from news on
demand to ordering pizzas all required the ability to manipulate full motion
video. So I think that that is one of the unexplored high growth areas, and I
would say again, as a company, whether we are AOL, HBO, or CNN, we are going to
go through every distribution system. But the ability to manipulate video and
all of these video streams, I think the cable architecture is fully capable.
Joe, why don't you answer that question and then we will come back to telephony.
I will do telephony, but why don't you supplement that answer.
COLLINS: Well, we are going to have digital boxes pretty much available
everywhere during the course of this year. And pretty much they are available
virtually everywhere right now with a pretty small amount of the rebuild left to
go for the rest of the year.
In terms of video on demand, right now anywhere on the island of Oahu you can
get video on demand, which is most of our Hawaiian system and so that is about a
quarter of a million homes. And we are going to have it available also this
year, and in fact, probably in the second quarter in our Tampa system and in our
Austin system. And so the total availability by the end of this year will be
well over a million homes.
And then we hope next year based on whatever tuning that we do to this business
in those markets that we will be able to make it pretty widely available across
our universe. Because we know that it is a product that the consumer is going to
want and is going to use.
LEVIN: You are looking for buy rates?
COLLINS: It is a little early to say exactly what the buy rates are going to be.
LEVIN: I think that we should just stick with our experience, which, based on a
lot of testing, is that the buy rates for near video on demand, which you see
more accurately in the DBS environment, that there is a multiplier affect when
you offer video on demand. And so is that two times? Three times? That is what
we will see. But it is there.
With respect to telephony. A lot has happened, but if you break it down into
several categories, I don't think that my view has changed. First of all,
circuit switched telephony, the ability of the cable plant to deliver robust
telephony remains. The question for us is if someone wants us to execute on
that, we are fully prepared to do that. And so if AT&T, for example, does in
fact want to have facilities based access in certain markets in the competition
for local and long distance, we are prepared to do that on terms that
essentially pay us to do that.
The more interesting development, and I think that everyone would agree with
this, is really IP telephony. Now, I will give you my layman's take on it, but
contained in that as my strategic view. There are two forms. One is general
stuff that goes on the internet. You can do it now with Net 2Phone. And so it is
my view that every ISP that is offering full service will have some form of IP
telephony that will be either an add on or included in however that ISP charges
for its service. This is, however you want to characterize it, it is a second
line service, it is not powered, it is not perfect. But it is certainly
sufficient for many purposes. And so, again, that is part of my excitement about
multiple ISPs. Contained in that is an interesting service.
Then there is what we'll call powered IP telephony that uses this initial link
and not the RBOC link. But then transposes that into a switched network like the
AT&T network so that it is more robust. It might be powered. And that I would
put, I think that is exciting because that can ride on top of the platform that
Joe Collins is building. And, again, that would require whatever the right split
or arrangement is. So we are really quite interested in seeing this happen
because it just enhances existing services.
Having said that, I do have one changed view. And that is because of AOL Time
Warner it is just clear that communications are being redefined every day.
Because the close to billion messages that occur through the AOL system, you
know twice what the post office delivers. The power of instant messaging, ICQ,
buddy lists, and not just on the AOL member service platform, is enormous. And
it is convenient.
So the addition of voice to text, and then pictures, and then selling things and
providing information, all comes together so that I don't look at telephony as
something that is a separate defined business strategy. It is all wrapped up in
what I just described but it is subsumed in a much broader form of
communications.
And in that sense AOL Time Warner will add the word communications to media and
entertainment in terms of the businesses that we are in. And I think that it is
transforming the way that people communicate, the concept of community, and so
even the definition of what the telephone business is is going to have to give
way to that. And so, I like our position.
ALAN GOULD: Thank you. Jerry, given the scale of the AOL Time Warner merged
company, the balance sheet, the free cash flow, and the fact that you will be
completing your cable upgrade this year on your existing cable plant, do you
have an appetite now to expand your cable footprint?
LEVIN: Well, let me give you two sides to the answer. The first is that it is
clear that AOL Time Warner will have a powerful balance sheet. We've talked
about a growth rate on free cash flow that looks like 50% a year coming off of a
pretty good base in the year 2001. And if we are going to keep our, as we've
done with Time Warner, put this financial envelope around it and be a solid BBB
company it means that there is a lot of capacity in cash to be measured against
a very high return characteristic including how does this stack up against
buying back your stock and doing other things. This suggests a very aggressive
company.
Now, adding to the cable footprint is both a current and historical question for
us. We've always tried to determine what is the optimum size. Now I am just
talking domestically. And a lot of that had to do with an earlier answer about
the quality of our footprint. There are certain geographic areas that would make
obvious sense for our cable company. Whether that is done through additional
acquisition, or through trades, or realigning some of the inventory remains to
be seen. But I'm not unhappy with cable footprint that passes 20% of the homes.
I think it is sufficient for the laboratory that it represents. I like the
demography. There are just maybe one or two cable companies that I have coveted
for my entire career in the business, and that hasn't changed. But, you know,
there is nothing that says that we need to go out and buy more cable right at
the moment.
ELLEN GIBBS: This is one of the few meetings that I've attended recently where
you haven't talked about wireless access to the internet. And given your
comments earlier about the merger with AOL redefining your notion of
communications, where does wireless fit into that? And does your new debt
capacity or acquisition ability make that a possibility after the close of this
deal?
LEVIN: Wireless is obviously the most exciting development on the horizon for
the AOL Anywhere strategy, but also for the CNN anywhere strategy, too. And
obviously we are seeing it outside of the United States in much more dramatic
form, whether it is iMode from DoCoMo in Japan, or what we are seeing with the
aggregation with Vodafone and Mannesmann, and the systems in Europe.
I will make a couple of statements. It looks like outside of the United States
that wireless capability is going to grow faster than the tethered computer
attached to a telephone or some form of wire line system. Just like outside of
the United States it hasn't been cable, it has been usually satellite. I think
that is pretty clear. As a company we will be there because of the power, first
of all, of the AOL habit structure because remember things like ICQ and instant
messaging and some of the statistics that Dick gave earlier, this is a worldwide
network system. And so the habit structure is already being developed around the
world for the AOL characteristics.
At the same time as we get into the next generation of wireless, we're the third
generation, more capacity for video, as well as audio and pictures, that is
basically what we do. I will make the broad side statement that this powerful
capacity that AOL Time Warner will have, other than the cable laboratory in the
United States we don't intend to be an infrastructure company. But we will
partner, make creative deals in order to ensure that the AOL and the Time Warner
system and services get fully distributed.
And so, I view what we will call the wireless explosion as a tremendously
positive event for AOL Time Warner because it means that this is going to grow a
lot faster, that is the community and the transactions with the internet, but
what it also says, and keep this in mind, that with the wireless, just like I've
got one buzzing in my pants right now, I have to return to my home base to get
my full text of things and a full video. So it is a terrific thing. But it will
also relate to, again, what I am calling a home base activity, where I think
that AOL reigns supreme.
Time for one more question.
LEVIN: This will be the penultimate question.
[inaudible]
SUMNER: The question for those listening in was from Mario Gabelli asking if
we were going to be bidding on spectrum?
LEVIN: The answer is no. Just as Time Warner hasn't, you won't see AOL Time
Warner doing it. So do we have a last question? If not, thank you very much.
