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Time Warner, Stay The Course


Time Warner has the potential to be THE premier integrated media company.

First, I'm going to write when I have something to say. Something I believe is critical to the market and to my life as an investor. Hopefully it will help you as well.
Carl Icahn, I'm not.
I have worked on this one for a while; reading, studying, waiting for my letter from Dick Parsons on the state of Time Warner (TWX). He opens in the second paragraph "you may have heard something about Carl Icahn…" As Mel Brooks said in History of the World, "a deaf man could hear you!" He certainly tackled the issues head on, which is no surprise. I've talked about TWX before and I'm starting to like this company even more. I'm concerned though that Icahn is going to take its eye off the ball and slow the progress being made by a company that fell way behind.
Now, some would argue that Carl Icahn is a brilliant strategist who has a deep understanding of most businesses. I say 'most' because it's readily apparent that he has limited understanding of the new media landscape.
It was only about a year and a half ago when Dick Parsons found the new media religion and realized what he had. Time Warner has the potential to be THE premier integrated media company. There is truly no other company out there that can compete with what is in its portfolio. If they can get the pieces of the portfolio properly aligned, Cable (distribution – Video on Demand) Warner Bros and Publishing (content film, TV and music) and AOL (new media portal, i.e., distribution - Internet, VoIP), it's a home run. A distant second is NewsCorp (NWS) and Disney (DIS) and in third, Viacom (VIA). Personally, I like all of these companies, but for a long term, Buffet-style investment I'm banking on Time Warner. The rest should be relatively volatile for the next few years as acquisitions like NewsCorp's Myspace and Disney's Pixar play out.
While earnings reports for Time Warner were good, the better news was that they have seemingly held control of AOL. The AOL Time Warner relationship has been like watching a steel cage match between George "The Animal" Steele and Bruno Sammartino, for those who remember when wrestling was really fun to watch. But now it is starting to get annoying. As someone who is building a media empire (I say that with all humility and sincerity ) I want to see focus and the last thing I want to see is someone really pulling management's attention away from the core strategy.
Specific to that strategy, Parsons says, "Our cable business is exceptionally well positioned over the next three to five years, and we have every expectation that it will be a far more resilient business than the investment community seems to expect." Oh Dickie boy, the pipes are calling….
When I talk about "the pipes" I'm talking about any wires that lead to consumers homes that deliver digital information. This includes the cable companies, telcos, satellite and utility companies. Yes - utility companies have developed a method of delivering information through electrical wire. (An article for another time - but essentially plug a modem into your outlet and voila, the Internet!)
I'm invested in the cable system because I believe three things:
1) Cable companies will overtake telcos - twisted pair or copper wire does not have the capacity to deliver the media that's being pushed through the pipe. Verizon (VZ) is offering installation of fiber optic for a very low price to play catch up. Keep an eye on this as I suspect Verizon is going to have a HUGE cost to convert from copper to fiber.
2) If cable continues on the trajectory with VoIP - voice over Internet Protocol, TWX added 1,000,000 VoIP subscribers last year), the telcos are going to get crushed. (Keep an eye on Vonage -IPO potential and great takeover target.)
3) Telcos are missing one key ingredient - content! They missed the boat when they had the chance. AT&T (T), or the new AT&T, is still the old AT&T. However, with the SBC merger, that cow is not out of milk yet.
So in closing: I'm happy to sit down with Carl Icahn and explain why I think his push is the wrong move. I'm happy to review my thesis on why keeping Time Warner intact is critical to its long-term success. Short term, breaking it up will give the company a pop, but they'll lose all the potential synergies. Fiefdoms seldom work well together and TWX has spent the last five years breaking down the barriers between groups and coming to their senses.
Dick, stay the course. I'll rarely quote George Bush (in this instance, put on your Dana Carvey voice) Dick tell Carl: "We can find meaning and reward by serving some purpose higher than ourselves - a shining purpose, the illumination of a thousand points of light."
Not to diminish the true meaning of George Bush Senior's point, but for Time Warner, stay the course.
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Position in TWX
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