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Not even its advertising and content business can save it.

If you happen to be an investor in Time Warner (TWX) today, you're going to have a decision to make on December 9. That's the date on which Time Warner will end its long national nightmare otherwise known as AOL. The company will be spinning off AOL in a tax-free distribution to existing shareholders, issuing one share of AOL for every 11 shares of TWX.

From my perspective, this is a dog that won't hunt and I'd dump the shares as soon as possible.

The good folks at Time Warner and AOL along with their bankers have decided that AOL is really worth about $3.4 billion based upon the distribution ratio and last week's closing price of Time Warner. On that basis, AOL is valued at about one-time trailing revenue which is about the same valuation as Hewlett-Packard (HPQ) and about twice the valuation of Dell (DELL).

What's more troubling for me is that baked into this guesstimate is the fact that its subscription business is heading south -- fast. Take a look at the graph below; it shows just how quickly the operation is deteriorating.

In 2006, AOL had more than 13 million subscribers (hard to believe it was that high), generating nearly $6 billion in revenue or about 75% of total revenue. Less than three years later, subscribers are down to only 5.4 million (as of September 30) and generated only $1.5 billion in revenue on a trailing 12-month basis.

What's worrisome is the fact that this deteriorating operation still represents about 45% of total revenue, so its continued fade will have a material impact on results. Management acknowledges that this operation plays a critical role in the company's profitability and its ability to generate cash flow.

Now the cheerleaders on this name are going to argue that it's not about the subscriber side of the company; that the key is really AOL Media, i.e. the advertising and content business. Really?

Let's take a quick look at how it's doing versus the competition in the next graph. Google (GOOG), Microsoft Online Services (MSFT), and Yahoo (YHOO) are the primary competitors, and with the exception of the last quarter for Microsoft, AOL's media operations are a chronic laggard. It can't even beat out Yahoo! There's nothing in this data to suggest that AOL is gaining market share; if anything, the opposite is more likely the case.

There's no question that the merger of Time Warner and AOL has been a disaster. But don't compound that mistake by believing that AOL on a standalone basis is going to magically transform into a major player and growth story. The world has changed and AOL's days of glory are back in the last century. No amount of spin is going to change that.

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