Friday, December 23, 2005


AOL and Google are getting a lot of exposure. The new deal between the firms will definitely increase total advertising revenues. Much new web content, including the TWX video library will be instrumental in increasing advertising revenues which will be shared by Google and AOL. The major difference for the two companies is that the new revenues will add to Google's total revenues but for TWX the new revenues will largely replace other declining revenues.

The problem for TWX is that the company owns a number of horse, buggy and buggy whip companies. When the auto started up the product growth curve in 1914, the first 5 years, only dented horse, buggy and related businesses. The build out phase that started around 1922 put the horse and buggy companies out of business. Not all of them went bust. A few were able to morph into other businesses which included every thing from furniture factories to auto parts and auto component makers.

TWX and AOL are trying to morph because they own a number of companies that could turn out to be the "buggy whip" products of today. Dial up internet service, magazines and cable TV are three of the areas that need to do serious morphing. I suppose there will be paper magazines around for many more years but can the total revenues grow? Cable TV will be around for a long time to come but consumers clearly desire the option to view shows over the internet when they want and after editing out the standard broad based and largely irrelevant commercials. Certainly the dial up subscription revenue is declining.

After reading positive comments about the Google-AOL deal at, I considered building a position in TWX; not gonna do it! I think Parson is doing a good job with a tough situation. I think he made a good choice in linking up with Google. I think AOL on line advertising revenues will grow at a rapid rate for the next many years and thatGooglewill benefit from the growth. However, it will take considerable AOL ad growth to replace the loss of revenues in the "buggy whip" businesses.

The Google of today is the GM. of 1922. TWX is a conglomerate of horse, horse stable, buggy, and buggy whip companies. The company has many valuable assets. The company has made the right move to become a "GM. parts and component supplier". TWX will survive, grow and prosper, but, for a few more years, much of the growth in online revenues will only replace other revenues.

Investors who only want market performance may want to hold shares they already own. Investors seeking alpha (above average performance) should seek greener pastures elsewhere. I little touch of irony here is that GM junk bonds with a yield to maturity of 14% will probably outperform TWX over the next few years. These bonds will appreciate in value 10 to 20% in value by the time GM signs off on a new labor contract with the UAW in 2008. The road between now and then will continue to be rocky for GM. However, it is a reasonable bet that the interest and principle will be paid on time, although, the 9% yield on the stock is certainly in danger of being cut.

Should the firm cut the dividend yield on the stock or should the company achieve heath care concessions from the union, the value of the bonds should pop. Receiving 14% interest checks, while I wait for capital gains, instills great patience. On the other hand, TWX does not offer the same incentive to let them take forever and a day to figure out how to monetize valuable content.


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