The world looks different from Dick Parsons' office, and not just because the Time Warner Center offers a spectacular view of Manhattan's Central Park. From the outside, Time Warner looks like a company under assault. Telcos are building video systems to attack Time Warner Cable's systems. The high-speed Internet business of cable brethren is slowly draining subscribers from AOL. Attack investor Carl Icahn wants to break Time Warner up.
But Chairman/CEO Parsons sees Time Warner as a tower of strength, armed with some of cable's top networks, one of the strongest cable operators and an Internet business that 20 million people still pay for every month.
His steady hand and success in rescuing Time Warner from the dotcom crash and a financial scandal earned him a place in the Broadcasting & Cable Hall of Fame, into which he will be inducted this week. He met with B&C Business Editor John M. Higgins to talk about the television industry, Time Warner and Icahn—including how, in some ways, the raider may be right.
Cable has been your most reliable source of growth for as long as you've been with this company. Can you sustain that growth even though you are under assault from competitors?
If you drew a picture of the world based on what you've read in the newspapers only or in the trade press, you would think the cable industry was sort of hunkered down inside the castle keep with all manner of pretenders to the throne—the wireless guys, the phone guys, the Internet guys—running around outside the castle as if we were under siege and hanging on for dear life.
If you actually live in the world and are running these businesses, it seems to be the other way around. Cable is kicking everybody's behind. Our basic-cable offering is growing again this year. Not wildly, but growing. We've been adding 200,000 high-speed–data subscribers per quarter this year. That's back to those historic high levels of two years ago.
We'll be north of a million new subscribers on our phone products by year end, and it looks like it could continue to grow at those rates in the next three or four years. So we're taking share; all parts of the business are growing. The cable company is shooting the lights out. So you tell me: Do the Indians have us pinned down with our stagecoaches in a circle and sooner or later they're just going to wipe us out? Or is it really the other way around?
This cable platform is simply the most robust platform out there. I don't feel beleaguered. I don't feel under siege. We've got the best piece of machinery out on the field, and we're taking share from others.
But do you worry about the telcos?
Of course you have to worry about the phone companies. Firstly, they have a huge cash flow, right? They have tremendous resources. But you've got to take a step back and think about the underlying dynamics. The telephony business generates about $13 billion in our cable footprint. About a year ago, we got zero of those dollars. So our challenge is to try and penetrate and get some. How much? We don't know, But anything north of zero is better than what you had before.
Now the phone companies are saying, “We're going to attack you in your business.” Well, they've got a whole lot of upgrading to do before they do that. They've got to spend a whole lot of money. Wall Street has to be persuaded that they're going to get a return on that money, or they're going to get stopped along the way. They haven't solved that problem yet.
AOL is suddenly back in fashion. Everybody likes AOL.
Isn't that fabulous?
Now Comcast, Google, Yahoo and Microsoft all want to buy a piece. Why would you sell even a piece of it, and what do you get out of it?
It has been completely unfashionable—and it's only now getting marginally back into fashion—to say that the original theory of the AOL/Time Warner merger is not completely cockamamie. The timing and the price we paid were, but not the original theory.
Convergence—and that's what we're talking about here, convergence—is on the way. We are moving into a world where more and more of what we do and what we produce is going to be delivered in alternative fashions, or through the Internet.
You know, the beauty of Time Warner is that we are the perfectly hedged firm. We have a play in every space. So every development that could be bad for any of our competitors, there's a a part of us for which it's good, right?
People have sort of said, “Wait a minute, AOL isn't dead.” They still have not only 20 million subscribers, but that probably represents 50 million unique users. And there's a core there that's pretty active online, spend probably more time online than almost anybody else. And getting access to that audience under the new monetization models is a highly desirable thing.
We don't know that we're going to sell a piece of it. We're transitioning from a single business model, which was subscription-based, to a dual-revenue model. We want to hang onto the subscription business, because that's highly profitable and generates a lot of revenue. But we're also transitioning to a portal business, which is going to be built around the advertising, like Yahoo or Google.
Carl Icahn is on the attack. His latest letter seemed to be a personal attack on you. Is he right about anything?
What do they say on The Sopranos? It's not personal, it's business. I mean, you can't take this stuff personally, and I don't. And moreover, I know Carl; he doesn't even really mean it personally. He's doing what he does and does well, and I gotta do what I do and hopefully do well.
Yeah, he's right about some things. I've said this to him, and I've said it publicly—the company is undervalued. I don't think that the market price of our company reflects the intrinsic value of the company.
Where he and I disagree to some extent is the reasons for that. What Carl has actually done is just looked at what we were already doing and said we're moving in the right direction but not fast enough. It shouldn't be a $5 billion share buyback; it should be $20 billion. It should be instant, as opposed to over time. He says, “Oh, they're going to separate part of the cable company. Well, they should separate the whole thing because that helps those of us who really are comfortable with content assets and a little squeamish with distribution assets. So Time Warner can trade at a higher multiple.” There's no reason to believe that would happen. None of the other pure-content companies trade at a high multiple. But basically Carl says, “Well, I feel that it will.”
I find that unpersuasive. It also fails to take into account that we regard cable as a strategic asset within our portfolio. It's not only a good business on its own, it helps our other businesses.
What's really behind the undervaluation of the company is the market is still dinging us over AOL. An appreciation is starting to creep back into the market. This thing still has life, it has real vitality and vibrancy.
If keeping the company together is the right idea, how are divisions interacting with each other to create unique value?
The market has been looking for a big bang for a long time. We don't see any big bang coming, but there are lots of little bangs. It's one of the reasons why we have as strong a balance sheet in our space. With the telcos coming for cable, it sure helps to be sitting on a large, flexible financial structure to be able to deal with whatever comes.
But let me try and be more specific. We decided to reposition TBS to capture a broader, more advertiser-friendly audience. So what's the core of TBS? Friends, Raymond, Sex and the City, Seinfeld. It so happens that all of those are our shows.
You could, in theory, have licensed all those shows without owning them. But we certainly would not have done it with the same efficiency and result. Now TBS is near the top in the teen demographic because that's where all these kids are going.
Look at HBO's subscription video-on-demand. Could HBO have worked with Comcast or Cox to experiment, model and build that service? Sure. But they chose to work with Time Warner Cable. Why? Because it's here, because they knew the guys. It's a lot more flexible.
What's your take on Disney's deal to air and sell TV shows on its video iPod? Time Warner seems to be on all sides of this issue, with a studio, networks, cable systems and AOL. How will this work for you?
I still regard this company at its core as a content creator. So we too are looking with great interest at this iPod deal with Disney to see how it works and what the benefits and downsides are.
This is not the first time anybody has set a price for their best content. We have Movielink, downloading movies for a price; it's kind of clunky, it doesn't work very well. Certainly, the music companies have done it. Does it impress me? I think it's a positive step forward, I do. It's going to give all of us an opportunity to see what the viability of this particular form of distribution is.
What do you worry about?
I always worry about the government. This is a big company. There's not much that can tip it over, alter its course. But governments can. One example is cable rereg in 1992. We're going to go through another wave of telecom regulation in 2006 or 2007. It's got to be managed carefully. Government is so big that they can sideswipe, put you in a ditch and not even know they hit you.
I worry about technology. Many of our businesses, not all, are more susceptible to technological disruption. Cable and AOL are on the frontlines. Our movie studios and our cable networks are in the middle ranks. Probably our publishing assets are the least affected, but they're all going to be affected by technology. Making sure we have our guns pointed in the right direction and we have our finger on the pulse of change so we can evolve—not necessarily lead but evolve—is something that I spend a lot of time thinking about.
Then there's leadership inside of our company. The history of collective humanity rises or falls on the basis of good leadership—principled, skillful thinking.
When you talk about leaders, Is that three people, is that 30 people?
Is HBO in a slump right now?
Listen, it's kind of like the Lord of the Rings trilogy. There's not going to be another Sopranos, people! Get over it! These things come along once in a generation, maybe. Sex and the City was on four years before it really, really, really became a cult hit. Deadwood has a serious and committed audience. Entourage has a serious and committed audience. Rome is building one.
Everybody knows HBO is the place you want to go to see something else. Their programming is just a cut above everything else on television. It's just consistently the place to go for the highest-quality, the most interesting, the most diverse, the most engaging programming on television. And the fact that they may not have an immediate replacement for Sex and the City is less relevant than the fact that their whole lineup of scripted shows is so much better than anything else you can see on TV. What are you seeing? You're seeing their subscribers build.
The WB seems to be trying to go older. So the buzz in L.A. is that maybe there's some consideration of shuttering it.
Why would we do that? It's taken years to build it. And from a Warner Bros. television production perspective, it is actually succeeding, building a number of small assets, like Gilmore Girls.
Any divisions you want to sell? Anything you want to buy? What about Cablevision?
We have to sit and wait. They have to figure out what they want to do with that asset. And no amount of external jawboning or pressure is going to affect the timing or the direction of their ultimate decisions. So we'll just be patient.
One area where we know, as a company, we need to have an enhanced presence would be in the wireless-phone space. Our cable guys are noodling through what their options are in the wireless space as we speak because that's going to be the fourth element of the bundle. That's an area that rife with opportunity.