Time Warner will separate from its Time Warner Cable unit at the end of March, and all eyes are on what it does with the $9.25 billion from that deal, whether now or down the road. Time Warner Executive VP and CFO John Martin, in a wide-ranging discussion in his office in the Time Warner Center in Manhattan, talks with B&C's Claire Atkinson about topics including Time Warner's plans for the funds and why the “TV Everywhere” initiative makes sense. Following is an edited transcript from that conversation.
You will soon gain $9.25 billion after the separation from Time Warner Cable. What's the most likely option for the influx?
It is not lost on us that to have a very strong balance sheet and to have a lot of strategic flexibility is really an asset. The near-term plan would be to use a portion of those proceeds to reduce our debt and strengthen our balance sheet. But we'll still have a lot of cash on hand in addition to generating a considerable amount of cash flow. We're going to be opportunistic and evaluate whether there are any acquisition possibilities, but we'll be extremely disciplined in whatever we might do in that area.
How active do you think the M&A market might be in 2009?
It's a little hard to predict. I think companies that might be potential sellers might have trouble selling in these low-value times. Having said that, we are in a position where we might be able to take advantage of situations where there could be distressed sellers—good companies operationally, but maybe [it's] the way the company has been capitalized, or they have high debt obligations or commitments. That's where we may be opportunistic and potentially create a lot of value. My general sense is there may not be a tremendous amount of activity in the near term.
The broadcast networks are having a hard time right now, but you seem committed to The CW network.
The CW has been a strategic asset within Time Warner. It's very small relative to Time Warner, but the value it provides our TV production business is still justifiable. Warner Bros. has five shows on The CW and some of them are doing quite well. Our ability to monetize those, whether it's DVD sales or syndication, is significant.
Turner buys a lot of sports rights. Sports networks have been having trouble as a result of the pullbacks in the auto and financial-services sectors. Doesn't the cost of sports rights have to come down?
Turner has a really attractive portfolio of acquired series, movies, originals and high-event sports programming; we have long-term agreements with Major League Baseball, NASCAR and the National Basketball Association. We'll continue to evaluate what makes sense for those networks.
But the fact that we've been able to monetize those audiences means we're in great financial shape for acquiring rights to any type of programming. On the other hand, sports is unique, it's very attractive, but the economics have to make sense for all the players.
Are we entering a time when the age of the media conglomerate is over or they need to own a lot less?
It certainly seems like that's been the trend, and Jeff [Bewkes, Time Warner CEO] and the board decided it was in our best interests to be smaller, more targeted and focused. We're certainly in an era where speed of decision-making is important, and [so is] trying to drive operational performance. We weren't being advantaged by Time Warner Cable; having it off on its own is going to be advantageous for our shareholders.
Tell us about the plans to push forward the world of online TV with “TV Everywhere.”
The concept of TV Everywhere is still being worked through in terms of getting all the industry players to understand it.
We want to allow our consumers to be able to watch TV online everywhere and anywhere just so long as they're a subscriber to multichannel video. That is the key concept to this. There is an authentication process that needs to be worked out.
Potentially, you could put material anywhere—Hulu, for instance—as long as it was authenticated.
Yes. It could also live on TimeWarner.com, YouTube, Google, ABC.com. The key concept [with TV Everywhere] is that you have to be a subscriber, because this is an opportunity for the distributors, for the cable companies and the satellite companies to maintain or increase their sub base.
How do you make money from it? If you've already paid for your subscription, won't the opportunity to increase subscription revenue be limited?
This is very consumer-friendly; this would allow consumers who have already paid their subscription to get more for the same amount of money.
Online viewing has the opportunity for fairly robust measurement techniques. If we can somehow integrate the ad load online with what's on TV, [we will have] an opportunity to grow out.
How do you model in an environment like this when seemingly nobody knows what's going on?
Scenario analysis. Our approach has been to look at a variety of potential outcomes and really stress-test. Maybe you don't exactly plan for the worst, but you have to be mindful of it.
Turner has been very bullish about its position versus the broadcast networks. At what point can they completely close that gap?
There is so much growth that could come our way that I feel extremely confident about our cable assets. Viewership trends are happening at an accelerated pace, but the ad trends have been slow to move and the gap in CPMs [cost per thousand] has held for a long time. We estimate that last year’s upfront was the first time we started to see that gap close. We really believe that the reach, the quality of our audience and our programming, and our ability to offer them a branded environment [prove] that we are very much as good as the broadcasters, and we can be more targeted in the quality of programming.
You’ve been doing a test of the TV Everywhere concept by offering HBO programming online in Wisconsin. Will you roll it out? Do you plan another test in another area?
We will start to see it being rolled out. There are plans in the works.
While we’re on the subject of HBO, what are the plans for further international expansion?
International in general is one of the key initiatives that Jeff has set in front of us. HBO is available in 50 countries, with more than 30 million subscribers outside the U.S. We have leadership positions in Asia and Latin America, and we’ve just increased ownership presence there. We’re in the U.K. and Caribbean, we just launched HBO Canada last October.
We will continue to explore strategies to [expand] the HBO brand, which is very well known in most parts of the world. But HBO is just one division, and we’re exploiting similar strategies with Turner and Warner Bros. It has been a broader push at the company to try to not only be an exporter of domestic product, but to increasingly investment in local resources and partner in local productions. We want to increase our capabilities in local TV and local film production, where the content that’s being consumed is indigenous local product.