Splitting up AOL may be first step in selling its Net access business

The division has been 'hemorrhaging' subscribers, analyst says

Time Warner Inc.'s decision to separate AOL LLC's Internet-access business from its Web portal and online advertising business makes sense if Time Warner plans to sell off the access business in the future, according to analysts.

Time Warner CEO Jeffrey Bewkes said today that the company is working on splitting AOL's audience and access businesses and running the two as independent entities.

Analysts said breaking up AOL into two businesses puts Time Warner in a perfect position to sell off the Internet-access business, which has been losing subscribers in droves.

"Splitting up makes a lot of sense," said Sally Cohen, an analyst at Cambridge, Mass-based Forrester Research Inc. "It's right in line with their strategy since 2006 in terms of going in the direction of becoming an ad-supported Internet business from now on and not a subscription or fee-supported business."

Cohen said selling the U.S. subscription business would follow Time Warner's efforts to sell off AOL's subscription business in Europe.

"I think we might see them sell off the subscription business in the U.S., and there's good reasoning for that: They're hemorrhaging subscribers, and they're losing the revenue in that area," Cohen said.

However, it remains to be seen who would buy the business, although Time Warner could sell it to any number of nationwide dial-up providers, she said.

"So they could think of selling to NetZero or EarthLink," Cohen said. "There are other potential providers who could step in and take over that business, and [Time Warner] could hang onto the ad-based business."

"It's a logical split," added Dan Taylor, an analyst at Boston-based Yankee Group Research Inc. "AOL's Internet access business is not really going to be a growth market. Our numbers have the number of Internet users growing at around 5% or 6% over the next couple of years. Plus, most of that's in broadband access."

"It makes more sense than Time Warner keeping them as two separate businesses with two separate organizational structures, which they don't need, said Kathy Sharpe, CEO of Sharpe Partners LLC, a New York-based marketing and consulting firm.

"The hosting business is a commodity, and it's not going to get better; it's not going to grow," Sharpe said. "Whereas the other part is going to get better, and maybe once they uncouple them, maybe you'll see further growth in AOL than you would otherwise. It makes perfect sense to sell it if they can find a buyer."

Copyright © 2008 IDG Communications, Inc.

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