It's been a tough year for AOL executives. Representing the Internet's triumph over old media, the luck of AOL's elite has gone south. Since the deal officially closed in January 2001, AOL executives were passed over for the chief executive position, shuffled out of the chief financial officer role and faced with confronting the embarrassments of Monday night's financial reductions. AOL was supposed to play the role of growth engine. But the Internet advertising collapse has begun to poke its head into AOL's financials, probably reducing the division's advertising and commerce revenue during the first half of 2002. In a sense, AOL has gone from jewel to stone in AOL Time Warner's crown. Meanwhile, some of the businesses inherited from AOL have caused short-term financial headaches. AOL Time Warner will acquire the remaining 49 percent stake in AOL Europe from German media conglomerate Bertelsmann for $6.75bn in cash. The purchase will hurt the AOL division's earnings in 2002 because it will be EBITDA negative. However, AOL Europe's rate of EBITDA growth actually helps AOL Time Warner as a whole in reaching double-digit EBITDA growth, according to Youssef Squali, an analyst at FAC/Equities. AOL Europe will lose $600m in EBITDA in 2001, but it will reduce those losses to negative $300m in 2002. Despite being in the red, the $300m in net growth will help boost AOL Time Warner's percentage growth next year. Confusing as it may be, it shows that AOL Time Warner's acquisition of AOL Europe may have saved its neck in perception. That could be a significant factor, given that Wall Street judges AOL Time Warner by EBITDA. Still, AOL faces more exposure to considerable challenges in the European market with AOL Europe under its belt: namely, the dominance of national telecommunication monopolies and metered pricing schemes that make surfing the Web expensive. To its credit, AOL remains the undisputed Internet leader. AOL has more than 33 million subscribers worldwide -- leaps and bounds beyond any competitor -- and its much-feared subscriber plateau appears exaggerated. It is also well positioned to push broadband into the home through aggressive marketing for people to upgrade their dial-up accounts. If anything, the realities of the media business during a recession have taught the AOL guard a valuable lesson: Nothing is immune to a recession, despite the strength of the business. "What these guys did was they made an arrogant bet that the economy would recover in time to meet their numbers," said David Simons, managing director of institutional research firm Digital Video Investments. The "V" word
For Wall Street, it's back to basics in its evaluation of the company. No longer does the Internet hold much sway in its financial potential. Revenue growth for 2002 will run at a paltry 5 percent to 8 percent, a conservative estimate that factors in a lackluster ad environment. Furthermore, stripping away AOL Europe from AOL Time Warner would show that the company would report 4 percent to 8 percent EBITDA growth -- much less than the 8 percent to 12 percent with AOL Europe included, according to FAC/Equities' Squali. Single-digit revenue growth and single-digit EBITDA growth has caused some to reconsider how they label on AOL Time Warner's stock. "It's starting to fall into the value category," said Squali. That's quite a turnaround, despite expectations of AOL's supercharging effect on the company's finances. The label only gives more proof that the pairing of AOL and Time Warner is being viewed from the tortoise's perspective and not the hare's. "If you're only growing 5 to 8 percent revenue or 8 to 12 percent EBITDA, you're not a growth stock," said Paul Kim, an equity analyst at Kaufman Bros. "The old Time Warner barely grew on 8 percent growth for EBITDA and only 3 percent for revenue." See techTrader for the latest financial news in the high-tech sector. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the techTrader forum Let the editors know what you think in the Mailroom. And read other letters.