Spun Off

Why Time Warner Felt It Had to Spin Off Magazine Unit Time, Inc.

The magazine unit still makes money, but it has lost its ability to contribute to growth, says Daniel Gross.

Time Warner announced Wednesday that it is spinning off Time Inc., its magazine unit, to existing shareholders as a separate company. Effectively, the parent company is cutting ties with the original founding division of the company. Time Inc.’s stock will trade separately, with its own management.

Until Wednesday, the presumption had been that Time Warner would effectively sell most of its magazines, including big moneymakers People and InStyle, to Iowa-based Meredith Corp. But Meredith, which specializes in women’s and consumer magazines, wasn’t interested in taking on harder-news Time, Fortune, Money, and Sports Illustrated. Rather than hold on to those prestigious titles as a small rump unit, Time Warner CEO Jeff Bewkes decided to spin off all the magazines to the public as a group.

The move highlights the dizzying pace of change in the media business. Time Inc. CEO Laura Lang arrived at the company in January 2012. She replaced the prior CEO, Jack Griffin, who had lasted just six months. Lang didn’t come up in the publishing world. A Wharton M.B.A., she was the former CEO of the digital advertising agency Digitas, and she quickly set about revamping the unit. Lang reshuffled executives and promised more innovation in digital ads, brought in Bain & Co. to consult, ordered up a round of cost cutting, and in late 2012 was energetically pushing new plans to higher-ups on how Time Inc. could prosper in a digital world.

But Lang returned from the New Year’s break deflated, according to company executives. Time Warner reviewed her plans and essentially said thanks but no thanks. It pocketed the staff reductions—layoffs of about 500 were announced in late January—and almost immediately set about figuring out a way to divorce the slimmed-down company. Time Warner started discussions with Meredith in mid-February.

It’s no secret that magazine publishing is a very tough business. But Time Inc. still makes money. In 2012 it reported revenue of $3.436 billion and operating income of $420 million. The overwhelming majority of media companies would be pleased with such a performance. But Time Warner, which is justifiably proud of its magazine properties and their fantastic history, is not a sentimental place. Ultimately businesses rise and fall within the company based on their ability to generate higher profits and growth. If a troubled unit is seen as a drag on the corporate bottom line, as AOL was, it can get spun off. If a successful unit is viewed as having greater potential as an independent entity, as Time Warner Cable was, it can get spun off too.

Time Inc. more likely falls in the former bucket. While still profitable, it has lost its ability to contribute to growth. The move, Bewkes said in his memo, enables Time Warner “to focus entirely on our television networks and film and TV production businesses, and improves our growth profile.” (My italics.) In 2002 Time Inc. had $5.4 billion in revenue and $881 million in operating income. In 2007 the unit had revenues of $4.955 billion, but still managed to make $907 million. But in the ensuing five years, as noted, revenues fell 30 percent while profits fell by an even greater margin—54 percent.

Here’s the unstated context behind the spinoff. If you run a large magazine business, it is quite likely you will never have more newsstand sales, more print advertising, and more print subscribers than you have today. Newsstand sales, which comprise a small portion of sales but have much bigger margins, have been falling across the industry. In the first half of 2012, they were down 10 percent from 2011. Inside and outside Time Inc., a lot of very smart and diligent people are working on apps, experimenting with digital revenue, and putting up paywalls and meters. And it is likely that digital revenue will continue to rise. But it’s hard to come up quickly with the hundreds of millions of dollars in digital revenue Time Inc. needs to replace its falling print dollars. While layoffs and spending reductions can help boost margins, Time Warner’s executives likely had great difficult envisioning a situation in which Time Inc.’s revenue and, more important, its operating profits resume an upward trajectory.

Prior Time Warner spinoffs, like AOL and Time Warner Cable, have thrived as independent entities. Will the same hold for the magazine business? Time Warner’s CEO is confident it will. “As we saw with the prior spinoffs of Time Warner Cable and AOL, we expect the separation will create additional value for our stockholders,” Bewkes noted.

Time Inc. has long been a battleship among media companies—huge in its own right, profitable, and steaming along in a convoy with even larger and better-armed vessels. It still has plenty of ballast, and powerful guns. But it is setting off on a new course, alone, into choppy seas.