Time Warner’s Richard Parsons

October 2006

By Anna Carugati

Interviewing Richard Parsons has been a particular pleasure for us.
His office is located in the Time Warner building, one of the most celebrated
structures recently built in Manhattan, overlooking Central Park. In our two
previous interviews, we have enjoyed his congenial style; his charming and
welcoming persona instantly put us at ease.

This time, however, we noticed that he may have been a little
preoccupied, possibly because Carl Icahn had just decided to create a new fund to
increase his investment group’s stake in Time Warner, and therefore gain more
leverage in his negotiations with the company. Earlier this year, Icahn, a
billionaire investor, proposed that Time Warner split its assets in order to
create greater value and improve its languishing share price.

When Parsons took over as the chairman and CEO of Time Warner, one of
his first priorities was to appease the company’s staff after the disastrous
merger with AOL. He also quickly put a stop to the flow of embellished growth
predictions the company was feeding Wall Street. Despite the fact that morale
inside the company is much better and its conservative estimates are trusted,
much still needs to be done to improve its value.

Running the biggest media company in the world, whose revenues in 2005
totaled $43.6 billion, is not an easy task. Running it at a time when
technological innovations are constantly rewriting the future outlook of its
assets is even more challenging. Parsons believes it is difficult for investors
to predict the future of the media industry, and this uncertainty is the main
reason Time Warner’s shares do not have a higher value, despite its divisions’
positive results. But he is adamant that the company must stay on course and
not make moves that it will later regret. “It’s never useful to panic, because
people don’t think when they panic,” he says.

In our exclusive interview, Parsons—who is receiving the
Personality of the Year award at MIPCOM—discusses the challenges of
charting the company’s future while looking for areas of growth in new media
and outside the United States.

WS: Time Warner’s
results have been good for quite some time, and yet the stock price is lower
than you’d like it to be.

PARSONS: That’s
for sure.

WS: Why is
that?

PARSONS: One
thing that people have to focus on is that all these stocks float in an ocean
of investors’ sentiment and concerns. And there is a sentiment in the
marketplace that is looking through our results, which, as you say, have been
pretty good. In the main [our results have been] usually slightly ahead of
where the analysts expected us to be.

So, I think what’s really
happening is that the terminal multiples on all the major media businesses are
being chopped. There’s an old adage, the market can price good news, the market
can price bad news, but it can’t price uncertainty.

WS: Carl Icahn
has said there is a significant gap between Time Warner’s asset value and its
share price. So the reason for that is investors’ uncertainty about the future?

PARSONS: I think
that’s the major reason. The way you value a company is you look at its current
performance, and you put a multiple around that and you project it out for a
certain number of years, and then you have what is called a “terminal multiple.”
I think what’s happening is that people have really reduced those multiples,
because they just don’t know what the picture looks like four or five years
out. And so it acts as a depressant on the current stock price. So Carl—like
we do— looks at the businesses and makes his own judgment about
valuation, and he thinks—as do I—that the intrinsic value of the
company is higher than what’s being reflected in the current market.

Where we disagree is what
the remedy is. Carl has said we should do what Sumner Redstone [Viacom’s
executive chairman] did and break the company up. But you see, that didn’t help
Sumner, because that’s not the answer. If we had an apple here and I just
sliced it in half, what have I done to “create value”? Carl’s theory is that,
well, if Time Warner were smaller and more nimble, then maybe different
investors would line up around different parts of the whole, and somehow, the
value will go up. But by simply breaking a company up, there is no empirical
evidence to suggest that this is a value-creating exercise. You have to do
something more than that.

WS: Especially
if it’s a company that is 100-percent media. But what about a diversified
company like General Electric (GE)? It owns NBC Universal but also financial
services, jet engines and power systems.

PARSONS: We’re
a media conglomerate, but none of the large-cap companies have been doing
strikingly well. So, GE has been sitting in the same range for three or four
years. Citigroup has been sitting in the same range for about six years. You
look down the list of the large blue-chip, big-cap companies, and there just
hasn’t been a lot of movement in their stock for the last four or five years,
because the marketplace is looking for clear growth stories. And they’re
saying, “These things are so big and their futures are so uncertain, how do you
get growth?” So a simplistic way of responding to that is just to say, “Break
it up into small companies again. From a smaller business it is easier to grow.”
But if you think it through to the next level, that doesn’t make any sense. Is
a movie company going to grow any faster if it were on its own [rather than] as
part of Time Warner? No.

WS: Could a
movie company operate all by itself these days? Or does it need all the rest of
the machinery?

PARSONS: If
you look at the real-world marketplace, by far the more successful movie
companies are part of entertainment conglomerates, because they can hand off
their product to a secure set of buyers and downstream users. It’s like a
manufacturer having a locked-in relationship with a wholesaler who has a
locked-in relationship with the retailers—it’s much easier to move things
up and down the chain. So Disney, Warner Bros., Fox, Sony—those are the
successful movie producers because they are part of an integrated operation.

WS: Having a
company this big also helps when there is a box-office failure.

PARSONS: The
risks inherent in the business are too substantial to have a pure-play movie
company. Eventually, when you hit a big blip like that, it puts you under.
Movie companies live off of their libraries and having a big balance they can
sit on. New Line Studio is ours, and there’s no way they could have made Lord
of the Rings if they weren’t part
of Time Warner. No way. They couldn’t take that kind of risk, because if you
open a movie on Friday, and by Sunday night you don’t have the kind of numbers
that you had anticipated, you’d be out of business. These are $100-million
weekends—if it doesn’t go right, [the movie theaters] take it right off
and boom, you’re dead. So you have to have strength of balance sheet to be in
that business and to take the kind of risks and make the kind of bets that a Lord
of the Rings or a Harry Potter or a Superman or a Spider-Man
[demands]. Disney put up a ton of money for those two Pirates of the
Caribbean movies, because they’re
Disney. No independent could have ever done that.

WS: So, what
have you been doing to create value?

PARSONS: We
have been doing quite a few things. In Europe, we’ve taken our AOL business
model and we’re in the process of selling the access business because that’s
the business where it has become highly competitive in Europe. The incumbent
telcos have a competitive advantage over us, so we’re basically stripping out
the dial-up or access part of the business and just keeping the portal part,
the advertising-based part. We retooled the whole AOL business plan in the U.S.
to focus more clearly on accelerating the migration to an advertising-based
business model. We sold Warner Books. We’re selling our sports teams. We’re
trying to be thoughtful about how to manage the portfolio and put the emphasis
on growth and to generate cash out of some of the nonstrategic assets and buy
our stock back, because we think it’s a good buy. And eventually, when people
look up and realize that we’ve taken in north of 20 percent of our outstanding
equity, that should have a positive effect on the stock.

WS: With so
many new technologies coming up every day, how does Time Warner decide on which
ones to distribute its content?

PARSONS: That’s
what we get paid to do, to manage our way through this thicket. We have a
highly talented group of managers whose job it is, on the one hand, to not be
so risk averse that they don’t experiment, innovate and try new things. But at
the same time, you can’t just throw money at everything that’s out there. So,
we think that the answer is to be adventuresome and innovative with these new
technologies, and establish to the satisfaction of the marketplace that we are
attempting to translate our brands, and our businesses, into the digital world,
but to do it with discipline. And then the other part of it is, we just have to
continue to grow and to exceed the expectations that are put on us. Everything
runs in cycles. You’ll notice that after the huge run-up from about 2002
through 2004, even the Internet guys have flattened out. Yahoo! has gone
backwards over the last 18 months. Google hasn’t gone up in 12 months. I think
that part of the cycle of, “We’re going to put all our money on these
high-growth companies,” has sort of flattened out. In fact, some people have
started writing about this—about how more traditional media companies are
going to come back into favor because people are going to look up and say, “You
know what? They’re still growing. They’re still producing not only impressive
growth but large amounts of cash and they’ve been buying their stock back.” I
think we’ll come back into favor.

WS: So content
is still king?

PARSONS: That’s
the other thing. What is YouTube trying to do now? YouTube is out trying to
make deals with the record companies for their videos. At the end of the day,
watching somebody kite-surf into a bunch of rocks is funny the first two times,
but consumers are going to come back to what I call professionally produced
content. And the only way that these distribution mechanisms can get that
content is they’ve got to deal with us. So we’ll figure out a way to monetize
our content. I believe that content is king and distribution is the power
behind the throne—without the two of them working together, you don’t
have a business. I think people will increasingly come to realize that the
content companies are an essential and unavoidable part of the value chain. [I
don’t believe that all this content] is going to be pirated or people will stop
watching TV and start watching YouTube.

WS: Time Warner
recently acquired Adelphia. How do you see the cable business?

PARSONS: I have
been, I am, and I probably will be going forward, very bullish on the cable
business because it’s all about infrastructure. Now that’s not a very sexy
thing to talk about, but for the last 10, 12 years, the cable industry, and our
company in particular, has been upgrading its infrastructure, so that it can,
in a fairly robust fashion, handle video, data, high-speed Internet access and
voice. All the cable companies over the last year or so have been posting
stellar numbers because we have this bundled offering of voice, video and data.
Satellite can’t do it and the phone companies can’t do it. Now the phone
companies are trying to catch up by putting more fiber into their plants—in
other words, up-grading their infrastructure. The satellite companies are
frankly a bit stymied because you can’t really have interactivity with
satellite. And they’re finding that while the video signals they can deliver
are quite good, they can’t really do the high-speed Internet access without a
phone return path, and they can’t do phone at all. So, they are disadvantaged,
and the phone companies don’t have the plant to do it, so right now the cable
companies are the only distribution platforms that can handle all three, and
what we’re finding is that consumers like the bundle.

WS: Are you
looking into acquiring some online companies like MySpace?

PARSONS: We’ve
made four or five acquisitions in the Internet space in the last two years. It’s
just that these haven’t been half-a-billion-dollar deals. They’ve been a
hundred million or less. But the last big acquisition was a couple of years
ago, Advertising.com, which was about half a billion dollars. It’s been very
successful for us, and we’ve made a number of smaller ones in the online video
space because that’s where we see AOL having an advantage over Yahoo! or
Microsoft or Google. We do video streaming better than anybody on the Internet.
So we’ve been active doing our thing.

WS: Everyone
talks about China and India—what is your perspective on those markets?

PARSONS: Well,
for us Europe is still the big international market by far. Maybe 20 percent of
our revenues come from outside the U.S. And of that 20 percent, 17 percent come
from Europe, 3 percent from the rest of the world, and the rest of the world is
mostly Japan. We make no money in China and very little in India. China is very
tough because the government is an active player in the market, both as a
censor and as a cheerleader for local content providers. So if you [distribute
movies or programming] that they think are a little too racy or a little too
antigovernment, you can’t do that. Or if you have a little bit too much success
and some of the local guys start to squeal, you can’t do that. And it’s a
heavily pirated market and so, while we all look at the 20 percent of mankind
in that country and understand that at some point in time we have to be there,
exactly how to do that, nobody has cracked that nut yet. So we’re continuing to
do small things and build relationships there, but we have not made big
investments in China. Some of the media companies have and they’ve gotten
burned.

WS: A few years
ago, we interviewed Sumner Redstone and Rupert Murdoch [the chairman and CEO of
News Corporation]. They loved to talk about China.

PARSONS: I
know. When I became CEO we intentionally turned the dial down on the rhetoric
and the hyping of the future, because we’d done too much of that before, and it
also happens to be my personal style. A new thing comes along and it’s like
nirvana, this is going to be the salvation of everybody. China is a super-tough
market. Nobody is making money in China, except the Chinese. In India, the
government isn’t as involved in the media. And they do have a rule of law. But
they have no infrastructure. So, for example, how do we sell DVDs? We sell DVDs
to 1,000 Wal-Mart or Best Buy stores. They don’t have those in India. So how do
you get them out? It takes time for these things to develop, and just because
you have some headline-grabbing numbers—20 percent of all humanity is in
India—it doesn’t mean you can translate it into dollars. You don’t hear
them talking that much about it anymore, right? Because it’s a slow build.

WS: So Europe
will be the big push for your international businesses, because the governments
there are more stable and the market is free?

PARSONS: [They
have] the rule of law. While pirating, for example, is a problem in Germany,
they have laws and you can get the law-enforcement authorities to work with
you. You can make contracts, which are enforceable, and that’s where the money
is.

WS: What
would be your plans for making acquisitions in Europe? PARSONS: We took a look at ITV. First of all,
there were two problems. One, the current management doesn’t want to sell. And
two, in order to induce them, I suppose we would have to pay some whopping
over-market price. We took a look and it was either too complicated or too
pricey. We look at everything, but are extremely disciplined: is it financially
and strategically right for Time Warner? But you can be sure that we’re
interested in these markets. For
instance, we think this new formula for AOL, where we focus on building the
portal side of the business [will bring positive results].

WS: Do you
think that eventually there will be mega-merged companies like
Disney-Google-Verizon?

PARSONS: I
don’t think so. Look at what just happened in the U.K. with respect to the
Sony-Bertelsmann music merger. Now to me, that’s bizarre. The two companies
went through all the processes, they got all the clearances, they merged their
companies, and then two and a half years later the court says, “No, you can’t
do that, pull it apart.” I don’t know what they’re going to do, but I think
that, just like investors are concerned and uncertain about what the future
holds for these businesses, so too are regulators. And I think you’re going to
see more regulatory push-back than invitations to more mergers.

WS: Even
though those companies are in different businesses, like Verizon and Google.

PARSONS: But
they’re not in completely different businesses. And that’s the problem. Could
AT&T and Google come together? That could happen. But a
Disney-Google-Verizon? I just don’t see it.

WS: You have
been named Personality of the Year at this year’s MIPCOM. What does this award
mean to you?

PARSONS: First
of all, as I usually say with any award, it’s the 87,000 men and women who work
for this company who deserve it. I am a proxy and I’m receiving it on behalf of
my colleagues in my company. This is a most important and prestigious award in
part because it is global in scope. We want to think of ourselves as truly a
global company, and to get recognition from a global organization—an
organization that isn’t U.S.-centric in focus—means more to us, because
we’re still trying to make our place [internationally], whereas we already
[established ourselves] domestically. Everybody knows our brands and corporate
responsibility and good works. To emerge and be recognized by a truly
international institution has double meaning.