Bewkes breaks up the old gang at Time Warner

With a leaner conglom, the topper tackles windows, VOD and studio succession

Jeff Bewkes spent most of 2009 deconstructing what was once the world’s largest media conglom.

Now that he’s pared Time Warner to its essential parts — film and TV production and distribution, cable networks and magazine publishing — Bewkes has the Time Warner troops focused on attacking the challenges vexing traditional media and entertainment while he faces a pivotal decision in the coming months about leadership at Warner Bros. With a full docket, the chairman-CEO already has staked his course in a handful of key areas:

–Release windows? He’s ready to remodel them to pursue his vision of robust video-on-demand as the big growth driver for high-end film and TV productions.

–Digital dilemma? He’s preaching the M-word — monetization — of everything from the gossip reports on to broadband streaming of TNT’s and TBS’ growing roster of original series.

–Global hot spots?Bewkes is navigating the continued expansion of HBO and Turner channels in foreign markets, and taking Warner Bros. into local-language film and TV production.

–Next-gen jitters? The exec has made Time Warner a player in the videogames business in a short time to extend the company’s brands into a growing market that reaches younger consumers.

–Regime change? The succession question at Warner Bros. is among Bewkes’ most pressing internal issues, as studio toppers Barry Meyer and Alan Horn are set to step down at the end of next year after a dozen years at the helm. Recently, though, there’s been speculation that Meyer may sign on for another hitch as WB chairman and CEO.

Bewkes is at this moment probably the most closely watched showbiz CEO — both in Hollywood and on Wall Street. He’s in the enviable position of operating from a strong base, with modest debt and a war chest of $5 billion in cash left over from the spinoff of Time Warner Cable completed early last year.

The spinoff of AOL, completed in December, didn’t yield such a windfall, but it did plug a big drain on Time Warner’s earnings potential. It was also a highly symbolic victory forBewkes, and for many of Time Warner’s old guard, who never hid their disdain for the AOL-Time Warner union.

Bewkes, the former HBO topper who became Time Warner’s CEO in January 2008 and chairman a year later, let go of Time Warner Cable and AOL because he firmly believes — based on his own company’s history plus examples of other ill-fated mergers such as Viacom and CBS — that the under-one-roof model of amassing unrelated content and distribution businesses is overrated. (Not everyone shares that view, obviously, or the biz wouldn’t be awaiting the nuptials of Comcast and NBC Universal.)

Bewkes saw the capital-intensive needs of the cable systems and the ever-changing business-model woes of AOL as a distraction to Time Warner’s core operations. And because pure distribution and pure content companies typically appeal to different kinds of shareholders, the old Time Warner’s stock was neither fish nor fowl to many investors. On the strength of solid quarterly earnings and a slowly recovering economy, Time Warner’s stock is up 23% over the past year.

So now that Bewkes has Time Warner where he wants it, what does he plan to do with it?

Don’t hold your breath for a bet-the-farm acquisition, at least not anytime soon. Bewkes sees plenty of opportunity in TW’s existing businesses, which now divide neatly into four major divisions: Warner Bros., the Turner cablers, HBO and Time Inc., home to 22 top mags including People, Time, Sports Illustrated, Fortune, Entertainment Weekly and In Style.

“We’re sitting in the lead position consistently in media businesses that are going digital and global,” Bewkes says. “The first thing we think about is not what we want, but how can we keep our businesses growing off the (base) we have. We need to redesign some of our business models so they work digitally and globally. And that is happening, which is why we’re No. 1 in our businesses and why we’ve been No. 1 in (media) earnings for two years now.”

It’s telling that Time Warner was not in the mix last year when NBC Universal quietly went on the block. Rather, Time Warner’s M&A activity mostly has focused on opportunistic, low-risk buys of videogame publishers and developers with creative talent and assets that Warner Bros. needs to expand its games biz. This year, it acquired a majority stake in London-based Rocksteady, which was had been working with the studio on a Batman game; and Boston-based online gaming outfit Turbine.

That company, through a quirk of licensing, controlled multiplayer online gaming rights to “The Lord of the Rings” franchise, while Warner Bros. had a lock on every other “LOTR” gaming format. Last year, it swooped in to buy “Mortal Kombat” maker Midway Games out of bankruptcy for $49 million after Sumner Redstone lost $800 million on the company. Warners also bought Bothell, Wash.-based Snowblind Studios last year.

The vidgame activity is a good example of the kind of strategic “tuck-in” deals that Bewkes is looking for to enhance existing operations. Time Warner’s revenue from vidgames rose from $100 million in 2007 to $510 million in 2009, according to the company.

The MGM library also falls into the “tuck-in” category — but only at the right price. Time Warner, which already owns the Lion’s pre-1986 vault, made an offer this year of about $1.5 billion for MGM’s 4,000-title library. But Bewkes has made no move to raise his bid even as the MGM debt-crisis drama has dragged on.

In film and TV, there’s no more hot-button issue for producers and distribs than the question of windows and how to harness digital platforms to improve profitability. Warner Bros.’ stock in trade has been to invest in top-tier talent and brand-name fare to ensure that its offerings stand apart from the pack and travel well overseas.

Warner Bros. is counting on the larger profit margins offered by video-on-demand services to boost the bottom line of its feature tentpoles and to offset the decline in physical DVD sales. Bewkes and WB’s Meyer emphasized this point May 27 in a daylong investor presentation at Time Warner Center, the first such dedicated sesh that the company has held with Wall Streeters in six years.

“We look at VOD as being the same as the DVD sale and rental model. But the margin for us is three times in VOD what it is in physical. So we can make more money at the same price point, or we can take the price down in order to (generate) greater quantities of transactions,” Bewkes says. “For us it may end up being the latter.”

WB has been aggressive in making its titles available for premium VOD purchase on the same day that physical DVDs hit store shelves. There is no doubt that the studio will experiment in the near future with still more premium VOD distribution options that will shake up the traditional theatrical/DVD/pay TV window paradigm. However, a recent proposal circulated to the Hollywood majors by Time Warner Cable to offer VOD pics just 30 days after theatrical release is seen as too radical a shift for now.

“I don’t think anybody is seriously thinking about a 30-day window. We’re very aware and cognizant of the impact on our exhibitor partners,” Meyer told the investor confab. But over the long haul, he said, “We think (VOD) is a good opportunity. We think there will be great customer demand for it at the right price point.”

Bewkes is equally bullish on VOD’s potential to boost the fortunes of scripted series production. Warner Bros. TV and its affiliates are far and away the industry’s largest purveyor of comedy and drama series, with some 38 series set for next season across the Big Four, CW (which TW co-owns with CBS) and major cablers.

But Bewkes has been puzzled by some media companies’ eager embrace of broadband on-demand distribution. He has been critical of the business fundamentals behind Hulu (in which NBC Universal, News Corp. and Disney are partnered) and other moves to make primetime series available for online viewing with only a fraction of the ad load that the same programs carry on TV.

Bewkes’ response to Hulu was to develop the “TV Everywhere” construct that allows viewers broadband streaming access to cable programming, so long as they are already paying customers of cable, satellite or telco TV services. As Hulu quickly gained traction with viewers, cable operators and satcasters sounded the alarm that making cable programs available for free online would give plenty of viewers incentive to dump their monthly subscriptions.

Bewkes didn’t need to be warned.

The Time Warner team began refining the process known in wonkish terms as “authentication,” in which subscribers use a password to obtain broadband access to a limited menu of shows.

Bewkes then teamed with the nation’s largest cable operator, Comcast, to unveil the first trial of the service last summer. (Time Warner Cable, DirecTV and others are developing similar platforms.) The Comcast rollout has had its technical hurdles, but the idea has been recognized by many as a necessary step for Hollywood to squeeze more coin out of the online world.

The Hulu partners have steered clear of TV Everywhere so far, but it is well known that Hulu is about to experiment with a subscription layer of its own in an effort to boost its bottom line.

Although he’s been the champion of TV Everywhere, Bewkes is characteristically contrarian about the prospects for broadband distribution of programming to computer and mobile screens. He says that while there is undeniable consumer demand for online viewing, there’s a whole lot more hay to be made for Hollywood from VOD.

Bewkes has seen the promise of VOD come to fruition with HBO On Demand, which was an instant hit with viewers. The concept is a trickier proposition with ad-supported programming, but it is something that can, and should, be tackled as an urgent industrywide need, Bewkes says. The most important step is to establish some uniformity in how broadband and VOD rights for programming are handled between studios and networks.

“The question is not the tech (issue). We’ve figured out the technology. The part that’s hard is developing the business model, getting the contracts aligned and figuring out how to do VOD ads outside the C3 ratings period,” Bewkes says. “The reason (the idea of) television shows on broadband is interesting is it really requires a totally consistent approach between broadband and VOD. It wouldn’t make much sense to have the broadband model be any different than what you do with VOD.”

The confidence Bewkes brings to bridging the old- and new-media divide and to positioning Time Warner in the media firmament is characteristic of the man who came of age as an exec at HBO in the 1980s. He’s got firsthand experience forging new paths that cut across multiple sectors of the entertainment business — who ever thought HBO would develop a robust off-network syndication business? — and he’s comfortable analyzing the pros and cons of market opportunities.

Biz observers say Bewkes will need all of those skills as he prepares to make the call on the succession issue at Warner Bros., a subject that has been one of Hollywood’s favorite guessing games, even though any transition is still 18 months away.

Meyer and Horn, WB’s prexy and chief operating officer, have long-serving lieutenants in Warner Bros. Pictures Group prexy Jeff Robinov, Warner Bros. TV Group prexy Bruce Rosenblum and Warner Bros. Home Entertainment Group prexy Kevin Tsujihara. Turner Broadcasting chief Phil Kent also has been mentioned as a possible contender.

Although Warner Bros. is graced with a wealth of a exec talent, it’s still a tough decision for Bewkes, because the selection of a WB insider could upset the management balance among divisions that are recognized industrywide as being well run in order to yield enviable profits year after year. But the selection of a WB outsider would probably be even more disruptive, at least in the near term, and as such seems an unlikely scenario.

This dilemma has fueled recent speculation that Meyer may wind up cutting a new deal to stay beyond the end of next year, when he and Horn’s current contracts expire. Insiders say Bewkes is characteristically keeping his own counsel and isn’t giving any hints on the direction he is leaning — and he probably won’t until he decides the time is right.

The rest of the long-term to-do list for Warner Bros. includes an initiative to better mine the wealth of the DC Comics vault, with an emphasis on relaunching characters in a range of venues, from feature films (“Green Lantern” is set for release next June) to vidgames and animated series — and of course, T-shirts and lunchboxes, etc. There’s a similar push under way for the Looney Tunes gang, which will be revived with a TV series and shorts on Cartoon Network later this year.

HBO has been a strong turnaround story for Time Warner over the past two years. After suffering a post-“Sopranos” slump, the pay cabler has got its groove — and its revenue growth — back on the strength of a new generation of hits led by sexy vampire drama “True Blood.” After skyrocketing in 2006, HBO’s operating income hit a three-year high in 2009 of $1.2 billion.

Turner Broadcasting has set the bar high for the next few years. Time Warner has been plowing money and resources into programming for the flagship TNT and TBS channels, most recently the deal with Conan O’Brien for a latenight yakker and the 14-year, $10.8-billion pact with CBS for NCAA rights. Turner’s challenge will be to capitalize on these high-priced acquisitions, not only through ratings and ad revenue but in higher carriage fees from cable and satellite operators.

CNN remains a trouble spot for Turner, but only from a domestic ratings perspective. The unit’s profits have never been higher, thanks to international channel expansion and licensing. CNN and its affiliates delivered $500 million in operating income for Turner in 2009, a new high for the 25-year-old enterprise.

Time Inc. is clearly suffering through the formidable downturn of print publishing biz — as evidenced by the steep drop in revenue and operating income. The only buffer for the division is that it is, by revenue and circulation, the No. 1 magazine group in the country, and its lead over its nearest competitors has only widened amid the economic downturn.Bewkes seemed to acknowledge during the investor confab that there has been some consideration of selling the division, but as he told the Wall Streeters, “The opportune time for that is not now.”

There have also been assertions that Time Warner’s strong earnings and wad of cash make it a takeover target. But although the conglom is much trimmed from its peak weight, it’s still plenty big enough to fend off any of its showbiz rivals — at least from a regulatory perspective. So unless Google or Microsoft or a deep-pocketed foreign conglom decides it’s time to break into Hollywood, it’s hard to imagine many predators going after the House that Bewkes Rebuilt.

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