Time Warner Gives Up on AOL

imagesTime Warner today continued unraveling perhaps its biggest corporate mistake by announcing that it would spin out AOL into a separate company by the end of this year. Earlier this year, it had amended its debt agreements and brought in a new CEO, setting off speculation that an AOL split was imminent. As part of the spinout, Time Warner, which owns 95 percent of AOL, will purchase the 5 percent held by Google in the third quarter of the year. The newly independent AOL will comprise the Internet access business, web content, social networking and Platform-A advertising division.

It’s been almost a decade since the debacle of a deal that saw AOL shell out $147 billion for Time Warner. AOL was one of the early superstars of the Internet, thanks to its dial-up business and huge user base that gravitated toward its content. The 2000 buy was mocked from the beginning, and led to a $54 billion write-down two years later.

AOL, which said earlier this year that it would focus on three primary lines of business: advertising, content and social networking, has seen its revenue drop 23 percent year-over-year in the first quarter of 2009. As Om has said, “Those three divisions together cannot be spun out as a separate company. To put it mildly, it would be 10 pounds of horse manure in a 5-pound bag.”

To mask the smell, or buy AOL time to dump some of the refuse, AOL gets to keep the cash-generating access line business that can pay the bills at the new company, as it struggles with a dismal advertising market and the aftermath of having splurged on its social-networking aspirations with the $850 million Bebo acqusition. The dial-up business, which once boasted more than 26 million subscribers, has shrunk to around 6 million at the end of the last quarter, but it still throws off hundreds of millions in cash a year. If AOL can use that cash to execute on products that can deliver and monetize the next-generation web, such as its newly launched SocialThing service, perhaps it has a chance. However, none of us here at GigaOM are holding our breath.

The spinout leaves Time Warner with its film, television and content creation business. Earlier this year, it spun out its cable assets into a separate company.

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