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AOL expected to scrap charges

Investors in Time Warner Inc., whose shares touched a two-year low in mid-July, are seeking signs of a turnaround on August 2, when the world's largest media company is set to introduce its fourth plan in five years to save its online unit AOL.

AOL is widely expected to announce that it will give its email and web services away for free, hoping to win back customers who had switched to other free services from rivals like Google Inc. and Yahoo Inc..

The new strategy, which will be discussed at a Time Warner board meeting in New York on Thursday, aims to boost online advertising sales, but analysts say it is a risky move as its subscription business currently accounts for 80 percent of AOL's revenue.

AOL is still expected to continue to charge for dial-up Internet access, but it will no longer advertise the service.

"I think a lot is riding on August 2," said Larry Haverty, a portfolio manager at Gamco Investors, which owned 14.1 million shares of Time Warner as of March 31. "People like us have been patient with strategy. From what I've heard, I'm comfortable.

"But seeing is believing," Haverty added.

Once the reigning king of online services, AOL has lost about 30 percent of its subscribers since 2003. The 2001 merger of AOL and Time Warner has been blamed for destroying some $200 billion in market value.

Free services are now viewed by some investors as the only hope of survival for AOL in a world dominated by faster-moving companies, including News Corp.'s

"They should have done what they contemplated two years ago to aggressively develop AOL as a web service," said Morris Mark at Mark Asset Management, which owns 1.22 million Time Warner shares as of March 31. "Its position is so much more powerful than the advertising revenue that they're generating.

Time Warner's enterprise value trades at 7.6 times its expected 2007 earnings before interest, tax, depreciation and amortization, compared to News Corp.'s 11.9 multiple and Walt Disney Co.'s 9.81 multiple.


Gamco's Haverty hopes Time Warner's online advertising sales will rise at least 30 percent, when the company posts its second quarter results on Aug 2.

That would put AOL roughly on par with Yahoo, but still lag Google's 77 percent advertising growth in the second quarter.

AOL strategists may be emboldened to act aggressively after a 26 percent growth in online ad sales in the first quarter.

But a Wall Street Journal report earlier this month cited unnamed sources as saying Time Warner could lose up to $1 billion through 2009 from its plan to offer free services.

Time Warner on July 11 dismissed the report and called the newspaper's assessment "incomplete" and laden with "largely erroneous financial information."

Six days later, its stock had slipped to a two-year low.

"Time Warner's stock chart is like the flatline EKG of a dead person for the last three years," Joan Lappin, chairman of Gramercy Capital Management, wrote in, calling for Chief Executive Richard Parson's resignation.

Lappin, whose firm no longer holds media stocks, was a long time media analyst who has watched the company since the late 1960s, when it was just a magazine publisher.

The sentiment on Time Warner's stock, however, appears to be improving judging by activity in the stock options market.

There are already more than 200,000 outstanding calls that give holders the right to buy Time Warner shares at $17.50 and $20 by mid-January 2007. The stock closed at $16.27 on Wednesday on the New York Stock Exchange.

"The high open interest is a sign that players have been positioning in these options, and placing relatively cheap bets that Time Warner will rise between now and the end of the year," said Frederic Ruffy, an analyst at Optionetics, a California-based options education firm.

Haverty said he hopes the stock gets a 10 to 15 percent boost when the dust settles.

(Additional reporting by Doris Frankel in Chicago)

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