Gerald M. Levin
Chief Executive OfficerAnnual Meeting of Shareholders
May 17, 2001
I'm Jerry Levin, CEO of AOL Time Warner, and it's a pleasure to be back live at the Apollo. Eight years ago when Time Warner first held an annual meeting here, it was with a clear understanding of the Apollo's significance as a global symbol of creative freedom, artistic genius and African-American achievement. At that meeting, I went over to touch the Tree of Hope, a legendary part of this historic place, which has been touched by generations of stars and would-be stars. This morning, Steve and I touched that tree with every confidence that our future performance will outshine anything that's come before.
Steve has already introduced the members of our board. I'd now like to do the same for our management team. Well before the merger was complete, we announced a management structure designed for an enterprise without historical precedent. The distinct responsibilities of our Co-COOs, Bob Pittman and Dick Parsons, reflect the array and interplay of the diverse revenue streams that fuel our growth. Bob heads our subscription, and advertising and commerce businesses. These include:
America Online..... Barry Schuler, Chairman and CEO
Time Inc..... Don Logan, Chairman and CEO
Time Warner Cable..... Joe Collins, Chairman and CEO
Networks..... Jamie Kellner, Chairman and CEO of the newly consolidated group, which brings together The WB and our Turner networks
and HBO..... the world's premier TV subscription service..... Jeff Bewkes, Chairman and CEO.
Reporting to Dick Parsons are our content businesses—a dry term for what are in fact some of the world's most distinguished and creative entertainment enterprises. These include:
Our Music Group..... Roger Ames, Chairman and CEO
Warner Bros. Studio..... Barry Meyer, Chairman and CEO
New Line..... Bob Shaye and Michael Lynne, Co-Chairmen and CEOs
Time Warner Trade Publishing..... Larry Kirschbaum, Chairman and CEO.
As Steve described it earlier, the AOL Time Warner Foundation is a full partner with our other divisions in ensuring that we reach our goals and carry out our mission. Here with us today is the president of the Foundation, Kathy Bushkin. One area to which Kathy and her team have already given special focus is teacher retention. As it stands, almost 60% of new teachers in New York City public schools leave within five years. That alarming statistic is repeated in many other American communities. In order to help address the problem, the Foundation is today announcing a major grant to expand the New Educators Support Team—or NEST—a pilot program that has shown real promise in providing teachers the assistance they need to stay at their jobs and to succeed at them.
If there are any real heroes today, they are the teachers who each morning go into the classrooms of Harlem and neighborhoods across the city and country to empower our children with the tools of knowledge, self-awareness and self-respect. As we see it at AOL Time Warner, the responsibility to support those teachers lies with all of us, the private sector as much as the public, and we're hopeful NEST will provide a national model for teacher retention.
In a few minutes, I'll speak briefly about the rapid progress we continue to make in creating the strategically focused, talent-fueled, growth-driven enterprise whose goals Steve just laid out. Before that, let me sketch the rest of this morning's agenda. Following my report, I'll show several trailers from our upcoming theatrical release schedule, as well as from the most ambitious mini-series in television history. From New Line, we have the extraordinary movie version of Lord of the Rings..... from Warner Bros., the highly anticipated A.I. directed by Steven Spielberg, and what is one of the most awaited films ever—Harry Potter and The Sorcerer's Stone..... and from HBO, Tom Hanks' and Steven Spielberg's movingly truthful depiction of American troops during the Second World War, Band of Brothers.
We'll start the formal business of the meeting by voting on the two items up for shareholder consideration—approval of Ernst & Young as independent auditors of the company for 2001 and election of the board. While the votes are being tallied, Steve and I will take your questions. We hope to wrap up by noon.
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Briefly, let me give you an overview of our operating performance.
Last year, on this same stage, I said our intention was to come out fast from the starting gate as a single entity focused on executing one strategy. Although the regulatory process delayed our start, there was a silver lining. During that time, our board and management became thoroughly acquainted. The degree of cooperation and consultation was extraordinary. We thought through our compensation plans, emphasizing stock options over cash and more closely aligning the interests of our talent and our shareholders. We prepared the way for deploying the same technology throughout our businesses and consolidating a host of other activities. I'm happy to report that AOL Time Warner is now running on Internet time.
Under CFO Mike Kelly, we formed a high-powered financial group that has done a remarkable job of designing a set of metrics for a company in a category all its own. As Steve stated, we worked closely with each division to set performance targets. As a result, we're comfortable with our 2001 year-end targets of revenues of $40 billion and EBITDA of $11 billion. They're grounded in the operating strengths of AOL Time Warner and its demonstrated potential.
Key to our performance is AOL. This is by far the fastest growing subscription service on the world's fastest growing medium-as central to the century ahead as television and the telephone were to the last. I've described AOL as our crown jewel. That's an accurate description as far as it goes. But the more I've thought about it, the more it's struck me that it doesn't go far enough. Rather than merely being a prize possession, adding incremental value to the whole, AOL is a transforming catalyst that immeasurably strengthens all our businesses.
The best way to grasp AOL's impact and implications is to look at the core asset
of our company..... in a word, subscriptions. As you saw in the video, AOL Time
Warner today has more than 133 million subscriptions. This is comprised of AOL's
29 million subscribers—over 6.5 million more than last year at this moment—Time
Inc.'s 50 million subscriptions, HBO's 37 million, Time Warner Cable's 13 million,
Road Runner's 1 million and CompuServe's, AOL's value brand, 3 million.
Strong customer relationships are the basis of every successful business. Subscriptions are the highest form of those relationships. They embodied not just a single sale but an enduring bond of trust and embedded consumer habits. From them, other relationships can be formed, their value continually extended and monetized. Consider what this means to the performance of our businesses.
AOL's 2000 performance was truly outstanding. Subscriptions grew by 30%, from 20.5 to 26.7 million. Internationally, AOL added 2 million subscribers and the possibilities for accelerating this growth are dramatic.
In the first quarter of 2001—our first as a combined company—the momentum stayed strong. One of the drivers is the marketing strength AOL gives us. Magazines are a prime example. Time Inc. is the most prestigious, profitable and inventive publishing company on the planet. Year after year, quarter after quarter, it continues to reinvent and re-invigorate itself. As strong as it's been, it's getting stronger.
Along with last year's acquisition of Times Mirror magazines and another season of record results, Time Inc. is experiencing the difference AOL makes to its future growth. So far, AOL has accounted for over a million new subscriptions to Time Inc. magazines, and we're just getting started. Better yet, this relationship is reciprocal. Our magazines provide a new way of getting AOL disks in the hands of the right audiences.
And best of all, this reciprocity—the ability to utilize a range of outlets that spans every media—extends across the entire company. Using AOL, Netscape and other online brands, for instance, we've significantly increased traffic to the Web sites of People, Time, Sports Illustrated, and Entertainment Weekly. Our new multi-brand marketing alliances with companies such as Swatch, Compaq and Cendant give them access to our unique breadth of media platforms and offer cross-promotional opportunities they can find nowhere else.
Cable is another area where AOL is offering us a new outlet for selling subscriptions,
and this is at a time when cable is becoming more attractive to more American households
than ever before. Thanks to Time Warner Cable's pioneering broadband architecture,
we've led the way in bringing consumers high-speed delivery of the Internet and
digital TV. Time Warner Cable had more than 1.7 million digital video subscribers
at the end of 2000, a 305% increase over the year before.
That same architecture opens the way to other value-added services such as digital music and subscription video on demand. Already, 2 million AOL members are accessing "AOL Plus" broadband content over high-speed connections.
This focus on operating as one company and taking full advantage of every chance to increase the efficiencies and strategic effectiveness of our businesses is also clear in our Networks division. In 2000, cable networks had strong results. TBS Superstation, TNT and Cartoon Network all placed in the top five basic cable networks in total day and prime-time household ratings. CNN reinforced its position as the #1 cable news network in the U.S., leading all 24-hour cable news networks in total viewers in both total day and primetime. The return this week of Lou Dobbs, the premier business journalist of our day, is a fitting symbol of CNN's commitment to maintaining its leadership.
When I started my career at HBO, almost thirty years ago, our initial goal was to sign up 20,000 subscribers—not a week, but a year. In 2000, HBO's total reached 36.5 million. Today as yesterday, the reason for HBO's success is the quality of programming like its smash hit The Sopranos. HBO not only leads the pay-cable category. It sets the standard for all television programming.
In order to take the group to the next level, we've joined The WB and the Turner networks under one management, thus creating the world's largest, most diverse, talent-rich networks group. For the first time, The WB and our Turner networks can capitalize on the same infrastructure of advertising, marketing and Internet opportunities.
The size of the mass audiences we can reach, as well as the specificity of the targeted ones, are what's behind the statement you saw displayed in the video: AOL Time Warner touches consumers 2.5 billion times each month. By itself, that's an astounding statistic. But what helps set us apart—what gives us our soul—are our content operations. Warner Music Group, Warner Bros. Studio, New Line and Time Warner Trade Publishing are essential to our mission and success. In addition to unmatched libraries of copyrighted music, films, and programming, their annual output allows us to constantly refresh those libraries with content whose value continues to increase.
Warner Music Group is embarked on a worldwide restructuring. The early indications of how it's going is uniformly favorable. Last week, Billboard magazine listed four of our artists among the top ten hits.
Despite the challenges the music industry has faced in the last several years, it's clear that the development of legitimate Internet sites for downloading and streaming music will re-energize the industry in profound ways. AOL Time Warner isn't waiting for others to show us how. AOL and Warner Music Group recently announced the creation of MusicNet together with Bertelsmann, RealNetworks and EMI. This groundbreaking platform for online music subscription services will roll out on AOL and other distribution networks.
When it comes to cross-promotion, the credit for the successful debut of Eden's Crush—the only female group ever to debut at #1 with their first single—is shared by The WB's Popstars, which chronicled their real-life experiences, and the AOL service, which promoted them.
No studio can match Warner Bros. for the richness of its film and animation libraries. But Warner Bros. isn't only a studio. It's an American icon. In 2000, as in previous years, Warner Bros.' mix of successful television production and syndication, feature films and video distribution, ensured a predictability of results that belies the industry's image of volatility. On top of the highly positive effect of the DVD, Warner Bros. is building film franchises that promise long-term payoffs. One of those franchises—"The Matrix II and III," which follow "The Matrix," the most successful film in Warner Bros.' history—will appear next year and the year after. So will the opening installment of what we hope-and expect-will translate the wizardry of the "Harry Potter" books from the page to the screen.
In just a moment, I'll show the trailers I promised at the outset. As brief as they are, the artistry they embody points up a central truth about AOL Time Warner: Beneath all the layers of production, marketing and distribution, the nucleus of our significance and our success is great story telling. In news, sports, music, publishing, programming and film, on TV, the Internet and the printed page, our story telling informs and entertains the world, connecting people and communities at the deepest level of their emotions and aspirations.
That's who we are…..that's what we do.
Please watch the screen.