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AOL, the $200 Million Coming Disaster

Time Warner (TWX) filed an 8-K with the SEC today and gave a preview of the AOL spin-off. It's coming quick and it's going to be expensive -- and messy.

It doesn't seem like that many years ago when AOL, swaggering under the weight of its pre-bubble market cap, decided that it was going to purchase Time Warner. Why? Synergy, of course. But synergy was another word for the term we-like-the-sound-of-it-but-don't-know-how-we'll-make-money, and pretty much the only people who saw some value out of the deal were managers whose bonus plans kicked in and the bankers and lawyers who took large fees to make the entire fiasco possible.

Now the company is going from the depths of that fiasco to an impending but unavoidable disaster. AOL as a business has largely tanked, given the number of people who've been able to swear off those free installation CDs and cruise on the Internet via broadband. Time wants to pull the trigger and put AOL, now a division, out of the publisher's misery. According to the filing, the planned spin-off will start to happen this calendar quarter and, through the first half of 2010, cost $200 million in restructuring charges. In this case, a big part of restructuring will mean layoffs, though for AOL to have an independent existence again will take significant other spending as well.

Heaven knows that Time hasn't been enjoying a whole lot of good news. In its earnings report for Q3, issued last week, year-over-year revenue was down by 6 percent, but for AOL the decline was more than 23 percent. That's about the decline for the entire first nine months, as well.

Not to say that AOL makes nothing. That first nine months revenue was $2.45 billion, with operating income for the same period of $449 million. But subscriber revenue, long the mainstay, was down 29 percent and ad revenue was off by 18 percent.

AOL has reportedly been eyeing the publishing model of content mills, but one example, Demand Media, has reported annual revenues of about $200 million. That's substantial, but nowhere in the league that AOL would need. So even if all comes out well, a happy story is not in the cards.