Why Time Warner should reacquire Aol

This post was also published in VentureBeat.

Aol released its earnings today a week after Time Warner, its former dot-com merger partner, announced earnings. The two businesses, once considered completely disparate and deemed one of the worst corporate mergers of all time, are now increasingly complementary as the industry shifts beyond delivery mechanism to content as the value differentiator.

Time Warner reported stellar earnings last week, with income up 14% year over year and strong 11% growth in television networks such as TNT and CNN, 18% growth for premium content such as HBO, and 13% growth for Warner Bros movies.

The one thorn in Time Warner’s side is Time, Inc. — the division grew a moribund 3%. The anemic growth at Time is coming primarily from online revenue, but it is a tough transition since Time does not sit on a premium editorial perch like the New York Times or Wall Street Journal. And although Time is currently profitable, the Time Warner CFO has warned that income will likely fall next quarter.

In the end, magazine content is just dull and is no match for the online content scrum. Time, with its weekly recaps of the news, has attempted to roll out tablet apps and implement a paywall, but there is no compelling reason to pay. Even worse for Time Inc., Americans are tiring of celebrity magazines like Time Inc.’s People magazine, which suffered a 10% decline in newsstand sales. Meanwhile, online pure plays like Sugar and Glam are growing in the category. So what can Time Warner do to accelerate the online growth of its magazine division?

Aol has significantly grown its content business over the two years since its divestiture from Time Warner. CEO Tim Armstrong has been incredibly aggressive, acquiring the Huffington Post, the leading online pure play for news, restructuring Aol’s various blog properties, and growing Aol video into the #2 video site according to Comscore.

Aol missed estimates today, and the market savaged the company with a 25% drop. However, there was actually some good news in Aol’s earnings announcement: Advertising revenue is now $319 million and growing 5%. The online content strategy is actually working — it is just bogged down by legacy dialup and longer-term initiatives like Patch.

Although on first blush it seems absurd, Time Warner could pick up Aol’s content division at a discount, shut down Patch, and divest the dialup business to Earthlink, just like it divested Time Warner Cable. Aol’s content business would accelerate Time Warner’s online growth, and technology such as Aol’s Editions iPad magazine viewer could help grease existing Time properties. And Time Warner, with its $31.84 billion market cap, can easily afford Aol’s current $1.2 billion price.

If you were betting on the future of news, would you pick Time or HuffPo? Time Warner is going to have to make a move here, and Aol just got a whole lot cheaper than Say Media or Glam.