Time Warner Inc (TWX) Severs Publishing Arm to Focus on Threat from Streaming Video: Netflix, Inc. (NFLX)

The rumors have finally been confirmed; Time Warner Inc (NYSE:TWX) announced that its Board of Directors has authorized the “complete legal and structural separation” of its publishing unit, Time Inc. Once the transaction is completed, Time will become an independent, publicly traded company.

Time Warner Inc (TWX)

It is a move that many analysts have been speculating for quite some time now. The decision of the board, however, comes at a time when media (film and TV entertainment) companies in the U.S. have found a new source of income: subscription video on demand.

Considering the series of rich deals made in the past, licensing content to internet companies such as Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) has a great deal of potential for high profits. The decision to separate Time as an independent company apparently sounds like a good decision –  separating a bad unit from a good unit – for investors. But is it really as good as it sounds?

Why is Time being separated?

Despite Time owning some of the best known and widely read magazine brands in the country, it was struggling to grow and pulling the parent company down.

Besides the publishing segment that is slated for separation, Time Warner Inc (NYSE:TWX) operates in two other segments: Networks (television networks and television services) and Filmed Entertainment (feature film, television, home video and videogame production and distribution).

In fiscal 2012, out of total revenue of $28.73 billion and operating income of $5.92 billion, the segments relative shares of the total revenue pie were as follows:

(figures in billions), Source: http://www.companyspotlight.com/viewer/17283

Evidently, the publishing business, which comprises 12% of total revenue and 8% of the company’s operating income, is bogging down the company.

Is online streaming a threat?

The relationship between online streaming video companies and broadcasting and cable TV companies started with licensing of old content from the library of prime time shows. However, there is a great likelihood of it becoming an addiction of sorts. Last week, CBS Corporation (NYSE:CBS) announced that the first three seasons of “The Good Wife” will be available on Amazon Instant Video and the fourth (which started in September 2012) will be available later this year.

If this catches on, will it not eat into their own revenues? If viewers know that they will soon be able to watch a series at a time of their own choosing where is the need for rushing home in time for the show. The choice is between newness of content and content without advertisements. With the trend shifting towards watching online streaming, there is a great possibility of online streaming winning the battle. As it is, the present generation is already more comfortable with watching online content.

It can be argued that the as subscribers grow, media companies will be able to demand higher prices from the likes of Amazon and Netflix, Inc. (NASDAQ:NFLX), which can compensate for any loss in ad revenue.