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Europe seen as AOL Time Warner road to growth

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CIOL Bureau
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Reshma Kapadia

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NEW YORK: AOL Time Warner Inc.'s European Internet service could be the
Trojan horse for the company's plans to generate half its revenue from outside
the United States by the end of the decade.

The focus on international efforts by the world's largest media and Internet
company has intensified amid a slowdown in subscriber growth and revenue at its
US Internet service. AOL Time Warner got about 16 pre cent to 17 pre cent of its
revenues from overseas last year. The company's total revenues for 2001 were
$38.2 billion.

The AOL Europe Internet service offers the best vehicle for growth, because
it gives the company a distribution outlet for its music artists like Madonna,
publications such as People, television programming and movies, Kaufman Bros.
analyst Paul Kim said.

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AOL Time Warner took full control of AOL Europe, among the top Internet
service providers in Europe, after buying back German media company Bertelsmann
AG's 49 pre cent stake this year for $6.75 billion in cash, a price some
analysts believed was too high.

Now AOL has to turn the money-losing European operation around and use it to
spur growth in other businesses. "This year what you are going to see is
nice growth on the member side with substantially reduced losses," Michael
Lynton, head of AOL International, said in an interview. "I don't think you
will see restructuring."

AOL plans to slash its $600 million losses in Europe and increase revenue
from $800 million to $1 billion by year-end by reducing network costs and
focusing on ad deals, Lynton said.

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Fixing AOL Europe

New ad deals will help AOL Europe reach those targets for the year, Lynton said,
despite an overall ad slump. The group is starting from a small base, having
started its search for such deals only 18 months ago, he added.

Critics have panned the deals to date, calling them small and scattered, and
are waiting for broad-based marketing deals like the ones AOL has trumpeted in
the United States.

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Recent industry moves are expected to also pave the way for growth for AOL
Europe, Lynton said. Flat-rate pricing for telecommunications in Britain and
France has helped AOL Europe, and Lynton is hopeful Germany will offer the same
type of pricing, boosting growth there.

AOL officials in Europe complain that high charges by telecoms operators for
high-speed communications have barred them from offering much more than basic
dial-up services. But former British Telecoms monopoly BT Group's decision to
halve high-speed Internet prices will now allow AOL to offer a bundled rate at
more attractive margins and roll out high-speed access via digital subscriber
lines, Lynton said.

A recent price hike by rival Britain's Freeserve PLC also leaves room for AOL
to follow suit possibly this year, raising its price from the nearly 15 British
pounds a month ($21.38) it charges, Lynton said.

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Acquisitions may be needed to reach target

Investors and analysts have been waiting for the world's largest Internet and
media giant to make bold moves abroad. Other than the purchase of British
consumer magazine publisher IPC, whose titles include Marie Claire and Loaded,
they are still waiting.

Many expect near-term acquisitions to come in the form of cable networks,
music labels and more publishing titles so AOL can recreate the marketing
machine it has tried to build in the United States by using the online service
to sell subscriptions and to promote music and movies.

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AOL Time Warner has already teamed up with German cable and satellite TV
music firm VIVA Media on a cable music channel. "There are still
acquisitions that have to be undertaken if you want to get to that full
number," Lynton said of the company's target for international revenue.

Lynton expects AOL to grow organically in Europe, but he kept the door open
to acquisitions. Industry insiders have said Italian ISP Tiscali could be a
potential AOL target. "It may be advisable in other markets to pair up but
I will say migration from one ISP to AOL is not a path we have typically
followed successfully," Lynton said.

British cable company NTL or Dutch United Pan-Europe Communications, both
deeply in debt, have also been identified as possible targets as AOL Europe
tries to boost broadband efforts, but Lynton said he did not think AOL had to
buy a cable operator in the region for its plans.

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He identified Europe, Japan, Latin America, and possibly China in the not so
distant future, as the most promising markets for near-term growth.

Asia

The company struck a venture with China's top PC maker Legend Holdings Ltd.
last year and has signed a pact to distribute its CETV channel to cable
subscribers in the southern region of China, building the foundation for growth
in the future.

"Is this going to be a tomorrow business? Probably not. The ad market
has to develop significantly overall," Lynton said. "But Internet
penetration is very good in China and the mobile business has taken off
there." India's markets have also been abuzz about possible ventures
involving AOL Time Warner, fueled further by CEO Gerald Levin's recent trip to
the country.

The company's Turner International unit has already formed a venture with
India's Zee Telefilms Ltd., but Lynton suggested deals on the AOL side had some
challenges ahead. "The chief issue is going to be telco costs, which are
prohibitive right now, as well as some of the payment technologies," he
said about India.

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