Time Magazine 2011 Annual Report Download - page 33

Warner is entitled to indemnification from AOL for taxes resulting from the failure of the AOL Separation to
qualify as tax-free (“AOL Transaction Taxes”) as a result of (i) certain actions or failures to act by AOL or
(ii) the failure of certain representations made by AOL to be true. Similarly, under the tax matters agreement that
Time Warner entered into with TWC, Time Warner is entitled to indemnification from TWC for taxes resulting
from the failure of the TWC Separation to qualify as tax-free (“TWC Transaction Taxes” and, together with the
AOL Transaction Taxes, the “Transaction Taxes”) as a result of (i) certain actions or failures to act by TWC or
(ii) the failure of certain representations made by TWC to be true. However, under these tax matters agreements,
if Transaction Taxes are incurred for any other reason, Time Warner would not be entitled to indemnification.
RISKS RELATING TO TIME WARNER’S NETWORKS BUSINESSES
The failure to renew affiliate agreements on favorable terms or the inability to renew affiliate agreements
could cause the revenues of the Networks segment to decline in any given period, and further consolidation of
multichannel video programming distributors could adversely affect the segment. The Networks segment
depends on affiliate agreements with cable system operators, satellite service distributors, telephone companies
and other distributors (known as affiliates) for the distribution of its networks and premium pay television
services, and there can be no assurance that these affiliate agreements will be renewed in the future on terms that
are acceptable to the Networks segment. The inability to renew affiliate agreements or the renewal of affiliate
agreements on less favorable terms may adversely affect the segment’s results of operations. In addition, the loss
of carriage on the most widely penetrated programming tiers, including as a result of an affiliate’s creation of
lower-priced video packages or tiers that do not include the segment’s networks, could reduce the distribution of
the segment’s programming and adversely affect its advertising and subscription revenues. Further, the reduction
of any marketing by affiliates of the Networks segment’s premium pay television services could negatively affect
the segment’s subscription revenues. In addition, consolidation among affiliates has provided them greater
negotiating power, and increased vertical integration of such affiliates could adversely affect the segment’s
ability to maintain or obtain distribution and/or marketing for its networks and premium pay television services
on commercially reasonable terms, or at all.
The inability of the Networks segment to license rights to popular programming on acceptable terms could
adversely affect the segment’s operating results. Turner obtains a significant portion of its programming, such
as motion pictures, television series and sports events, from movie studios, television production companies and
sports organizations. In addition, Home Box Office has agreements with certain movie studios that provide it
with the exclusive rights to exhibit the studios’ original theatrical films during specified time periods, or
windows. Competition for popular programming is intense, and the growing number of content aggregators
offering online subscription video services has increased competition for programming. The businesses in the
segment may have to increase the price they are willing to pay or be outbid by their competitors for the rights to
programming or in connection with the renewal of programming they currently license, and the cost to license
such programming may increase due to such competition. The cost may also increase as companies seek window
exclusivity rights for acquired programming or the right to exhibit programming on new distribution platforms.
Increases in the costs to produce programming may adversely affect the gross margins at the Networks
segment. The Networks segment produces programming and it incurs costs for creative talent, including actors,
writers and producers, as well as costs relating to development and marketing. The segment also incurs
significant additional costs, such as production and newsgathering costs. The Networks segment plans to
continue to produce original programming for its advertising-supported networks to drive consumer demand and
growth in subscription and advertising revenue. The segment’s failure to generate sufficient revenues to offset
increases in the costs of creative talent or in development, marketing, production or newsgathering costs may
lead to decreased profits at the segment.
The loss of subscribers could adversely affect the results of operations and future revenue growth at the
Networks segment. If the current weak economic conditions such as stagnant household formation and high
unemployment rates persist or deteriorate further, or retail video service rates charged by affiliates continue to
increase, subscribers may cancel their video service subscriptions, reduce the number of services they subscribe
to or elect to subscribe to a lower-priced tier that may not include all of the segment’s networks and premium pay
television services. In addition, technological developments and changes in consumer behavior, particularly
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