Time Magazine 2012 Annual Report Download - page 37

received in connection with these transactions were based on, among other things, certain facts, assumptions,
representations and undertakings made by Time Warner and by AOL or TWC, as applicable. If any of these
facts, assumptions, representations or undertakings is incorrect or not otherwise satisfied, Time Warner and its
stockholders may not be able to rely on the relevant IRS ruling or opinion and could be subject to significant tax
liabilities. Furthermore, opinions of counsel are not binding on the IRS or state or local tax authorities or the
courts, and a tax authority or court could determine that the AOL Separation or the TWC Separation should be
treated as a taxable transaction. Under the tax matters agreement that Time Warner entered into with AOL, Time
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. The Networks segment depends on agreements
with 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 or genre-based packages 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.
The inability of the Networks segment to acquire or produce 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. Home Box Office has agreements with certain movie studios that
provide it with the exclusive rights to exhibit the studios’ original feature films during specified time periods, or
windows. Competition for popular programming is intense, and the growing number of SVOD services has
increased the competition for programming. The businesses in the segment may have to increase the price they
are willing to pay to avoid being 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. The segment also produces
programming and it incurs costs for creative talent, including actors, writers and producers, as well as costs
relating to development and marketing. The increased amount of original programming being aired by cable
networks and, to a lesser extent, SVOD services could increase costs for talent due to increased competition for
their services. The segment also incurs significant additional costs, such as newsgathering costs. The segment’s
failure to generate sufficient revenues to offset increases in the costs associated with acquiring programming or
producing original programming 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
among younger consumers, could result in such consumers choosing not to subscribe to multichannel video
services. The segment also faces increasing competition from SVOD services. If consumers elect to utilize these
services as an alternative to video services provided by affiliates, the segment’s networks and premium pay
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