Time Warner Inc.'s decision to spin off its shrinking Time Inc. magazine division helped send its stock to its highest price in several years Thursday. But the prospects for Time Inc. as an independent public company may be less sunny.

As the largest U.S. magazine publisher, Time Inc. has an enviable stable of titles, from the highly profitable People to the prestigious Time. But its operating income has dropped by roughly half over the past five years, and analysts expect revenue and profit to keep falling this year as the industry struggles to regainadvertising lost to the recession and the Web.

'In this case, freedom is just another word for nothing left to lose,' wrote Michael Nathanson, an analyst for Nomura Securities who used to work at Time Inc. 'This once proud and profitable division is being punted as its business prospects look structurally challenged.'

Whether Time Inc. can rise to this challenge rests on how aggressively it cuts costs and how much debt the new company takes on, observers say. Another big factor: who takes over as chief executive. The division's CEO, Laura Lang, plans to step down ahead of the spinoff.

Internal candidates are likely to include Todd Larsen, executive vice president and group president of the News and Sports Group, and Paul Caine, Time Inc.'s chief revenue officer, people familiar with the matter said. Neither responded to requests for comment. The company is expected to also look at external candidates, according to a person familiar with the matter.

The other big question: Time Inc's balance sheet. While News Corp. is expected to spin off publishing assets with a cash cushion when it splits this summer, analysts predict that Time Inc. will take on up to a billion dollars in debt. News Corp. owns The Wall Street Journal.

'The risk is, if the business deteriorates further, can they reduce the leverage?' said John Janedis, a UBS Securities analyst. 'The last thing they want is an asset that would appear to be overleveraged in two years.'

People familiar with Time Warner's thinking say industry revenues, and probably those of Time Inc., are likely to continue to decline for the next year or two before possibly stabilizing. But they say the new company will be able to cut costs to match any such revenue declines, thereby ensuring profit growth. They say the debt to be taken on will enhance shareholder returns, making the company an attractive investment.

Time Inc. has already cut about $1 billion in costs in recent years but still has annual expenses of about $3 billion, the people say. This includes the costs of running a big fulfillment center to ship magazines around the country and printing costs. Analysts also predict Time Inc will look at moving out of its headquarters in the iconic Time & Life Building in Midtown Manhattan.

Analysts say staff reductions, which have become commonplace at Time Inc. in recent years are likely to continue. In January, for instance, the company announced it was cutting nearly 500 of its 8,000 jobs.

'Being on its own, it's going to be a lean culture,' Mr. Nathanson said.

Despite these prospects, Time Inc. employees seemed cheered by the prospect of a spinoff rather than the proposed deal to merge most Time Inc. titles with Meredith Corp.'s magazines, according to interviews with staffers and former executives. Some Time Inc. executives worried about how the company's brands would fare under the management of the cost-conscious, no-nonsense Meredith, as well as what would happen to their own, typically higher, salaries.

Time Inc. executives were also upbeat about the spinoff because they think it would mean an overhaul of the company's leadership, which many believe was adrift just as the magazine industry was going through a period of radical change.