Time Warner shares fell 16 cents to $23.16 in afternoon trading.
Frederick Moran, an analyst at The Benchmark Co., said investors and Time Warner shareholders will be pleased by the spinoff news because AOL has acted "almost like an anchor" on Time Warner's stock over the last few years.
Time Warner also recently spun out Time Warner Cable, which provides cable TV and broadband Internet access. Since then, Time Warner Cable's stock has risen 26 percent — but Time Warner shares have been essentially flat.
Ted Leonsis, an executive who retired from AOL in late 2006, said the decision to spin off AOL emphasizes a shift from seeking size and scale — two attributes that were in vogue 10 years ago — to a focus on being nimble and innovative.
"I'm thrilled for the employees and I don't see any other plan, so while it's a great decision it was an inevitable decision," he said.
Former Time Warner CEO Gerald Levin, who was instrumental in AOL's takeover, recently declined to comment about the looming breakup. Levin now works as director of a rehabilitation center in Southern California.
AOL co-founder Steve Case, the other main architect of the 2001 deal, wrote Thursday on the short-messaging site Twitter that he is glad to see the breakup. He said it "has been a long, tortuous journey" and now is "time to open a new chapter."
AP Business Writer Andrew Vanacore in New York and AP Technology Writer Michael Liedtke in San Francisco contributed to this report.