AS MORE and more of the world's business is conducted online, a battle royal is taking shape. The struggle is to decide which company will become the primary gateway to the internet. Three firms, Google, Microsoft and Yahoo!, are aiming to establish the world's leading internet portal–the site that most internet users rely on for everything from searching the web to sending e-mail and catching up on the news. All three firms are hoping to strike some sort of deal with AOL–the fourth player in the battle of the portals.
It is highly convenient for Time Warner, the world's biggest media company, that its struggling web portal, AOL, is suddenly at the receiving end of competing bids from all three of the other internet giants. Microsoft, the world's biggest software company, was the first to start haggling, via its portal, MSN. Then Google, the world's most popular search engine and nowadays Microsoft's archest arch-enemy, came running, with Comcast, America's biggest cable company, as a prospective co-bidder. And now Yahoo!, the biggest web portal and determined runner-up to Google in internet search, has also entered the bidding.
Lest anybody pick the wrong metaphor, it is not the case that AOL is "the prettiest girl at the dance", says Safa Rashtchy, an analyst at Piper Jaffray, a bank. Instead, he says, AOL "is big open real estate and you don't want your competitor to get it." That is because the vaguely defined and fast-changing "web-portal" industry, though still young enough to be the fastest-growing advertising medium, is also showing the early signs of maturity. That would suggest that this industry, like many others, will evolve towards three large generalist players and several small niche firms, a phenomenon that Jagdish Sheth and Rajendra Sisodia, two academics, call "the rule of three" in a book of the same title. The big question is which three emerge and in what combination.
Analysing how the four portals currently measure up is surprisingly hard. Conventional wisdom says that Google is the one to beat. That is because it is the clear leader in internet search–the most technologically exciting and profitable end of the business. Yahoo! is a strong second in search and MSN a poor third, whereas AOL does not compete in search at all. Instead, it uses Google's technology to generate search results and to make money out of them (by placing the hyperlinks of advertisers near related search results).
But when the criterion is not the number of searches but the number of site visitors in America, Yahoo! is the clear leader, with MSN in second place, AOL in third and Google last. Terry Semel, Yahoo!'s boss, used this fact to make a barbed joke when speaking at an internet conference in San Francisco last week: "Gosh, it's starting to look more and more like a portal," he said of Google, whom he is suspected of envying, and "as a portal it would probably be rated number four." Yahoo!'s web mail service, he added, has ten times as many users as Google's alternative.
If instant-messaging (IM) technology is the measure, AOL is the clear leader, with Yahoo! and MSN competing for second place (and, last week, linking their technologies in a partnership), while Google is again last. Instant messaging is currently hard to make money out of, but potentially crucial since it is one vehicle for free internet telephony and tends to make its users fiercely loyal.
By the more conventional measures of advertising revenues and operating profit, Google is still the clear leader and MSN the big loser, says Henry Blodget, the president of Cherry Hill Research (Mr Blodget became notorious as an equity analyst at Merrill Lynch for his role in inflating the dotcom bubble, which led to his being banned from the securities industry for life). After making losses for about a decade, MSN is now expected to make an operating profit of about $500m this year, a sharp contrast with an estimated $2.4 billion for Google. "The web war is over," argues Mr Blodget, "and Microsoft lost."
This might suggest that a combination of AOL with MSN makes the most sense. Both are unhappy step-children of parents that live in other industries (Microsoft in software, Time Warner in traditional–ie, offline–media), whereas Yahoo! and Google remain the pure internet businesses they have been since their inception. For MSN, switching AOL away from Google's search technology and towards MSN's might offer a last chance of staying in the search competition. And both MSN and AOL still have lucrative but fast-shrinking side businesses in dial-up internet access, which Google and Yahoo! scoff at as holdovers from the narrowband stone age.
By contrast, Google would at first glance seem to be the least likely partner. It is run by technology purists–proud geeks who preach that computer algorithms, not human editors, will change the world. On the other hand, as confident as Google currently is, AOL is its single largest customer, accounting for 11% of its revenues in the first half of this year. Google would prefer not to lose this to MSN, so its bid appears to be defensive. "Google would probably not have done this if MSN had not made this move," says Hal Varian, an academic and adviser to Google. This would explain why its bid is intended as a joint-venture. The idea is that Comcast would bring the broadband internet access, AOL the media content and "eyeballs", and Google would do the "monetisation" through its advertising technology. This would ensure that each partner concentrated on the bit of the business in which it really excels.
A Google-Comcast-AOL combination would also be the most effective counter to Yahoo!'s (so far) successful strategy of teaming up with broadband providers. Yahoo! has deals with SBC and Verizon, America's two largest phone companies, to give their broadband customers free Yahoo! accounts, web mail and online storage; this week Yahoo! struck a similar deal with BellSouth, the country's third-largest telephone company. Google, the only portal that does not make content of its own, and Comcast, the biggest broadband provider in America, are feeling a bit left out.
But a deal between AOL and Yahoo! might be culturally the easiest. Both are at heart media companies–Yahoo!'s Mr Semel made his career in Hollywood before moving to Silicon Valley. Both see media content, whether generated by teenage bloggers or professional film studios, as their natural terrain.
Ultimately, it all comes down to the three suitors' estimates of what Mr Varian calls "the power of the default". Default users are "the great unwashed", says Mr Varian. They are the ones who, for instance, use MSN because it comes pre-installed in Internet Explorer, the web browser that itself comes pre-installed on new computers. By contrast, teenagers and geeks mix and match their web mail, IM, online maps, search, blogging and so on from whichever service on the internet they happen to like best. Default users are less demanding, older but nonetheless rich enough to target with small hyperlinked text advertisements. For the dealmakers, it all comes down to figuring out how much these naifs, collectively, are worth.
