After its disastrous marriage with Time Warner, America Online (AOL) became the ugly duckling of the online world. Five years down the line, the circle has come full again, and the belle now has a string of suitors lining up. The big three of the new media Google, Yahoo and Microsoft are falling head over heels in trying to woo AOL.
When Time Warner, the world's largest media conglomerate, announced a $100 billion merger with AOL, the ideal marriage left everyone starry-eyed. Convergence and cross-media promotions became the buzzwords. The click company was heralded to have arrived, death knells began to be sounded for the brick company. Media speculation and corporate hype made the dotcom world boom.
But before the winsome twosome could make the marriage work, the market turned against Internet stocks. Merger costs began spiralling for Time Warner, and soon enough the dotcom bubble burst. AOL remained stuck in its primeval dial-up mindset as broadband operators gnawed away its subscriber base. AOL is supposed to have lost upto two million subscribers a year.
With latecomers Google and Yahoo gobbling up advertisers with claims of a larger user base, revenue options were drying up faster than AOL could utter its three alphabets. That AOL was having a negative impact on Time Warner's image became evident when it dropped the AOL moniker without a murmur.
So, what makes Google, Yahoo, Microsoft chase AOL now? Even Comcast and news Corp are said to be in the running.
Time Warner's move then had been perceived as one of the world's most prestigious media giants effectively safeguarding its future pre-empting an onslaught of new media players. Online realities have changed spectacularly but the issue remains the same. The three big companies want to secure their own future in a scenario where online advertising is not only booming, but also seen to be effective. AOL may be the repulsive old hag of the Internet world, but it still has about 20 million subscribers. That is what is at stake here eyeballs. Hence, its suitors. Who's in love with you damn it? We are after your assets.
MSN and Yahoo are after AOL because they want to be one up on their rivals. Comcast wants to enhance its online offering for broadband customers. Microsoft also sees a chance to get back at Google which has stolen a march over the former vis-a-vis the Internet. AOL currently uses Google for its Web search service, bringing a moderate percentage of revenue to the world's biggest search engine. This is what Microsoft wants to take away from Google. Google, for its part, earns 11 per cent of its entire revenue from this AOL deal, or $291m in the first half this year. Google, which wants to retain this revenue stream, has decided to work in tandem with Comcast for a joint stake in AOL.
Issues at hand are slightly more complex than even what they may seem. Microsoft and Yahoo, three weeks back, decided to marry their instant messaging (IM) services in a bid to take on market leader AOL. The move came just as the latter's AIM was beginning to expand into video chatting and Internet telephone functions.
The partnership will give the companies more power to compete against AOL and new entrants Google Inc, which launched its Google Talk in September. The Yahoo-Microsoft partnership gives the companies nearly as many US users (49.2 million) combined as AOL has (51.5 million) in total.
At stake is the ability to attract users and offer them other services and information from the Web portals, which in turn helps Microsoft's MSN Internet unit, Yahoo, and AOL earn their advertising dollars. AOL's instant messaging client, AIM, had 51.5 million unique US users in September, compared to 27.3 million for MSN Messenger and 21.9 million for Yahoo Messenger. Worldwide, this IM marriage is expected to unite 275 million people. AOL will be pushed to the second spot with 100 million users.
Apart from its main role as an internet service provider (ISP), AOL operates several free websites that was expected to sell about $1.2 billion in ad revenue this year: aol.com, moviefone, mapquest and netscape. These sites had 111.8 million visitors last month, second only to Yahoo. Moreover, AOL’s content has kept pace with what young users want to see and hear. Backing up its assets is an enviable collection of 15,000 downloadable clips of music, sport, news and television. AOL radio offers a vast array of specially created music and talk shows.
The Time Warner management has been under tremendous pressure from billionaire investor Carl C Icahn, who is leading a group of investors who have about a 2.6 per cent stake in the company. Icahn is pressing for Time Warner to sell all of its Time Warner Cable unit. Time Warner intends to spin off about 16 per cent of the cable division after completing a deal to buy Adelphia Communications Corp next year. Icahn has been critical of the 2001 merger that brought together AOL and the properties of Time Warner, such as publishing, television networks and movie studios.
Icahn has also denounced the "fire sale" of other assets in recent years, and in a letter to shareholders earlier this month, said he also believes that "opportunities are now available to enhance value at AOL." He criticised the Time Warner management for not doing enough to tap into its value.
It would be a few more weeks before Time Warner anounces who has won AOL's hand. The Time Warner board, which met late last week, is said to have deliberated over selling a stake in its AOL unit. Though details were not divulged, an unnamed official later told some newspapers that "robust" discussions were on with Google and Microsoft's MSN about a possible deal. AOL can expect to sell a minority sake for as much as $5 billion.
Time Warner has been on the defensive over AOL from the onset. When stories started doing the rounds earlier this month, its chief executive Richard Parsons shrugged it off as "market rumours". Coincidentally or otherwise, it was around the same time that AOL laid off 700 of its employees. The rumours have since been botched. But it would still be a few weeks before a decision is announced. Time Warner made a mistake last time. It does not want to repeat it again.
