Breaking AOL in Two

Time Warner's plan to separate AOL's free, ad-supported portal from its dial-up business could lead to closer ties with Google

by Tom Lowry and Catherine Holahan

Time Warner CEO Jeff Bewkes. Paul Hawthorne/Getty Images

Time Warner (TWX) CEO Jeff Bewkes has finally begun to exorcise the demons of Jan. 10, 2000. That, of course, was the day that the Old Media behemoth announced it was selling itself to the high-flying Internet company America Online in a $164 billion combination, one of the costliest takeovers in corporate history.

Bewkes said during a Feb. 6 earnings conference call that he plans to bisect AOL, separating its moribund dial-up access business from its free, ad-supported portal. The move, the biggest structural change to AOL since it acquired Time Warner, will let AOL focus more fully on its faster-growth advertising business. It could also presage the sale of one or both pieces of AOL.

In a potentially more momentous implication, AOL could give Google just the ammo it needs in a battle for Web users made all the more intense by Microsoft's (MSFT) $44.6 billion bid for Yahoo! (YHOO). Google already owns 5% of AOL, and Bewkes didn't rule out the prospect of a deeper alliance between Google and AOL's portal business. Google "is our partner, and we are talking with them all the time," he said.

"Rich Content on AOL"

Google has the option on July 1 to register its AOL stake and take it public, a deadline that might put pressure on both sides to negotiate a larger partnership or even a sale, given the competitive pressure from the possibility of a combined Microsoft and Yahoo. "As for strategic options, it is simply always a good idea to align your businesses," Bewkes said. "In doing that, it provides the most advantaged position for any of our operations should they need to make some kind of arrangement with other companies."

Since Microsoft announced its bid for Yahoo (BusinessWeek, 2/2/08) on Feb. 1, the prevailing wisdom has held that among the big Internet players, AOL would be hurt the most by the combination, and that Google would have no interest in buying AOL. But Microsoft-Yahoo would have 665 million worldwide monthly unique visitors, based on comScore (SCOR) data for December, surpassing Google's 588 million visitors. So from an audience perspective, Google could make good use of the 238 million worldwide visitors AOL had in December.

Another area where an AOL pairing would help Google is editorial content. Consider personal finance, where Yahoo and Microsoft would combine two already strong portals. In December, 2007, Yahoo Finance and MSN Money had a combined 24.2 million unique monthly visitors, according to comScore. AOL Money & Finance had a respectable 13.5 million visitors, but Google Finance was an also-ran with 782,000 visitors. "Google is very much a techie site, and AOL has more consumer-friendly editorial," says Shahid Khan, a partner at media consultancy IBB Consulting, who believes a Google-AOL tie-up makes great sense. "The rich content on AOL could help Google compete."

In addition, Google could benefit from AOL's ad-network technologies. Working in concert, the two companies could more effectively place and generate revenue from ads on sites across the Web. AOL would also give Google the upper hand with instant messaging, one of the main reasons people use AOL. Google already provides search capabilities to AOL users. Getting together would let Google more fully partake of the revenue generated by ads placed alongside those search results, which currently are divided between the two.

There's no question that Google, with its hoard of cash, would easily be able to afford AOL, which when separated from its dial-up business, could have a value ranging from $15 billion to $20 billion, say IBB's Khan.

Facing the Regulatory Obstacles

To be sure, a Google-AOL combination would face tall regulatory hurdles. U.S. regulators closely scrutinized Google's proposed acquisition of ad network DoubleClick amid concern the deal would give Google too large a slice of the online advertising market and provide it with too much information on consumers' Web surfing habits (BusinessWeek, 9/28/07). The European Union has yet to greenlight the deal.