Move over, Microsoft. The list of corporate heavyweights eager for a piece of America Online just got longer. Comcast (CMCSA), the country's largest cable operator and broadband provider, and Google (GOOG), the leading Web-search engine, are teaming to pursue a possible bid for a stake in AOL's portal business.
Time Warner's AOL Internet unit has already been in talks with Microsoft (MSFT) over possible combinations with the software giant's MSN service (see BW Online, 09/20/05, "Can Microsoft Land AOL?").
Google extended an invitation to Comcast in the first week of October, so talks with AOL are at the earliest stages, say sources familiar with the discussions. But the possibility of a joint Comcast-Google minority stake in AOL, which is what has been proposed so far, has huge implications for the digital-media landscape, from advertising to Internet calling to on-demand entertainment.
Such a combo is fraught with conflicts, too, with various agendas at Comcast, Google, Time Warner (TWX), and Microsoft creating potential road blocks.
PRIOR CHEMISTRY. So why do some of the biggest names in media and technology have such a sudden interest in a business that just two years ago was deemed by angry Time Warner shareholders as having little to no value? The answer: the explosion in Internet advertising, AOL's still-amazingly broad subscriber base, and Time Warner's huge storehouse of programming. Selling ads against lots of content that's easily searchable and on-demand is where Big Media is heading.
And it's why tech outfits are now among those prominently in the mix. Some analysts value the entire AOL business at about $20 billion, with its portal business as the fasting-growing piece, at about $12 billion. That's the only part of the AOL business Google and Comcast are interested in talking about, say sources. News of Comcast and Google's interest was first reported on Oct. 12 by CNBC and the Wall Street Journal.
Just as Microsoft was restarting talks with AOL after negotiations were discontinued for most of the summer, Google executives called Comcast CEO Brian Roberts in early October with the invitation. Comcast and Google have always been smitten with each other. After all, wasn't it Google executives who said they wouldn't have been as successful in broadband had Comcast not used Google search on its high-speed portal, which has 8 million subs?
UPPING AOL's VALUE. In turn, Comcast, which also has 21.5 million cable subscribers, loves Google's technology, particularly video search, and sees an opportunity to use some of that know-how as home networking takes off, with shows being moved from TVs to computers.
So Roberts quickly called Time Warner for a go-ahead to talk with AOL, according to sources. Comcast, which had joined Time Warner in a joint bid for cable company Adelphia Communications (ADELQ.PK) in the past year and partnered in a new New York Mets sports channel, felt compelled to ask. The response from Time Warner: No problem. After all, another big-name suitor, along with Microsoft, could only push up the value of AOL.
But beyond the usual deal posturing, a love triangle of Comcast, Google, and AOL fits nicely into each company's strategic plans. For Google, the preferred search engine on AOL, an ownership stake in AOL would aid in an effort to elbow out Microsoft on the Net. While AOL represented 11% of Google's revenue in the first half of 2005, most of that goes directly back to AOL as the cost for acquiring traffic. All told, the relationship only provided about 2.6% of Google's net revenue over that period, according to Citigroup (C).
CONTENT ENVY. Nevertheless, some analysts believe Google's interest in AOL stems from its desire to keep these users in its network and out of the clutches of competitor MSN. "It's about owning these Internet users," says Forrester Research analyst Charlene Li. "Do you risk losing them to MSN, or do you want them in your orbit?"
What's more, Google has made no secret of wanting more content, so it can be an even bigger aggregator of cool content that is searchable. Time Warner has plenty of content, including news, sports, movies, and TV shows. Google may also be interested in offering its own telephone service over the Net, especially after eBay (EBAY) agreed to buy voice over Internet protocol (VoIP) outfit Skype. Comcast is already in the VoIP business, rolling it out to subscribers.
For its part, Comcast would get access to Google's search technologies, which could prove invaluable since Roberts & Co. are making big bets on video-on-demand services. Google could prove to be a key navigator as content selections grow. Google, too, has content that might fit well on Comcast's portal. But it's content from AOL and Time Warner that is most enticing to Comcast, which currently has a relatively small programming presence.
OUT OF NEUTRAL. What Comcast also lacks is advertising on its portal. By partnering with Google and AOL, each with robust ad growth, Comcast could swap access to its vast audiences for a chunk of the ad dollars.
For Time Warner CEO Richard Parsons, striking a smart deal with two companies that have the sweeping reach of Google and Comcast without giving up total control of AOL might just convince shareholders his company's stock is not a dog. It has been stagnant at about $18 a share. At the very least, engaging in such talks with these new parties might just put new pressure on Microsoft.
In the latest round of talks that began 10 days ago under the lead of Time Warner Executive Vice-President Olaf Olafsson and Microsoft's Senior Vice-President Hank Vigil, both sides still envision combining their respective dialup services, portals, instant-messaging, and advertising businesses. AOL would then switch out its current search partner, Google, for Microsoft's less-tested search engine. The two companies would launch a partial IPO of the new venture, one that would see Time Warner would retain control.
THORNY ISSUES. Still, Time Warner and Microsoft are trying to resolve sticking points, according to sources familiar with the latest talks. They include haggling over what assets Microsoft throws into the joint venture, and some assurances that Microsoft won't compete with the assets in the venture. For instance, Time Warner might want an agreement that Microsoft will not send users to Microsoft Search on its operating system, rather than direct them to Microsoft Search on the AOL site, according to sources close to the talks.
Bidding for an AOL stake could cause Comcast some problems, too, with Gates & Co. After all, when in 1997 Microsoft Chairman Bill Gates said he believed in the future of cable, it was Roberts who challenged Gates to put his money where his mouth was. Microsoft invested $1 billion in Comcast. Today, it holds about a 5% stake in the cable operator. A successful Google-Comcast run at AOL would certainly test Microsoft's longstanding support of Comcast.
Another prickly issue is Google's budding interest in providing wireless access to millions of Internet users -- a business that could threaten Comcast's own broadband business. Google was one of dozens of companies to submit a proposal last month to blanket the city of San Francisco with wireless access. Google, which promised the service would be free to users, could recoup the money by serving up local ads to searchers using its Wi-Fi connections.
STAY TUNED. Google already sponsors at least three Wi-Fi hot zones, where anyone can show up with a Wi-Fi-enabled laptop or device and begin to access the Internet. Two of the hot zones are in San Francisco and a third is in New York City's Bryant Park. Talk is, those are just the first in Google's plan to take Wi-Fi across the country.
And back at Time Warner, how do senior executives explain to the brass at its own cable business, which is No. 2 to Comcast, that it has just struck a deal giving Comcast all these new opportunities with a division of its own company? Will Time Warner Cable, which was never able to realize synergies between its broadband Roadrunner service and AOL, feel slighted? Or do both cable companies use AOL as the entree into their broadband offerings?
The courtship between the Google-Comcast duo and AOL has just begun and, at the very least, it promises to deliver on high drama in the days ahead. And its bigger consequence may be throwing an already tumultuous media world into even greater flux.
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