Yahoo + AOL: Another Negotiation Ploy, Or a Grasp at Straws?

Posted by: Rob Hof on February 10, 2008

Honestly, I don’t know whether Yahoo seeking to acquire AOL, as reported by the Times of London, is just a way to jack up Microsoft’s unsolicited bid, or a real, last-ditch bid for independence.

I suspect the former, because here’s the reality: AOL doesn’t really do that much for Yahoo. As TechCrunch’s Mike Arrington points out, AOL doesn’t have any search technology, minuscule search query share, and no search ad platform, since it uses Google to serve search ads. So it won’t be clear to Yahoo shareholders how this adds enough value to the company to outweigh the 62% stock price premium in Microsoft’s offer. There were reports in late 2006 that Yahoo had approached Time Warner on acquiring AOL, but if it didn’t happen then, I’m not sure why it makes more sense now except as a desperation move on Yahoo’s part.

Not to mention, it wouldn’t be cheap, because as HipMojo’s Ashkan Karbasfrooshan notes, Google’s 5% investment in AOL valued it at $20 billion. He doesn’t think it will happen. Nor does Rafat Ali at paidContent.org.

Microsoft must know all this, too, so I wonder how seriously it will take the threat. But at least Yahoo managed to come up with an option that few people had raised as a new possibility. So, maybe that along with the continuing threat, small as it is, of a search ad deal with Google, will force Microsoft to up its bid. But I still think these games won’t last too long. Unless several strange things happen, this is still Microsoft’s deal to lose.

Reader Comments

Jay Neely

February 11, 2008 3:04 PM

The only criticisms of an AOL/Yahoo! merger I'm seeing in your entry are about search, but Yahoo! is not a search company. They've made it clear that they want to become the starting point of the web, not the search engine. The benefits of a Yahoo!/AOL merger are different:

1) Yahoo! maintains its position as the top site on the web. Quantcast shows that adding AOL’s visitors to Yahoo!’s puts Yahoo! at almost 200 million monthly uniques, almost 50% ahead of Google. ComScore data is less exact, since it groups AOL under “Time Warner Network”, but still shows the same trend:
- http://www.quantcast.com/top-sites-1
- http://www.comscore.com/press/.....press=2000

2) Yahoo! becomes the dominant player in IM. Yahoo! Messenger is already interoperable with Windows Live Messenger; adding interoperability with AIM means that they control ~70% of desktop IM client market share(more recent numbers on this are needed, but by the end of 2006 AIM was ~50 million, and both Yahoo! and Microsoft’s were ~20 million), and their clients can talk to everyone else’s. Yahoo! and AOL have both made progress in integrating IM with E-mail, something Microsoft still hasn’t done. As Yahoo! expands its e-mail services into enterprise markets, and enterprises increase their usage of IM, this could be a big deal.

3) Much better integration potential than with Microsoft. After being stuck in Time Warner’s in-fighting old media bureaucracy for so long, I’d imagine that AOL employees would be overjoyed to be brought into an organization that understands and is about the web. There’s also excellent potential for brand integration here:
- Yahoo! is a brand AOL users would be comfortable with.
- It’s a brand that it makes sense for AOL to adopt as it’s been expanding overseas operations(where Yahoo! already has a strong presence).
- The Yahoo! brand offers a graceful way to retire a brand that the tech-savvy have long scorned.
- Go to Yahoo.com, then go to AOL.com. The portals are almost identical. It’s feasible that a full-scale integration of the two properties could at some point take place.

4) Mobile services are something Yahoo! and AOL have both been working hard on, and in the early stages of an emerging market, their integration could give them a big lead on other competitors. Mobile advertising has a lot of potential, especially when you add local map-based services, yet another area where a Yahoo!/AOL merger would create a clear leader that's likely to last.

5) Another method of monetizing their userbase is through entertainment services. AOL has the largest, most popular music portal online with a key partnership with XM Radio. Yahoo! has a renewed commitment to DRM-free music sales. With more promotion, and a partnership with an MP3-playing device maker(or one of the cell-phone makers they're partnering with for their mobile platforms), I bet they could outsell iTunes. They could also add streaming internet radio to their IM platforms, with tiny "Buy for 99 cents" notifications.

6) Those are just a few ideas. When you have that many users, and you're the leading provider of that many services, it becomes almost impossible *not* to find ways to monetize your userbase. There are plenty of other reasons why an AOL/Yahoo! merger has potential, like the concentration of content-provider partnerships, and the fact that both are much more youth-friendly brands than MSN or Google. Yahoo!/AOL could be the company that is best known to younger generations of internet users, not just older ones.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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