Speculative Alpha

Google In, Microsoft Out

The WSJ is reporting that Google, the world's most used search engine, will cut a deal to pay $1 billion for a 5 percent stake in Time Warner's AOL unit.  In agreeing to the transaction, Google will display AOL links beside internet search results while  AOL will then have the ability to sell display ads on other web sites that use the Google ad system - in other words, Google gets to keep in "biggest customer".

Before this announcement, I was intrigued by the possibility of Time Warner potentially spinning off AOL as an IPO to "unlock shareholder value".  The irony of this strategic alternative was knowing that AOL founder Steve Case recently publicly stated he supported a spin off.  Amazing, when one considers that he initially orchestrated the failed deal which resulted in Time Warner writing down $100 billion in assets. 

Later this weekend, I will dive into the numbers and what it means to Microsoft's web strategy.  Stay tuned.

Where's AOL going?

The newslines tell it all: AOL is looking for an alternative. It's the victim of a ruthless, competive landscape where the top two players, Google and Yahoo, are wreaking havoc on the rest of the web industry. We know for a fact that AOL is losing subscribers (subs) somewhere in the neighborhood of 650,000 per quarter - not good by anyone's metric. To make matters worse, each time a sub leaves AOL it loses about 5 web-based users. How do they attempt to stop the bleeding?

Last month AOL announced their plan to restore old Time Warner sitcoms for free online viewing. The service, called In2TV, will offer shows such as "Wonder Woman"and "Welcome Back Kotter" for viewing so long as viewers can endure 15 and 30 second commercials during the shows. Will it cutoff the AOL mass exodus that continues to plague the firm? Who knows? One thing I do know is that I am glad to see that we are actually starting to see some synergy between AOL and Time Warner. I still recall the time these two companies merged, the idea behind the marriage was based on bringing old economy media/content through the AOL distribution system...Has it happened up to this point? Nope. My guess is that it will attract some new subs but don't expect earth shattering numbers in the near future from the dying dial-up business model.

Given these recent developments, is there any value in AOL right now? Well who knows...As MSN and Google contemplate the purchase of AOL, Yahoo confirmed last week that they had no reason to continue considering an AOL acquistion. They gave no reason other than they did not like the "proposed terms" that were involved. While there are many ways to look at this situation and possible outcomes, the one player that I think will ulitmately make a move is Microsoft. Why? Look no further than the current market share standings...AOL and MSN are number 3 and 4. The only way Microsoft's CEO Steve Balmer could "kill Google" (as he was rumored to have said) would be to make an outright purchase (or establish a serious partnership) of the AOL assets to combine technologies thus making the new AOL-MSN a viable competitor to Google and Yahoo. This deal is a must if it intends to even keep a respectable pace behind Google.

Google today is the big monster of the web universe. While many believe it to be a technology "search engine" company (and yes it is very successful in this area), other strongly suggest that having advertising revenue of $9.5 billion (2006 estimate) makes it a media company. These type of numbers would place it slightly below ABC and ahead of NBC in ad dollars. As Google's grip tightens, I believe that Microsoft will have to do something with their stock pile of cash ($60+ billion) if it intends to even stay remotely close to Google in the web space in the near term.