Google, Comcast Eye AOL Stake

By Chris Gaither and Sallie Hofmeister

Oct. 13, 2005 12 AM PT

Times Staff Writers

Google Inc. and Comcast Corp. are negotiating to acquire a joint minority stake in America Online, seeking to create an online media powerhouse, three people familiar with the discussions said Wednesday.

The potential partners have increasingly overlapping businesses and one common goal: to muscle Web surfers and advertising dollars from Internet leader Yahoo Inc. A successful tie-up also would block the aspirations of another tech titan, Microsoft Corp., which for months has been negotiating to form a joint venture with AOL, a unit of Time Warner Inc.

The negotiations with Google and Comcast, which the sources cautioned were still in the early stages and could fall through, have centered on their buying a stake in AOL’s “audience” business, which includes the AOL.com portal and other ad-supported Web services but not the declining dial-up business.

In such a deal, the audience business would be valued at about $10 billion, roughly half of AOL’s overall value, said the sources, who declined to be identified because of the sensitive nature of the discussions. Time Warner would maintain a stake of 50% to 70%.

Whatever the price, a deal would combine Google’s search expertise; AOL’s instant-message users and rights to valuable content such as video clips; and Comcast’s base of 8 million high-speed Internet customers.

“It makes strategic sense for everyone in different ways,” said Rob Sanderson, an analyst with American Technology Research.

Microsoft has been discussing a joint venture with the world’s biggest Internet service provider since early spring, trying to persuade AOL to dump Google’s search engine technology in exchange for Microsoft’s and to let their respective instant-messaging programs work together, said a person close to Time Warner.

Google, which generated 11% of its $2.64 billion in revenue in the first half of the year from ads it placed on AOL’s search-engine results, started separate discussions in hopes of blocking Microsoft. Mountain View, Calif.-based Google approached Comcast last week about sharing the cost and risk of taking a stake in AOL, the sources said.

The entrance of Google and Comcast into negotiations was first reported by the Wall Street Journal on its website. AOL, Comcast and Microsoft declined to comment. Google would say only, “Google and AOL have a healthy global partnership, and AOL remains a valued partner.”

On Wednesday, the stocks of the three companies in the latest talks declined. Google shares fell $5.13 to $300.97, and Comcast lost 40 cents to $27.92. Time Warner, down 10% year to date, fell 31 cents to $17.49.

Two of the sources, including one close to Comcast, said Time Warner approached the Philadelphia-based cable giant early this summer about acquiring all of AOL, which would contradict Time Warner Chief Executive Richard Parsons’ public assertion that he wasn’t shopping the Internet service provider. The source close to Time Warner denied the claim, saying AOL had merely discussed potential alliances with Comcast.

Since August, Time Warner has come under pressure to improve its stock price because of the public campaign against management waged by billionaire investor Carl Icahn.

Icahn has demanded that the company increase its share buy-back plan to $20 billion, from $5 billion, to lift the price. He also has urged management to completely spin off its cable business rather than just 16% as Time Warner had planned.

This week, Icahn, who leads a group that owns 2.8% of Time Warner’s shares, stepped up the pressure, criticizing management over two major asset sales in recent years. In a letter to shareholders, which was filed with the Securities and Exchange Commission, Icahn said Time Warner sold Warner Music Group last year and its 50% stake in Comedy Central two years ago at a discount.

Icahn, who demanded shareholder representation on the board, also derided as lavish the new headquarters Time Warner built in Manhattan’s Columbus Circle.

One source close to the negotiations said Time Warner’s eagerness to bring Google and Comcast into the bidding for AOL’s portal resulted from the pressure exerted by Icahn.

But the players have good reasons for seeking an alliance, analysts said.

Google could protect the advertising revenue it derives from AOL. A deal with Time Warner also would give Google a big-media ally in its efforts to persuade providers of movies, TV shows and other content to make their material available in Google’s search engine.

Comcast could use AOL’s video products and other services to bulk up its Comcast.net Internet portal and market its high-speed Internet service to AOL’s dial-up customers.

Comcast and Google also are logical partners for building an interactive programming guide to find and watch cable TV shows, said Patrick Mahoney, an analyst with Yankee Group.

While it continues to negotiate with AOL, Microsoft on Wednesday confirmed that it had reached a deal with Yahoo that would let users of their respective instant-messaging programs chat with one another. The deal strikes hard at one of AOL’s most popular services.

The source close to Time Warner said the alliance seemed intended as a message to AOL: Partner with Microsoft -- or it will attack.

Said Sanderson, “The Internet is getting fun again.”

(BEGIN TEXT OF INFOBOX)

Retention span

Average total time a visitor spent in September on each website

(In hours, minutes, seconds)

Among the 10 most visited websites, America Online holds on to its visitors the longest.

AOL: 6:12:50

Yahoo: 3:37:34

EBay: 2:02:37

MSN: 1:50:13

Google: 0:47:14