AOL's Dance Card Is Full

By Chris Gaither

Oct. 17, 2005 12 AM PT

Times Staff Writer

SAN FRANCISCO —

Since its disastrous merger with Time Warner Inc., America Online hasn’t been able to find much love. Now the suitors are lining up at the door.

The list of potential partners for a marriage with the once-troubled Internet service provider includes Yahoo Inc., News Corp., Google Inc., Comcast Corp. and Microsoft Corp.

Microsoft is furthest along in discussions concerning buying a stake in AOL, with Google close behind as it weighs a solo deal or a joint bid with cable giant Comcast, according to a person close to Time Warner.

Yahoo and News Corp. in the last month have expressed interest in bidding, but talks have not progressed beyond preliminary stages, said the source, who, like others with knowledge of all the back-and-forth, requested anonymity because of the sensitive nature of the discussions.

The interest in AOL reflects early success in its strategy of knocking down much of the walled garden it spent a decade building for subscribers and opening its advertisingsupported Web services to the general Internet public.

“It’s ironic: A year ago people were questioning whether it would exist, and now five of the largest media tech companies in the world are speculated to be interested in buying a piece of it for multiple billion dollars,” said Richard Greenfield, an analyst with Fulcrum Global Partners in New York.

At the Web 2.0 conference in San Francisco this month, AOL Chief Executive Jonathan Miller referred to his business as the “swing vote” among Internet giants. Indeed, the media concern that emerges with a piece of AOL would immediately improve its standing in the booming online ad market.

Such ads generated $5.8 billion in the first six months of 2005, a 26% jump from the comparable period last year, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. That would put the industry on pace to surpass 2004’s record revenue of $9.6 billion. The industry’s four biggest players -- Yahoo, Google, Microsoft’s MSN and AOL -- each reaped more than $1 billion in online ads last year.

That’s a strong recovery from the Internet crash that came just as America Online Inc. and Time Warner, the world’s biggest entertainment company, were consummating their $99-billion union in January 2001 to create AOL Time Warner Inc.

Once the dominant Internet player, AOL saw its fortunes fall so far that its name was stricken from the company title and it was relegated to a business unit within a broader Time Warner division. Indeed, AOL’s base of U.S. dial-up Internet subscribers had fallen to 20.8 million in June from a peak of 26.7 million in September 2002.

Investors have punished Time Warner for AOL’s poor performance, sending shares from near $55 when the deal closed to the teens in 2002-03.

To offset the subscriber losses and capture some of the mojo that sent Yahoo and Google stock soaring, AOL has set out to reshape itself in the mold of a full-service portal by offering e-mail, a search engine, news stories, music and other features free through its aol.com home page.

That “audience” portion of the business, which includes its popular AOL Instant Messenger program, has been valued at $10 billion to $11 billion in talks with potential suitors, people familiar with the negotiations said. AOL’s assets include the leading instant messaging program; more than 110 million visitors to popular websites, including its home page, MapQuest and Moviefone; and licensing deals for news, music, TV clips and film trailers.

Time Warner has come under strong pressure this month from disgruntled investor Carl Icahn, who has mounted a public campaign against management over many of its decisions. The stock has remained relatively flat in the last year, but word on Friday of Yahoo’s interest in AOL sent Time Warner shares up 41 cents, or 2.3%, to $18.

“From a Time Warner stock perspective, it’s just great that everyone is going back and really having to examine what is AOL and why is everyone so interested in it,” Greenfield said.

Mark Stahlman, technology strategist for investment bank Caris & Co. in New York, has followed AOL’s rises and falls closely since he helped take the company public in 1992 as an investment banker at Alex. Brown & Sons. He said he buttonholed Time Warner Chief Executive Richard Parsons at a recent event and asked what he planned to do with AOL.

“He looked me in the eye and said, ‘AOL is the future of Time Warner. We’re going to make this thing work the way it was originally supposed to work,’ ” Stahlman recalled.

And that, Stahlman said, involves partners such as the ones talking with AOL.

Time Warner, Yahoo, News Corp., Google, Comcast and Microsoft all declined to comment, leaving it to others to speculate about their motives, aspirations -- and chances of success.

Some analysts say the best strategic fit would be a pairing of Microsoft and AOL. The talks began early in the year when Microsoft asked how it could replace Google in providing the technology for AOL’s search engine, then progressed into talks about creating a joint venture between AOL and MSN.

Such a deal could satisfy larger strategic goals for the parent companies, such as boosting Microsoft’s position against search leader Google and giving Time Warner more ad revenue and stronger online distribution for its content.

With Yahoo and Google each generating nearly three times as much online ad revenue, MSN and AOL are “kind of fighting it out for No. 3 and 4 in Internet relevance, and no one wants to fight that fight,” said analyst Rob Sanderson of American Technology Research in San Francisco.

Comcast would bring little to a partnership other than distribution. The leading cable provider has 21.5 million television subscribers and 8 million high-speed Internet customers.

A partnership of AOL and Comcast would have been more fruitful had it been struck when broadband services were first being rolled out three years ago, analysts say. But Comcast rebuffed early overtures from AOL because its high-speed Internet customer base was growing rapidly and competition was not as intense as it has since become, according to a second source close to Time Warner.

Now that broadband growth is slowing, Comcast is looking to AOL for a leg up against the competition, which includes SBC Communications Inc. and other phone companies that provide high-speed Internet connections. But the Time Warner source cautioned that Comcast’s Internet access subscribers could be reluctant to switch their home pages to AOL.

Google has stepped up its pursuit of AOL in recent weeks, in an effort to block Microsoft’s bid, according to people familiar with the matter. Google invited Comcast to join the bid but could still do a deal on its own.

Patrick Mahoney, an analyst in Los Angeles with Yankee Group, said Google would make a better fit with AOL because each has things the other wants: Google is pursuing more of a portal strategy based on the kind of media content AOL has, and AOL is trying to bulk up search engine traffic and revenue.

“They could still keep their strong brands, not have a brand tug of war,” Mahoney said, noting that such conflicts could detract from an MSN-AOL pairing.

Although none of the suitors appears close to closing a deal for AOL, a source close to Time Warner said Microsoft and Google had two distinct advantages over Yahoo: cash and a willingness to own a minority rather than a controlling stake. After the AOL merger debacle, the source said, Time Warner board members are reluctant to take Internet stock in a deal, even if that stock appears less inflated than during the dot-com boom.

Whereas Yahoo has nearly $5 billion in cash and short-term investments, Microsoft has $37.8 billion, and Google recently armed itself for acquisitions by raising $4.2 billion in a second offering of stock to add to its nearly $3 billion in cash.

“Of the three, Yahoo would be the least likely winner,” Stahlman said.

But, he added, “they have to be at the party to at least see how the dance is developing.”

Times staff writer Sallie Hofmeister in Los Angeles contributed to this report.

(BEGIN TEXT OF INFOBOX)

Messenger of good news

One of America Online’s top assets is its instant-messaging service, which dominates the market.

Most used instant-messaging services in September (in millions of visitors)

AOL Instant Messenger: 51.5

MSN Messenger Service: 27.3

Yahoo Messenger: 21.9

Yahoo Avatars: 1.5

Skype Messenger: 1.2