AOL, MSN May Join Forces
Humbled by the surging fortunes of Google Inc. and Yahoo Inc., two titans of the Internet’s early days -- Microsoft Corp. and Time Warner Inc.’s America Online -- might scrap their historic rivalry and join forces.
Microsoft’s MSN and AOL are negotiating to combine some or all of their operations -- including their free e-mail and instant-messaging services as well as widely viewed portal pages, according to two people familiar with the talks.
The talks, which the sources say are still preliminary, demonstrate how vulnerable both companies feel in the face of competition from Google and Yahoo and how much the once bitter rivals now have in common.
Both sources are close to the Time Warner side of the talks and asked not to be named, saying they could lose their jobs for detailing sensitive negotiations.
In the 1990s, AOL and Microsoft vied for control of the emerging market for consumer Internet access. But as phone and cable companies began rolling out high-speed Internet access, demand for dial-up waned. In contrast to the paid access of AOL and MSN, Google and Yahoo use advertising revenue to offer free services over the Web.
Executives at Time Warner and Microsoft believe investors are ignoring the potential of their Web businesses, sources say, and hope a union will change that.
“If there was a way of putting together a joint venture that had an intelligent mix of assets from both sides, structured in the right way, people would want to do that,” one of the sources said.
The dialogue between the world’s biggest software company and the biggest media company began early this year and has stopped and started several times, according to the sources, who said no deal was imminent.
“It’s very fluid,” the second source said.
A Microsoft spokesman declined to comment.
Rob Sanderson, an analyst with American Technology Research, said the rise of Google and Yahoo, which are adding more content and services, was driving the talks.
“In relevance, they’re third and fourth behind Yahoo and Google,” Sanderson said of AOL and MSN. “So putting together the No. 3 and No. 4 to make a more relevant entity makes a lot of sense.”
Although they have been eclipsed by Google and Yahoo, AOL and Microsoft’s MSN still have 38 million subscribers between them -- 29 million at AOL and 9 million at MSN. MSN contributed $2.3 billion to Microsoft’s $40 billion in revenue last year. AOL accounted for $8.7 billion of Time Warner’s $42 billion in 2004 revenue.
“The whole goal would be to leverage what are very large numbers,” one source said.
Among the major undecided issues is what each company would contribute. Combining AOL’s market-leading instant message users and e-mail clients with Microsoft’s is the most obvious part, the people said. Also attractive is merging the advertising teams that sell space on AOL and MSN.
More questions include whose technology to use and how to blend two different sets of Web pages, the sources say.
“In theory, it makes a lot of sense to combine the two operations, especially on the back end,” Forrester Research analyst Charlene Li wrote on her blog. “But merging the two actual portal consumer experiences into a unified site will be a nightmare.”
Even just cooperating on advertising or letting the two instant messaging networks reach each other “would allow them both to act as if they were something bigger, and I think they need that,” said analyst Michael Cohen of Pacific American Securities.
Time Warner shares have lost two-thirds of their value in the last five years. The company is under fire from investors including raider Carl Icahn to boost its share price, which gained 58 cents to $18.50 on Thursday after the talks were first reported in the New York Post.
Icahn stepped up the pressure this week, saying he wanted to nominate one or more Time Warner directors. He couldn’t be reached for comment Thursday.
Microsoft shares fell 4 cents to $26.27.
Comparative newcomer Google, meanwhile, raised $4.2 billion this week in its second stock offering in just more than a year, and it now has a total market value of about $85 billion, roughly the same as Time Warner’s. Google shares rose 53 cents Thursday to $302.62. Yahoo shares have nearly doubled in the last two years; they fell 23 cents to $33.57 on Thursday.
The talks began when Microsoft asked AOL to use its search technology instead of Google’s. Microsoft sees the fast-evolving Google as its biggest threat.
AOL rejected the pitch, one of the sources said. But the company said it might use Microsoft’s search capability if it also took over the selling of advertising for both companies. Since then, joint ventures as well as simple joint marketing agreements have been discussed.
Sources say the cordial conversations are in dramatic contrast to the positions the two publicly staked out five years ago. AOL was Microsoft’s top competitor in Internet access and the owner of the Netscape browser, which was crushed by Microsoft’s Internet Explorer.
Two years ago, Microsoft paid $750 million to end AOL’s antitrust lawsuit against it over the browser wars, and it has grown closer to Time Warner ever since.
In a recent interview, Microsoft Chairman Bill Gates said the relationship “is quite an amazing thing, given that they had a lawsuit against us and we were really mostly in conflict.... We have a great, ongoing dialogue with them, including them guiding us on the concerns of other content companies.”
