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Is AOL in play?

All eyes are on America Online as rumors swirl about who's hankering for a piece of its action.

Stefanie Olsen Staff writer, CNET News
Stefanie Olsen covers technology and science.
Stefanie Olsen
5 min read
After years of languishing inside media giant Time Warner, America Online suddenly appears to be the belle with whom all the Internet heavyweights want to dance.

Google and Comcast are in serious talks to buy a minority stake in Time Warner's AOL, according to sources familiar with the matter. The investment talks, which would not include AOL's access business, are at a very early stage and could still fall apart.

However, the interest is undoubtedly a strategic counteroffer to Microsoft's reported bid for AOL, which would potentially combine two of the largest Internet portals and create the highest trafficked site on the Web.

Or not. Truth is, for all the smoke surrounding the future of AOL, there's precious little fire.

Time Warner CEO Richard Parsons has denied any discussions. He said recently that AOL is the future of the media giant, despite long-simmering investor sentiment that the $109 billion merger between Time Warner and AOL was a titanic waste of money.

Now, it seems, AOL is at a crucial stage: It's trying to transform from an Internet service provider and portal with subscriber-only access to an open, online media property looking to cash in on the Net advertising boom. It really doesn't have much choice, because subscriber rates for dial-up Internet access are declining.

Choosing the right partner could buoy AOL's future, regardless of whether it stays a part of Time Warner or is scooped up lock, stock and barrel by another company.

So why are several companies interested in the once-mighty AOL?

Google's overtures are designed to defend the single largest source of its revenue from Microsoft. AOL is Google's biggest affiliate partner, and the search giant makes roughly 12 percent of its ad revenue from paid listings delivered to AOL Search in the United States and abroad. That money would be jeopardized if Microsoft and AOL formed a joint venture, as has been rumored for better than a month.

In such a deal, Microsoft would likely try to replace Google as the provider of AOL's search advertising, a business partnership worth roughly $290 million. Microsoft's MSN recently introduced a rival search-advertising auction service, and it will be aiming to build up its advertiser and distribution base.

Google acknowledged this vulnerability in a filing with the Securities and Exchange Commission: "If one or more of these key relationships is terminated or not renewed, and is not replaced with a comparable relationship, our business would be adversely affected."

It's not clear how much Google would have to spend to defend that turf. The company has about $7 billion in the bank, so it certainly has the cash to do it. But Wall Street analysts say they'd be uncomfortable with the search king spending more than $1 billion on AOL.

"From Google's perspective, securing AOL's traffic and taking it away from Microsoft, for some moderate investment, would be worthwhile," said Safa Rashtchy, senior Internet analyst at Piper Jaffray.

According to research firm Nielsen/NetRatings, AOL reaches roughly 49 percent of the Internet population, or about 72.5 million people monthly. In contrast, Yahoo reaches 67 percent of the population, or 99 million people monthly. Microsoft draws 61 percent or 91 million people. And Google pulls in 53 percent, or 79 million.

Rashtchy believes that an investment is impending.

For Comcast, a partnership with Google and AOL would accomplish several strategic moves.

For one, Comcast could bolster its online presence and try to persuade AOL Broadband subscribers to sign up for its cable-modem Internet access. Under their plans, AOL Broadband customers must bring their own Internet access. Comcast could market to those subscribers a complete access package with exclusive online content and high-speed connectivity.

"From Google's perspective, securing AOL's traffic and taking it away from Microsoft, for some moderate investment, would be worthwhile."
--Safa Rashtchy, senior Internet analyst, Piper Jaffray

Comcast has already invested in an online portal and content partnerships to offer news and entertainment to Internet subscribers. For example, Comcast.net offers "The Fan," a navigation tool for video and audio clips, which includes channels for news, sports and entertainment videos. Roughly three-fourths of its subscribers have maintained their Comcast.net home page.

By teaming with AOL, Comcast could tap into the Web portal's long-standing partnerships for content and expand its own online services. AOL has been inking strategic partnerships over the last seven years, and apart from its obvious ties to Time Warner, its partners include Hewlett-Packard, YellowPages.com and Major League Baseball.

"More important is the opportunity to up-sell Comcast high-speed Internet access. You're getting this subscriber base to bring their own access, and Comcast can sell them cable-modem service pretty aggressively," said Aditya Kishore, director of media analysis at The Yankee Group. Comcast could also team with Google on media search technology.

Comcast, Google and AOL all declined to talk for this story.

There's another reason for Comcast's apparent interest: New technology that allows video to be streamed using Internet Protocol technology is completely changing the television landscape, and traditional TV players like Comcast are scrambling to keep up.

IP is not only changing the players involved in television; it's also changing how people will view programming. IP allows viewers to interact more with their television shows. This means allowing

viewers to watch what they want when they want, while integrating Web-based content into their TV viewing.

Comcast and other cable companies are already reacting to the changes. Comcast has begun assembling a large library of on-demand programs and movies, and offers more on-demand content than any other provider to date. This includes 250 free movies, 500 music videos and 300 shows for children. The company plans to increase this library to 10,000, from 3,500 today.

"The biggest fear of cable operators like Comcast is simply becoming the provider of big dumb pipes," said Jim Penhune, an analyst with Strategy Analytics. "Comcast in particular has been struggling to build its portal business to give customers another reason to choose their service over a competitor's."

The addition of more content to the Comcast lineup means that the company will need better search tools to allow customers to find the programs they want to see. This is where Google could help. Google has already developed search technology that could be used to improve these interfaces. And as Comcast's programming becomes more interactive, it will need to integrate its Web content with the television service. A stake in AOL could help the company develop more Web-based synergies with the TV part of the business.

"Building a better search tool or integrating Web content into television are all things Comcast will have to do," Penhune said. "But it will be technically challenging for the company to do it all internally. That's why partnerships could have some advantages."