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AOL and Microsoft to Create an Ad Service to Compete With Google

Discussion in 'General Discussions and Lounge' started by ovi, Dec 7, 2005.

  1. ovi

    ovi Guest

    Rumors have swirled for months about Microsoft (MSFT) or Google (GOOG) making a deal with Time Warner's (TWX) America Online. But the nature of the deal has kept everyone guessing.

    At first there was talk that Time Warner might sell a stake in its AOL Internet service to one of the two companies  or perhaps sell off the entire unit. Now it appears such a deal is less likely.

    Instead, AOL is expected to cooperate with Microsoft on advertising and Internet search projects, according to news reports this week. An announcement of some kind could come by the third week of December, the reports say. In one scenario, AOL and Microsoft would create a Web ad service that would compete with Google's service.

    In light of the new reports, many industry watchers no longer expect Time Warner to unload a big piece of America Online.

    Despite the troubles of AOL, which gets most of its sales from outdated dial-up Internet access, the Internet service may be too valuable to sell off, they say.

    "It would be strange if Time Warner let go of AOL," said media consultant Joseph Jaffe.

    AOL gives its parent company a huge beachhead in the online world, he notes. That's something that Disney (DIS) and other rivals still don't have.

    Even so, rumors had circulated since September that Time Warner wanted to sell a stake in AOL or create a joint venture with Microsoft, Google or Yahoo. (YHOO) Yahoo is believed to have dropped out of talks with Time Warner earlier this year.

    If Time Warner Chief Executive Richard Parsons did indeed want to sell off a chunk of AOL, his plans may have been spoiled by financier Carl Icahn.

    Icahn, who's been accumulating shares of Time Warner, launched a dissident shareholder group in August.

    The group believes the media giant is mismanaged, and it wants to sell off Time Warner's assets to boost the stock price. Icahn's also pushing the idea of a stock buyback.

    Icahn may launch a proxy fight against Time Warner's board to change the company's leadership.

    In the midst of this turmoil, Parsons may be hesitant to sell off a piece of AOL, says Jefferies & Co. analyst Youssef Squali. Parsons may fear that AOL won't get fetch a good price while Icahn is making waves.

    "Parsons may want to strike a marketing alliance (with Microsoft) instead of an outright sale of a portion of AOL because of Icahn's activist bid," Squali said. "Parsons may not want to be in a position to say, 'We value AOL at X,' only to have Icahn come back and say, 'It's really worth Y,' or substantially higher than what Parsons says it's worth."

    Icahn has made no secret of his displeasure with Time Warner's reported plan to sell off some or all of AOL. "I'm going to hold the board of Time Warner personally responsible if they give away AOL for the wrong reasons," the billionaire investor told analysts in New York last week.

    Most took the statement to mean that Icahn would be upset if Time Warner sold AOL too cheaply.

    Microsoft now appears to be the front-runner in a potential deal with AOL. But Google may still be in the race.

    AOL is currently Google's main partner. Twelve percent of Google's revenue in 2004 came from ads it placed on AOL's sites.

    Google would hate to lose that money. But the companies may have trouble coming to an agreement, analysts say. AOL wants to get more revenue from ads, and that could cut into Google's sales.

    Google currently gives AOL 80% of the revenue from ads placed on AOL sites, analysts say. Google has offered to raise that cut to about 90%, they say. But that might not be enough to please AOL.

    America Online wants broader power to make money from online ads, Squali says. That's why a pact with Microsoft could make sense. Microsoft's MSN  its Internet service unit  is more eager to deal.

    "MSN needs AOL the most, and should be the most generous with terms," Squali said.

    If AOL and Microsoft join forces, they could create an online advertising hub  placing ads more broadly across the Internet. That would seriously threaten Google and Yahoo, analysts say.

    "It would be a big coup for Microsoft and would impact Google's bottom line," said Matt Rosoff, an analyst with the research firm Directions on Microsoft. "It would really give Microsoft a big customer for the new ad platform that it's building."

    Microsoft is working on technology to provide more targeted advertising. Its platform aims to get a better understanding of Internet visitors, where they go and what they're interested in, Rosoff says.

    Source: www.investors.com

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