Microsoft-Yahoo May Force Google to Buy AOL

If Microsoft succeeds with its $44 billion offer to buy Yahoo, Google may be forced to make a run for AOL, now that Time Warner has spun off the web access portion of that business, according to industry insiders.

In fact, part of the logic of a Microsoft-Yahoo tie-up would be to make a strong push in the display advertising market, where Google, the text-based ad leader, is vulnerable, according to UBS analyst Ben Schachter.

"Microsoft doesn't want to give Google any opening on display ads," Schachter said on a conference call this week. "With Yahoo, if they execute, they can dominate on the display ad side."

Display ads may be the next great battlefront in the Internet ad wars, because they sell at a premium to less-eyecatching text-based ads.

While the text-based advertising market is slowing, the market for display and multimedia ads will jump 60 percent by 2011 to $13.7 billion, according to researcher EMarketer.

Google C.E.O. Eric Schmidt has long said that he does not want to get into the web-access business. Now that Time Warner has spun off the access portion of AOL's business, Google is in a position to get the piece of AOL that it wants cleanly.

Google paid $1 billion for 5 percent of AOL in 2005, valuing the entire company at $20 billion, and has a right to trigger an I.P.O. of its stake in July. AOL is probably worth much less than that now, especially after having been broken in two.

Meanwhile, the decision to split up AOL represents the final death knell for Web 1.0, according to a former top AOL executive. In less than one week, two of the Web 1.0 pioneers, AOL and Yahoo, appear to be headed toward oblivion.

Former AOL senior vice president Fred Singer said that Time Warner made the right call in splitting up AOL. "The Internet dial-up access business is just going to get smaller and smaller," said Singer, now C.E.O. of Anystream, which makes video-streaming software for websites.

With the Web-access side of AOL broken off and the company focusing on generating ad revenue off content, the challenge for AOL becomes how to make inroads in a market dominated by Google, Microsoft and Yahoo, he said.

"The question for AOL has always been, 'Where do you go next next?'" Singer said. "I think AOL is in the same strategy arena with Microsoft, Yahoo and Google, which is trying to monetize content using ad networks. The question is how fast they can scale and consolidate and find a unique position, and that's an unknown."

Singer said that the decision to break off AOL's Internet access business from its web content business was an almost inevitable outcome, given Time Warner's failure to make its $160 billion merger with AOL work.

"The problem was that the acquisition price for AOL was so high," Singer said, "that at the point in time that AOL had the lead and the most customers, instead of investing in the brand and rebuilding the platform, which had been built in the early nineties, they were basically paying down the debt, and weren't able to invest enough money in the business to build the next generation of technologies."

Just as Time Warner was trying to integrate AOL into its company, emerging Internet giants like Google and Yahoo were investing heavily in the next generation of Web technologies, particularly around search advertising.

"So at that critical point in time when the Web 2.0 winners had to make the investments," Singer said, "AOL was in the middle of an integration and they were not investing in the technology as much as they could have, and obviously it cost them. The other thing is that they never integrated AOL into the cable business, and there was a huge drop off in the internet narrowband business. It looks in retrospect like that cost them."

"The internet business is an incredibly volatile, competitive field, and if you make any mistakes along the way, you will pay a huge price," Singer added.

by Sam Gustin