Time Warner, AOL, Google Menage

On the verge of apparently doing a disastrous sales-force combo with MSN, Time Warner has reportedly pulled a positive AOL deal out of the hat.  According to the WSJ, Time Warner's new partner, Google, will fork over $1 billion for 5% of AOL and remain AOL's search partner, and AOL will get free links to its content embedded deep within Google's pages.

On its face, this seems a good deal for all three companies--and a bad one for Microsoft.

Time Warner gets another $1 billion in cash to pay down more of its debt, gets to crow that AOL is worth $20 billion (which is apparently 2x the value the Street places on it--although this may just be media analysts overestimating the value of Time Warner's other properties), and gets to flip shareholder gadfly Carl Icahn the bird.

AOL gets to avoid switching search horses and, thus, risking the possible disruption and poor performance that might have been expected from an untested system from Microsoft.  More importantly, it presumably gets boatloads of much-needed traffic to its portal from Google.

Google, meanwhile, gets to keep AOL as a search customer (approx. $400 million in revenue and $50 million in gross profit) in exchange for some chump change from its cash hoard.  It keeps its fingers deep within the AOL portal pie, which is a positive because, despite its indignant denials to the contrary, it's headed straight for portal-dom.  It gets to keep its brand in front of AOL's demographic (Internet newbies and teenage girls), which has little overlap with its own demographic (web-savvy professionals).  And, perhaps most importantly, it gets to own a piece of a company that is strong where it (Google) is weak: communications.  Properly exploited, AOL's IM and mail products could improve the outlook for Talk, gmail, etc.

The deal won't solve everything: If AOL is to survive, it still needs to figure out a way to toss of the strait jacket of Time Warner's other divisions and cut some broadband, DSL, and VOIP deals in a hurry.  But it's a step in the right direction.

And MSN, meanwhile, must now be feeling even more lonely and forlorn than before.  Time to cozy up to Yahoo.

Comments

[Brad]

hmmm....five percent huh? Sounds like a $20B Valuation!!!! That way surpassed the deal that Yahoo! purposed. It sounds like the boys at google are willing to spend money, even if this is just dipping their foot in the water to check the temperature. But still 20B??? Google is at 110B approx, and aol is 10% of their business (right now, but would probably shrink). So that would seem to not make sense. Unless you think of it as a way to get your foot in the door, take a billion dollar write off, and never worry about your competitors using AOL to slay you.

[Chris]

What is most interesting about this deal always fails to get mentioned. Google doesn't need AOL - well not that much at least. They simply need Microsoft to NOT get AOL. Given the massive cash position Google finds itself perched upon, it is cheaper for them to buy Microsoft out of the market by doing the AOL deal.

I disagree with the position about AIM and AOL Mail. GMail blows doors on AOL's Mail application while AIM is far superior in user experience to GTalk. Merge AIM & GTalk (and at a minimum you know they will be integrated w/ this deal) and phase out AOL Mail w/ GMail and voila - you have two really well designed, integrated applications with shared contact lists, virtually unlimited storage space and ubiquitous presence management on the largest IM network in the world. The only thing missing is a calendar app and task management, which are half-way there in Google Desktop. As these pieces start to come together it becomes very easy to see why AOL matters to Google. The best defense is a good offense. Within a matter of 2-3 months, Google can be in a position to out "Outlook" Microsoft with a complete contact and communications platform for the masses - all the while watching is 'seep' into start-ups who are open-sourcing their entire business model to lower costs and take advantage of the pervasiveness of quality applications.

I believe the Yahoo! Typepad deal will spur Google to make a stronger move with Blogger in the very near future and complete infrastructure for a start-up or boutique company can be had from a single 'free' provider in Google.

Now THAT starts to change the dynamics of the market even more.

[vic]

Good point Chris. Google will be able to make a lot of their money back over a couple years just serving ads on a new AOL Gmail.