Internet Outsider

Time Warner to Keep AOL, Sell Cable, and Buy...MSN?

Matthew Karnitschnig of the WSJ kicks off the morning with a Twilight Zone piece about how Time Warner may not dump AOL after all, but instead sell off cable and "double down" on the Internet by buying another big net company. 

Without commenting on the plausibility of this theory (except to say that it would be quite a change of heart), here are some thoughts:

• Oh, the irony!  The theory behind the strategy, apparently, is that cable will become increasingly commoditized and less relevant in a world with the Internet and Internet TV, etc.  It was, of course, exactly this sort of thinking that led to the "transformative" AOL-Time Warner merger in the first place.  Without concurring that cable will become less relevant (somebody has to plumb the pipes), this would lend credence to the idea that the AOL-Time Warner merger wasn't a colossal, bubble-headed strategic error, but just early. 

• The most sensible big-net-company acquisition/merger candidate is MSN.  A combined AOL-MSN would dominate online communications, and, together, would have the scale and clout that each company alone currently lacks.  The integration, management, and long-term growth strategies, of course, would be a nightmare.

• Assuming Time Warner isn't up for that challenge (and who could blame them), companies like Facebook, Bebo, Music Nation, and others fit into the company's entertainment DNA and would help offset/refresh the demographics of AOL's geriatric user base.  They also wouldn't require another bet-the-company roll of the dice.

AOL's having a 'meet the new AOL' event today, so maybe we'll get further details.

UPDATE

A reader suggests another sensible Time Warner acqusition candidate: Joost.  Any others?   (I personally think Joost would make sense but also be extremely risky, because 1) the site hasn't even launched yet, and 2) if/when Joost is owned by one of the big media companies, it will lose its status as a neutral "Switzerland" BigMedia solution.)

Another "Doh!" Award: Time Warner's Wayne Pace

At least one senior Time Warner manager probably has more on his mind than AOL.  According to the Post, an alleged New York high-end madam has fingered TW CFO Wayne Pace as her sugar-daddy.  The Post article is waaaaay short on detail (even the alleged madam isn't claiming she slept with Pace, and "helping" someone buy an apartment doesn't necessarily mean forking over suitcases full of cash), but one imagines that the scandal is rocking the Time Warner Center.

Time Warner has yet to respond, but it will have to soon.  Unless Pace can persuasively deny any and all of the alleged madam's intimations (a denial that will presumably have to include an explanation of the alleged "help"), he will soon be "pursuing other interests."

Until details emerge, it would be unfair to give the married Pace a Doh! Award for his own actions, if any.  But it is fair, I think, to give him one for being the subject of a Post story entitled "Doing Time."  For Wayne's sake, here's hoping there's a good explanation.

Time Warner Says Synergy Is BS. So Sell AOL.

According to the WSJ, Time Warner has abandoned all pretense of "synergy" between its various media divisions, the failed concept that was the sole justification for its merger with AOL.  Without synergy--cooperation between divisions to develop next-generation services in music, VOIP, VOD, DVRs, interactive TV, and a host of other applications that have since been launched elsewhere--the merger had no reason for being.  Worse, as the article makes clear, the lack of synergy actually gives the merger significant reason NOT to be: Instead of helping the combined company, the divisions just waste each other's time and piss each other off.

Jeff Bewkes (TW's president who, to his credit, was never a fan of the merger and now feels comfortable enough to call the synergy concept "bullshit" in the WSJ) is no fool, so it would probably be shortsighted to view yet another Time Warner strategy shift as an excuse to bash the company for the sins of the past.  Perhaps synergy is, in fact, bullshit--perhaps the merger was doomed from the moment it popped into Steve Case and Jerry Levin's bubble-addled heads.  If so, however, then why on earth won't Time Warner just throw in the towel and sell AOL?

AOL-Google Deal Even Better In Details

Thanks to leakage, trial-balloons, and market conditioning that would do the White House proud, there wasn't much news in the TimeWarner-AOL-Google press release.  If anything, though, the deal looks even better than previously described.

For example, Google agreed to "white label" its search technology for AOL so the AOL sales force will be able to sell search within the AOL properties.  This should not only invigorate the sales force, but allow the company to get a quick if modest bump in advertising revenue.  Per the New York Times, Google also agreed to give AOL $300 million in marketing credits (links within Google to AOL content), which should drive significant amounts of new traffic to AOL--and traffic of a different demographic than AOL's core user base (teenage girls).  The two companies will also link their messenger products, creating a powerful alliance against Microsoft and Yahoo! and allowing Google Talk to become slightly less irrelevant.

Although Google purists are bemoaning the company's lurch toward "evil" by helping a partner figure out how to game the search engine and by agreeing to plaster some of its pages with banner ads, Google shareholders should be applauding this move: Google's search business is amazing, but if disaster is to be forestalled, the company's future growth cannot and should not depend on search alone.  As for the $1 billion investment, this is relative chump change (two quarters of cash flow or 1/4 of the $4 billion Google raised a few months ago by selling a tiny percentage of itself), and Google now owns a piece of a company that can help it improve its weak communications and content capabilities while generating meaningful revenue on the side (a run-rate of $600 millionish).  And, who knows, it might even turn out to be a good investment.

The deal will not save AOL, so the backslapping in Dulles and New York shouldn't last too long.  The company still needs to find some way to migrate its fleeing dial-up subscribers to broadband plans (cable, DSL, wireless, or BPL--the subscriber's choice), and until it does this, it is screwed.  Still, the Google deal addresses one of the company's big problems (more web-only traffic to the portal), and, Carl Icahn notwithstanding, is a big step in the right direction.

New AOL-MSN JV Idea Sounds Even Worse

Maybe it's just the bad memories of a late 90s JV between Infoseek and Disney, but the latest AOL-MSN proposal (through the WSJ) sounds like a train-wreck in the making.  According to the Journal:

AOL, whose current ad partner is Google, would switch to using Microsoft's search engine, and the two companies would set up a joint venture to sell online advertising across both AOL and Microsoft's MSN portal. The services would remain under control of their respective owners, but their ads would reach many more online customers than they do now.

The thinking behind this idea, apparently, is that AOL and MSN would get the benefit of greater reach and volume--and, therefore, be able to compete more effectively with Yahoo! and Google--and Microsoft would get a big customer for its new ad serving/buying system, AdCenter.  And in theory, perhaps, that's a fine plan.  In practice, it sounds godawful (at least the merged sales-force part).

The first problem is that AOL and MSN's collective problem is not reach: They have plenty of reach.  Their problem is valuable inventory growth.  AOL is losing about 650,000 subscribers a quarter, and they are taking their pageviews with them.  MSN, meanwhile, has never been able to generate as much money from its inventory as Yahoo! and Google, perhaps because it has more messaging and email traffic as a percentage of its total pageviews than the others do (MSN's reach is comparable to Yahoo!'s and bigger than Google's).  What the two properties need is 1) to eliminate each other as competitors (on the inventory side, not the ad sales side), 2) to develop a clear brand positioning strategy, and 3) to leverage the one area in which they do have a competitive advantage--communications.  Combining ad sales forces doesn't accomplish any of this.

What it does accomplish is increased complexity and decreased responsibility and control.  Which company will have direct control over the ad sales force?  Will the salesforce be able to order the product development folks at both companies around?  Which company's options will the salesforce be partially compensated with?  Which company will they work for (nominally)?  Will advertisers be able to buy one property or the other--or will they have both shoved down their throats?  What if AdCenter sucks--will AOL be able to go back to Google?  If AOL continues to shed subs and, therefore, ad inventory, will current MSN salespeople pay the price for this?  How will the JV's costs be accounted for?  Etc.

The idea that Infoseek's salesforce would sell advertising on Disney's web properties (ESPN.com, ABCnews.com) sounded great in theory, but in practice it was unworkable.  The salespeople fought over who had the right to sell the best inventory, and advertisers hated having bundled inventory shoved down their throats.  Add to that distracted management without complete control (on both sides), and the JV was doomed from the get-go. 

So here's to hoping the WSJ article is just another last-ditch Time Warner attempt to get Google to step up to the plate.

Hey Google Shareholders...

As usual, Time Warner is also using the NYT and WSJ to negotiate: According to today's WSJ, Time Warner is nearing a deal with Microsoft to use AdCenter as the primary search-ad vehicle for both AOL and MSN, booting Google in the process.  This is really a letter to Google's shareholders asking them to call up Eric Schmidt, et al, and threaten to sell their stakes unless Google ups its bid and breaks up the Time Warner-Microsoft deal.

In any case, Time Warner should think long and hard before committing to use AdCenter, especially in the manner that the WSJ described (to sell ads jointly on MSN and AOL).  Joint sales efforts, like joint ventures, are a recipe for disaster, because no single party bears full responsibility.  AdCenter might serve as an effective distributor of AOL search inventory, but using it as a technology and combining forces with MSN to sell ads across both properties are two different things.

Time Warner Gets Wise: No AOL JV

Per Saul Hansell at the NYT, Time Warner has abandoned the AOL-joint venture concept (sell a piece to Microsoft, Google, or Comcast) and is now just trying to cut a better deal on its search economics with one of these two parties.  It is also apparently still considering spinning out a piece of AOL in an IPO.

Joint ventures are usually a disaster, so no loss there.  The trouble with AOL remaining within Time Warner, however--or, worse, with selling a stake to the public--is that AOL will be forced to continue to focus on short-term timeframes (quarters and years) at the expense of the long-term.  I think the company needs to make several strategic moves, such as cutting deals with broadband providers, that will consume near-term cash flow but will allow the company to survive the transition from dial-up.  These moves will likely be more difficult to make as a public company or division of Time Warner.

Time Warner Learns From Mistakes?

Time Warner is apparently negotiating through the press again, trying to drive up bids on AOL by saying that Yahoo! offered to buy the content piece at $13 billion (this through Julia Angwin and Kevin Delaney at the Journal).  Yahoo! reportedly scoffed at this idea, claiming that it had never made an offer, and that, instead, after the first date at Time Warner headquarters, had jilted them.  So welcome to the business version of who dumped who.

In any case, Time Warner reportedly turned up its nose at Yahoo!'s offer because Yahoo! wanted to pay for the purchase with Internet stock (specifically, Yahoo! stock).  Whatever happens, in other words, Time Warner wants the world to know that it's not going to make THAT mistake again.  Unfortunately, in this case, Time Warner learning from its mistakes is probably itself a mistake, because Yahoo! would make a good partner and Yahoo!'s valuation is a lot more reasonable that AOL's was back in the day.

But, in any case, it sounds as though Yahoo!'s out, Microsoft's less interested, and Google's right in the thick of it.

Disclosure: I own Yahoo! stock.  I have also been dragging the bag of rocks known as Time Warner stock around for years (when I bought it, it was AOL). I own some Microsoft.  I owned Google stock for a few minutes after the IPO, before I gleefully flipped it.  The MacArthur folks will be calling any minute now...