By David A. Vise
Washington Post Staff Writer
Sunday, October 23, 2005
The most ferocious battle on the Internet these days is between Microsoft Corp., the incumbent software giant, and Google Inc., the extraordinarily profitable Internet search firm. It's both an epic clash over this era's new mass medium and a cool development for people who use computers, because the companies constantly try to top each other with new products, such as mapping and desktop organizers.
In the important area of Web search, Google and Internet powerhouse Yahoo Inc. are the clear leaders, and Microsoft has been looking for a fast way to catch up.
To strike a blow at Google and gain ground itself, Microsoft wants its MSN Search to replace Google as the search engine of choice on the Dulles-based America Online Internet service. AOL is Google's single biggest partner, serving tens of millions of information-hungry computer users whose searches turn into ad revenue.
Microsoft recently touched off a feeding frenzy centered on AOL by offering to buy the business from Time Warner Inc., which indicated it would only consider selling a minority stake.
Google then opened its own direct talks with Time Warner about buying a stake in America Online and expanding their long-standing relationship. And soon thereafter, Yahoo joined in the bidding for AOL.
Currently, Time Warner is in negotiations with all three. Simultaneously, Comcast Corp. is talking with Google about being its financial partner in any deal involving AOL.
There is no guarantee that a sale of part of AOL will take place, but Time Warner is under pressure to boost its stock price -- and one way of doing that is to increase the value of the America Online service.
The jockeying for AOL highlights the forces that are shaping the Internet as it matures into a utility we all depend on. What follows is a scorecard looking at some of the key areas that affect the companies' ability to grab and hold the attention of people who depend on this new medium for entertainment, research, communications and more.Money
In today's hyper-competitive, dog-swallow-dog technology universe, cash is perhaps the most potent weapon a company can have. Unlike during the bubble years of the 1990s, when companies' soaring stock value made shares more prized than greenbacks, firms today -- mostly -- want cash money for their assets.
Microsoft is far ahead of the field, dwarfing others with its war chest of nearly $40 billion. Google and Time Warner, by comparison, are runners-up with less than $8 billion apiece.
The need for more cash could explain why Google appears to be partnering with Comcast to woo America Online, in response to Microsoft's flirtations with the Internet service provider.Tools
As the computer increasingly becomes integral to daily life, companies are jockeying to develop the most essential tools that drive traffic to their sites. Traffic, in turn, translates into revenue, as advertisers seek the most exposure for their messages. As a result, the big players are being careful not to cede ground to their competitors.
Microsoft dominates the computer world with its operating system and Office software. Google is known as the search king but is pushing into areas such as wireless communication, satellite mapping and the computer indexing of printed works. Yahoo remains the top Internet gateway, has close relationships with Hollywood and is testing the waters of originally produced news.
AOL is prized in part for its Instant Messenger tool, which remains dominant despite competition from Yahoo and Microsoft and brings with it a highly prized demographic of young users. Marrying it with service of one of its competitors would create a category-killer.Search
There are two things computer users spend most of their time doing online: One is communicating via e-mail and instant messaging, and the other is search.
Search enables computer users to find whatever information they are looking for rapidly on the Internet. Google is the undisputed global leader in search, Yahoo is second and Microsoft is a distant third. Google and Yahoo give away search on their own Web sites and on thousands of affiliated Web sites and then profit when computer users click on text-based ads.
Through search, Google and Yahoo have found the magic formula that people have been wondering about for years: how to make online advertising work. The resulting transformation has led advertisers large and small to shift billions of dollars in ad spending to the Internet from television, newspapers and magazines.Hollywood
The Internet used to be a vehicle for transmitting Hollywood-style entertainment that was produced elsewhere -- using online software such as Napster and Kazaa to trade music files, for instance. But companies such as Yahoo and AOL now see themselves as producers of made-for-Internet content, which makes money either through advertising or pay-per-download services.
AOL is building its own recording studio in New York -- part of the company's effort to make its affiliated Web sites, AOL.com and AIM.com, hubs for news and entertainment. AOL also has access to the vast media holdings of parent company Time Warner, which owns HBO, Warner Bros. Entertainment and Turner Broadcasting System.
Yahoo's chairman and chief executive, Terry S. Semel, is a former co-head of Warner Bros. who brings an entertainment focus to the whole company. Yahoo's site includes the Yahoo Music online store, as well as videos that Semel hopes will help build Yahoo into a made-for-Internet entertainment channel like MTV was for cable television.
Microsoft has long been involved with studios to develop Internet-television technology, and Google and Microsoft both are trying to develop underlying technologies that help entertainment companies manage their digital rights, said Allen Weiner, an analyst with Gartner Inc. Google also recently launched Google Video, a pilot project that kicked off by allowing viewing of UPN's premiere of "Everybody Hates Chris."
Getting Hollywood's biggest studios to relinquish their valuable content to the online companies is going to be a huge challenge because studios don't want to give up control, said Weiner. "Major entertainment companies are very, very reluctant to move into this in a big way."Access
There are still only two major pipelines that bring the Internet's splendors to most American homes: telephone wires and cable TV lines. For an Internet company such as AOL or Google, having a direct relationship with a cable or phone company can help steer traffic to its Web sites and drive up ad revenue.
The regional phone giants -- Verizon Communications Inc., SBC Communications Inc. and BellSouth Corp. -- all have deals with Yahoo to jointly offer high-speed Internet access over a digital subscriber line, or DSL, connection.
Comcast could benefit from a similar relationship in which AOL would provide a world-class portal that pulls in more broadband customers. The two might share revenue from AOL dial-up customers who switch to Comcast broadband, benefiting both.
"In some ways, a relationship with AOL is more valuable because it not only provides a portal and the marketing that goes with that, but it also comes with the largest dial-up subscriber base," said Craig E. Moffett, an analyst with the Sanford C. Bernstein & Co. research firm. "Over time, most, if not all, of those subscribers will [move to] broadband."Eyeballs
Winning on the Internet these days is all about attracting the largest and most engaged audience of computer users and converting those eyeballs into profit through advertising. The increasing amount of time people spend online has led to an enormous jump in spending, by companies large and small, on Internet advertising and commerce.
The Internet appears to be in its earliest stages of financial growth, offering the opportunity for numerous companies to prosper. While Yahoo and the America Online network of Web properties attract the largest audiences -- with each reporting more than 100 million unique visitors per month -- Google, on its own Web site and thousands of affiliated sites that utilize the search engine, puts search-related advertising in front of more eyeballs than any other player.
Yahoo's eyeball strategy involves deepening its relationship with users so they will spend more time on its Web sites. In contrast, Google seeks to move computer users on and off of its search site as rapidly as possible, by taking them to the place that has the information or products they are seeking and then profiting by showing them ads related to their search.
Staff writers Jonathan Krim, Yuki Noguchi and Arshad Mohammed contributed to this report.