washingtonpost.com
Possible Yahoo Sale Puts Focus On AOL
Time Warner Unit Seen as 'Odd Man Out'

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, February 4, 2008

Microsoft's $44.6 billion bid for Yahoo on Friday revived debate about AOL's plan to remake itself as an online advertising company and whether it might too become a target for acquisition.

AOL has been on a tear assembling an advertising network called Platform A that is meant to be the basis for the company's future growth. At the same time, discussions have surfaced occasionally at AOL's corporate parent, Time Warner, over whether the subsidiary should be spun out in part or whole.

In November, new Time Warner chief executive Jeffrey Bewkes said he would consider selling parts of the company to enhance its "strategic advantage." Time Warner's stock has lagged for years as its merger with AOL in 2001 failed to live up to its promise.

Among those that could take an interest in AOL include Google, which already owns 5 percent of the Internet giant and is in the process of buying online ad business DoubleClick. This weekend, Google made clear its concern about the Microsoft-Yahoo deal as it said that the bid "raises troubling questions" for "openness and innovation" on the Web. Another possible suitor for AOL is Rupert Murdoch's News Corp., which has shown its willingness to go after big enterprises by buying such businesses as MySpace and Dow Jones.

Yet analysts were skeptical that a sale was in the cards.

The potential Microsoft-Yahoo deal "robs AOL of the two most likely and able suitors," Michael Nathanson, an analyst at Bernstein Research, wrote in a note to investors. "As such, there appears to be no one on the horizon in need of AOL's audience and Platform A capabilities that is willing to pay Time Warner a similar value."

"We believe AOL is the odd man out," Lehman Brothers analyst Anthony J. DiClemente and his team said in their own note.

AOL has spent more than $1 billion over the past year and a half to fortify its status as one of the largest providers of online advertising. AOL has bought companies specializing in all sorts of new-media advertising -- including targeting Web surfers based on the sites they visit and people who browse the Web on their phones.

But the fruit of such labors has yet to be shown.

In the third quarter of 2007, AOL lost 851,000 subscribers to its dial-up Internet access business. Ad sales rose a modest 13 percent, but not enough to offset subscriber declines. Overall the unit's profit declined 24 percent. Time Warner is set to report fourth-quarter results on Wednesday and has warned that AOL will face "continued downward pressure." An economic downturn that depresses advertising budgets may only exacerbate the challenges.

Last year, AOL's online ad sales slightly eclipsed Microsoft's, according to eMarketer, though it fell short of Yahoo's and Google's. A combined Microsoft-Yahoo entity would rival Google's sales and trump AOL's many times over.

"Whenever two major players get together, it makes it a little tougher for the remaining players," said Colby Atwood, president of Borrell Associates.

That said, AOL has taken a number of steps that analysts have liked, including putting Curtis G. Viebranz, chief executive of Tacoda, an online advertising concern AOL bought, in charge of the company's advertising operation. And AOL has revamped its portal and is rolling out dozens of products to capture visitors, building on the substantial audience it already has.

"Money follows the eyeballs," said Kevin Lee, chairman and founder of Didit, a large online advertising buyer. "Media buyers are agnostic as to who gets the dollars as long as it's working for them."

View all comments that have been posted about this article.

© 2008 The Washington Post Company