Google considering AOL investment

Google and Microsoft battle for AOL's business

Tom Sanders in California, vnunet.com 14 Oct 2005

America Online (AOL), the world's largest internet provider and second largest website operator, is allegedly talking to Google about spinning off its online publishing business.

According to a report in the Wall Street Journal the companies are seeking to create a joint venture in which AOL would be a majority shareholder.

Google and cable operator Comcast would be the other owners, making a combined investment of up to $5bn, the newspaper claimed.

Google currently supplies its search technology to AOL's internet portal, making the search firm hundreds of millions in advertising revenues. Last year Google paid AOL $300m for advertising sales generated by AOL users.

Microsoft is also said to be keen to win the AOL search contract, as the Redmond company is keen on increasing its market share in the search arena. This attention will allow AOL to negotiate more favourable contract terms.

"It is inevitable that MSN and AOL also discussed other ways they can co-operate, especially the idea of combining advertising sales forces on the branding side," Forrester Research analyst Charlene Li said in September about the prospect of the two teaming up.

"As the number three and four portals behind Yahoo and Google, they will need all the fire power they can muster."

AOL's parent company, Time Warner, is open to changing the online part of the business, according to Li. She added, however, that a deal with MSN would "make a great deal more sense than either Yahoo or Google".

AOL's internet access business in the US has been waning as consumers increasingly switch to broadband or low cost providers.

The company's offering is often mockingly referred to as "internet on training wheels". The provider tries to keep customers inside the AOL network of websites and content rather than have them venture out to the internet.

But AOL has built a large content portfolio with advanced media features in recent years, which it feels is undervalued and underappreciated.

Partnering with a leading internet brand like Google's could reignite interest in AOL's content. Also, a separate legal entity could get a higher valuation in the stock markets than it currently gets as a division of Time Warner.

The bouncing back of online advertising is a major driver behind the merger talks. Spending on internet advertising increased by 26 per cent last year to $5.8bn, according to recent reports.

Meanwhile Microsoft has shown strong aspirations of becoming a top player in the portal market by investing heavily in developing the MSN Search engine.

In a bid for customer loyalty, Microsoft and Yahoo revealed earlier this week that they would break down barriers between their instant messaging platforms, a market in which AOL currently dominates.

The move effectively merges the two services into a single platform.

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