- The Washington Times - Sunday, November 13, 2005

NEW YORK - America Online, once widely seen as an Internet dinosaur dragging down the world’s biggest media company, has become the hottest property in cyberspace.

The biggest names in technology, Microsoft Corp. and Google Inc., have emerged as the top contenders to acquire a minority stake in the Time Warner Inc. division.

The two giant online rivals are vying to dominate the hot Internet advertising and search markets and to gain control of a big slice of Web-based entertainment. An alliance with AOL would give either partnership a significant advantage in reaching millions of consumers online.

Another leading online power, Yahoo Inc., said last week it had bowed out after a meeting between top Yahoo and Time Warner executives last month. Yahoo said that after it heard Time Warner’s terms, which were not revealed, “we passed and we’ve never looked back.”

Others still find the deal attractive, despite AOL’s disastrous 2001 merger with Time Warner and its shrinking dial-up Internet access business that dates from the Internet’s early days.

“It’s easy to forget that AOL is still a big player,” said David Card, a senior analyst with Jupiter Research. He noted that the Sterling, Va., company is still profitable as the nation’s No. 1 Internet access provider and, most important, it is a leading online destination.

U.S. Web surfers spent more time at Time Warner’s Internet properties, mainly AOL and its related sites, than any other online destinations in September, ComScore Media Metrix reported. Visits there accounted for 14 percent of all time online.

Yahoo sites had 123 million actual visitors in September, followed by Time Warner with 119 million, Microsoft-MSN with 115 million and Google with more than 87 million.

All those visits mean lots of potential customers, and “online advertising revenue is growing like gangbusters,” Mr. Card said.

The three portals, along with Web search giant Google, earned more than half of the $9.3 billion in U.S. Internet advertising revenue last year, Mr. Card said. That accounted for more than 4 percent of all ad revenue. That figure is expected to reach $11.9 billion this year and nearly $19 billion in 2010.

However, AOL’s overall revenues declined 5 percent in the third quarter this year as it lost another 678,000 subscribers, bringing its total to 20.1 million U.S. customers, down from a 2002 peak of more than 26 million. A 28 percent rise in advertising offset much of the loss.

Winding down the subscription business and increasing advertising is at the heart of a new AOL strategy and Web presence launched this summer. The company tore down the walls around its members-only world, launching a Web portal geared toward high-speed users and betting that a strategy of giving away music, video and online services would boost ad revenues.

Although only months have passed, that bet is paying off, said James Bankoff, AOL’s executive vice president for programming and products.

“The strategy certainly has been validated,” Mr. Bankoff said. Although he wouldn’t reveal figures, he said more people are visiting the overhauled AOL.com site and advertisers are happy with the approach.

He said there are smiles at AOL, too.

“The mood is really good because AOL is innovating again,” Mr. Bankoff said. “The marketplace, … whether that’s consumers or advertisers or business partners, is starting to recognize that.”

Microsoft and Google certainly have noticed.

For Google, a stronger alliance with AOL could help the search giant move further into the portal business with access to more AOL services, features and multimedia content.

Cable giant Comcast Corp. reportedly also is a potential participant in a Google-AOL deal, creating a bridge between its broadband customers and AOL’s content.

However, part of Google’s motivation is defensive. The company already partners with AOL, providing Internet search technology for AOL.com and sharing advertising revenue from searches. More than 10 percent of Google’s revenues come from this relationship.

“AOL has been our longest and, in many ways, tightest partner for many, many years,” Google Chief Executive Officer Eric Schmidt said. “We hope it will continue forever.”

Microsoft has different hopes.

The maker of Windows software has been evolving into a more Internet-oriented company, partly because of growing competition from firms such as Google that give away programs and rake in online advertising revenue. Microsoft’s response has included the launch of its Windows Live and Office Live services.

In a memo to top execuIn a memo to top executives made public last week, Microsoft Chairman Bill Gates warned of a disruptive “sea change” as the technology industry shifts to Internet-based services and software and leaves behind programs delivered in traditional packaging.

Microsoft also has sought to challenge Google’s leadership in Internet searching by jump-starting its own search engine, something that could happen by working with Time Warner.

“The only game in town, if you want to get a lot of eyeballs in front of your search engine in one fell swoop, is to do a deal with AOL,” said Mr. Card.

A Microsoft-AOL deal would serve the dual purpose of advancing Microsoft’s goal of increasing its Internet presence while attacking one of rival Google’s core partnerships.

Another bonus to the winner of an AOL alliance could be access to its market leading instant-messaging network, which has about 49 million users, according to ComScore. MSN Messenger has about 23 million and Yahoo Messenger 21 million.

Most instant-messaging services cannot talk with each other, but last month Microsoft and Yahoo said they would partner to change that by next summer, creating a service to rival AOL.

Time Warner Chief Executive Richard Parsons has said he sees improving AOL as a key way to increase value. Mr. Parsons has called the talks over AOL fluid “exploratory discussions” that would result in a deal only if it would increase value.

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