Efforts to find a partner for Time Warner's (TWX) AOL Internet unit are taking longer than expected, according to a Time Warner executive. The media giant has been in discussions with Google (GOOG) and Microsoft (MSFT), which are both interested in creating a joint venture with AOL. Time Warner had hoped to begin exclusive talks with one company or the other by Friday, Dec. 9, the executive says, who adds that in retrospect, that timetable was "optimistic."
Both suitors still appeared to be in the running as of Dec. 11. But given the talks' complexity, it's not surprising that they're dragging. It's unclear at this point whether Time Warner will reach a deal with one or the other by the end of the month, as originally expected.
Time Warner wants to retain full ownership of AOL, with which it had merged at the height of the dot-com boom. Afterward, the deal seemed ill-advised as the value of the new behemoth, originally named AOL Time Warner, plunged. But in recent months, AOL's longer-term strategic value has grown.
STRONG FOUNDATION. The Internet advertising market is expanding at an annual rate of 40% and is expected to hit $13 billion this year, according to investment banker Ken Marlin, founder and managing partner of Marlin & Associates. That pace is at least five times as fast as the traditional ad business, where Time Warner is heavily invested. Among its major properties are cable-TV systems and networks, and magazines. Going forward, it needs a strong presence on the Internet.
Although AOL is already a strong foundation for Time Warner's online operations, the media giant is looking to bolster it in several ways. Hence the company's interest in forging a joint venture with a powerful partner, which would give AOL more scale and scope.
Time Warner's Internet sites, which include AOL and other destinations, had 117 million unique visitors in October, the last month for which complete data is available, according to comScore Networks. That was second only to Yahoo! (YHOO), which had 124 million. Microsoft's MSN network had 115 million, and Google had 90 million. Combining with MSN or Google would give AOL a huge base against which to sell advertising and allow it to charge higher rates.
TRICKY FIGURES. Finding the right partner also would help change the perception that AOL users include many dial-up customers who log in at night, primarily from home. Those customers aren't considered as lucrative as high-speed users who are online day and night, while at work and at home. A deal with either company also would help bolster technology at AOL, a one-time leader in that area. That could be crucial as AOL moves deeper into areas such as video search.
The suitors have a lot at stake, too. MSN ranks behind AOL, Yahoo, and Google in the search business, which must rankle Time Warner, Marlin says. And despite Google's momentum, it doesn't want to lose AOL as a partner that currently uses its search engine. That would change if AOL struck a joint venture with MSN, which has a search engine of its own.
Despite how much each side could gain from a deal, any partnership will face challenges. It will be tricky to figure out how AOL and a potential partner will value assets they contribute to a joint venture. That has been difficult enough for Time Warner and AOL to calculate on an internal basis. And it will be challenging to figure out how the companies share the revenue derived from ads and other sources.
FOUR EQUALS. MSN and AOL also may include in a deal an accord that would make their instant-messaging platforms compatible. That would be great news for users, who wouldn't have to run both programs anymore. But since AOL has about 42 million IM users and MSN has about 20 million, complicated issues of valuation must be resolved.
A deal still appears likely, though. In a business where the top four players are roughly equal in size, combining two of them into an Internet powerhouse could yield huge strategic and financial benefits -- and establish the dominant player in the medium of the future.
Rosenbush is a senior writer for BusinessWeek Online, based in New York
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