Silicon Insider: How AOL Strangled Time Warner
Why Google might buy AOL, the once-dominant, now dormant name on the Web.
Feb. 8, 2008 — -- You could see this one coming. The real question is: Why did it take so long?
Microsoft's announcement last week that it was looking to buy Yahoo already appears to have set wheels in motion across the Web content and search world. Now the news, as of Wednesday, is that Time Warner plans to divide its AOL operation and set both up either for sale, reorganization or an IPO.
Lost in the media coverage of the Microsoft announcement last week -- and Google's snarky reaction -- was the fact that the proposed Yahoo deal of $44 billion, huge as it was, was dwarfed by a much bigger merger between two media companies. Though it seems almost a lifetime ago, on the far side of the historical divide of 9/11 and in the insane days of the dot.com bubble, it was in fact almost exactly eight years ago that AOL announced that it was buying Time Warner for $164 billion.
I remember that day well -- and more as an admonishment than anything else. I was running Forbes ASAP magazine at the time, and even though we long had considered AOL to be passé, the very fact that it had the financial muscle and the momentum to purchase the legendary Time Warner, the Big Dog of dinosaur media, the land of Henry Luce, Steve Ross and Jack Warner, was cause for cheering and high-fives.
After years of trumpeting high tech's growing influence over every corner of modern life, this seemed like vindication: Now even our own profession had been transformed by high technology and the Internet. Here, at the dawn of the 21st century, a company we had known as a little start-up had already grown so rich and powerful that it was now taking over a company with roots that dated back to the dawn of the 20th century.
I also remember well the groans of disbelief that came from the more traditional corners of the magazine world. How was it possible that an Internet company specializing in e-mail, for heaven's sake, could own the home of Time, Life, Fortune and Warner Brothers pictures and Warner Music. It was truly the world turned upside down.
Well, as we all know, the story didn't quite turn out that way. What the old-time print guys prayed for came true, but not in the way they planned. Almost from the day of the merger announcement, AOL began to fade away -- not so much from indigestion of absorbing such a huge meal but from an obsolete business model.
In an odd irony, precisely because it played on such a faster-moving field, AOL's business model was actually in more immediate jeopardy than Time Warner's. The Web world was moving rapidly away from the traditional subscription model -- a leftover from the days when most of the good content on the Web was centered in a handful of silos -- toward a wide-open, advertising-based business model.
In this new world, speed was just as important as access, and AOL, by being a pioneer in the field, found itself dragging along a legacy of millions of subscription dial-up users who were unlikely to ever switch to free broadband access. By comparison, Time Warner, though stuck with technologies (print, television, movies) that were far older, also had a sturdier business structure, one built on decades of relationships with subscribers, advertisers and ad agencies. They would prove even more resistant to change the old AOL users -- but in the case of print, this would be an advantage.
You know the main points of the rest of the story. The bubble burst, 9/11, the rise of Google and Web 2.0, and now, in the last week, the sudden and long-awaited consolidation of the Web search world. Where analysts once feared that Time Warner would be an albatross around AOL's neck, the reality proved to be just the opposite.
For most of the last eight years, Time Warner has, like the rest of its counterparts in the print world, been slowly fading away in the face of the Internet onslaught. Meanwhile, it's been AOL that's proved to be the albatross. From a high of 30 million at the time of the merger, AOL's subscriber rolls are now down to 10 million and falling.
At the same time, far from making Time Warner into, as was predicted, a leading player in the Web world, the most cutting edge of the old media giants, the presence of AOL has had just the opposite effect. So catastrophic was the AOL merger on Time Warner's morale, risk taking and confidence with high tech, that the company has instead become one of the least innovative media firms.
But all of that has changed in the last month with two major events. The first was the promotion on Jan. 1 of President Jeffrey Bewkes to the job of Time Warner CEO. Bewkes probably had the problem of AOL at the top of his to-do list anyway, but the second big announcement -- Microsoft's proposed purchase of Yahoo -- no doubt gave him a reason to pull the trigger now; the consensus being that AOL will be the company most hurt by the deal.(Click here to read my column in the Wall Street Journal about Yahoo and Microsoft.)
Bewkes' plan is to essentially cut AOL in two -- one half being the old dial-up side, with its aging but loyal subscribers, the other being the much hotter broadband/advertising side with its stronger advertising model and greater upside potential (let the old customers complain: It'll take them weeks to load up the e-mail program anyway). With AOL split, Bewkes can then treat the two parts separately -- one theory being that the subscription half would be set up to go public, with the free access broadband half put up for a quick sale.
The likely buyer? Google, which shrewdly bought 5 percent of AOL a while back just so it would have first dibs on just this eventuality.
Why would Google want a tired old company like AOL? Well, for one thing, if you haven't looked at AOL.com lately, you'd be surprised how lively it's become -- and Google would like to get some of that content. Second, AOL's got some strong portals, such as personal finance that it could use to counter 'Microhoo's' comparable offerings. Third, since the game is all about ad revenues now, Google would like to get its hands on some of AOL's proven ad-network tools.
And last, but hardly least, as BusinessWeek has noted, the combined Microsoft-Yahoo would have 665 million worldwide monthly visitors, leapfrogging over Google's 588 million. But add AOL's 238 million and Google's goes back on top.
One hopes that should Google make an offer, that Microsoft returns the favor and begins muttering to the media about how this could be a dangerous threat to competition and may well violate anti-trust laws. Google deserves a taste of its own medicine on this one -- and, in fact, Microsoft could probably make the better case.
Estimates are that Google can pick up AOL.com for less than $20 billion, while the dial up side would go for a fraction of that. Think about that: Just eight years ago, AOL could afford to pay 160 billion bucks to buy Time Warner. Today, you buy AOL for not much more than a rounding error of that original number.
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