Deal Could Ultimately Alter the Media Landscape

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NEW YORK ( -- Search giant Google has joined with cable colossus Comcast to make a play for a stake in Time Warner’s AOL portal business.
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An executive familiar with discussions confirmed that Google brought Comcast into talks this past week to acquire a portion of AOL. This executive said no deal is imminent and negotiations were characterized as “preliminary.” The news was first reported by The Wall Street Journal.

Global partnership
Neither Comcast Corp. nor Time Warner would comment. A Google spokesman said the company didn’t comment on market rumors but added that “Google and AOL have a healthy global partnership and AOL remains a valued partner.”

If the deal goes ahead, the AOL portal business could be transformed and relaunched to take advantage of its powerful partners. For advertisers, the move would alter the media landscape, pushing further ahead a vision of consumer-controlled media future that would allow marketers greater ability to target customers. Online advertising is currently experiencing a renaissance of popularity among major ad spenders.

Yahoo and Microsoft
Google, Comcast and AOL are looking to bolster their profiles on both the content and distribution fronts. A deal would also leave Yahoo and Microsoft Corp. out in the cold, though Microsoft, through its portal MSN, is understood to be continuing separate talks with AOL. Microsoft representatives did not return calls for comment.

Comcast has been aggressively pursuing video content for its cable-delivered video-on-demand platform, while AOL made inroads with broadband video consumers as shown by the traffic to its Live 8 concert Web broadcast last month. Google, meanwhile, has been expanding its own video product in conjunction with broadcast network UPN, which provided the online giant with an episode of its top show, Everybody Hates Chris. Google has also been collecting video blogs from the public.

On the distribution front, Comcast is a major provider of high-speed Internet access, with 7.7 million customers at the end of the second quarter signed up for the service. The company’s high-speed Internet product is currently ad free, something that a union with AOL and Google might alter. AOL has been buoyed of late by an increase in ad revenue, and while overall revenues were down for the second quarter to $2.1 billion, online ad revenue was up by 45%.

Icahn letter
The news of a possible deal comes hot on the heels of complaints from Time Warner activist shareholder Carl Icahn. Earlier this week, Mr. Icahn sent Time Warner shareholders a letter packed with scathing criticism of the company’s board of directors. His shots specifically called out the 2000 merger with AOL, in which he wrote the company “had an early belief in broadband evidenced by the billions spent on Time Warner Cable, yet failed to effectively address the migration of AOL dial-up subscribers to broadband access providers (punctuating the question of why they merged with an approximately $150 billion narrowband business).”

AOL has been bleeding subscribers from its narrowband service while trying to push the newly minted free Since’s content is rich in broadband-enabled video, it has also been marketing a broadband-connection service through Roadrunner, which is offered by corporate sibling Time Warner Cable. AOL had 20.8 million U.S. members at the end of the second quarter, a decline of 917,000 from the previous quarter. If an AOL deal with Comcast included access to the cable giant’s 7.7 million broadband customers, AOL could be in a much better spot to sell its broadband service.

79 million monthly visitors
Google brings a premiere search capability to the possible union while AOL still maintains a sizeable subscription base. Google attracted 79 million visitors in September, according to Nielsen/NetRatings, and is No. 4 among the top five brands on the Internet, behind Yahoo, Microsoft and MSN. AOL is No. 5. If Google and AOL were to merge, the resulting entity would become the No. 1 Web site, with an active reach of 72%.

Such a deal would make sense for Google, which lacks a content play in its quest to grow as a major media company. Google’s 2005 U.S. paid search revenue will reach nearly $3.2 billion in 2005, according to online market research firm eMarketer. Google will own nearly 25% of the online advertising spending in 2005 as well. With rich content from Time Warner, AOL would offer Google a way to enter the content/portal market now dominated by Yahoo and, to a lesser extent, AOL. Last month, when reports surfaced that AOL and Microsoft’s MSN were considering a partnership, many industry watchers speculated that would include MSN powering AOL’s search engine and AOL dumping Google. Estimates suggest AOL represents 11% of Google’s revenue.

MSN-AOL talks continue
According to wire reports, MSN is also continuing talks with AOL. That led one media analyst, who wished to remain anonymous, to wonder why this deal would make sense for Comcast given that Microsoft is a shareholder in the cable operator. “Microsoft is a major investor in Comcast. The idea of them doing any joint transaction would be offensive to Microsoft," the analyst said. "Strange things happen. But this doesn’t make sense.”

An AOL/MSN merger would likewise be the largest entity on the Internet, with a reach of 79%.

Kris Oser contributed to this report.

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