Wednesday, December 21, 2005


AOL-Google Link: a Critical Step in Strategy 2.0 Landscape

Four Actors in Strategy 2.0: AOL, Google, Microsoft and Yahoo

Critical steps in how strategy 2.0 will shape up in 2006.


December 21, 2005
AOL and Google Formalize Partnership to Include Shared Selling of Ads By SAUL HANSELL
America Online formally announced a revived partnership with Google yesterday, a deal that affirmed AOL's value less than a year after a chorus of calls for its parent, Time Warner, to shed the division as a lost cause.

Google said it had agreed to buy 5 percent of AOL for $1 billion and to provide advertising credits for AOL to promote its Web sites on Google's search service. Those advertising credits total $300 million over the five-year term of the deal, according to an executive involved in the negotiations.

In return, AOL agreed to continue to use Google as its Web search engine and to display its search-related advertising, as it has since 2002.

Richard D. Parsons, the chief executive of Time Warner, said the deal would help accelerate AOL's shift from selling Internet access subscriptions to running free advertising-supported Web sites.

"By sticking with our current partner, we have the best partner, the most technologically sophisticated and powerful company in the ads space, and we have deepened our relationship with them," he said. "We are aligned around the opportunities to drive more revenue in this fast-moving space than either of us could do separately."

Eric E. Schmidt, Google's chief executive, said the deal offered a way to accelerate its goal of expanding from simple text ads associated with search to a broader range of advertising formats including graphical display ads. Under the arrangement, AOL's sales force will be able to sell both search advertising and display advertising on Google's own Web site and the many sites on which Google places ads.

"We have not offered a complete advertising solution until this point," Mr. Schmidt said. "This is about expanding the network of our revenue and partners and advertisers, and we couldn't do that by ourselves."

Google beat out Microsoft, which had made an aggressive bid to win AOL as the premier outlet for its new search and advertising services. Microsoft had offered a large guaranteed payout for America Online and a joint venture to sell ads.

The Google-AOL deal involves a range of other forms of cooperation. Notably, AOL will allow users of Google's new Google Talk instant messaging system to chat with users of AOL's messaging network, the largest in the country. Until now, AOL has resisted linking its system with those run by its major rivals - including Yahoo and Microsoft, which recently agreed to link their own. It does connect to Apple Computer's message system and several services aimed at corporate users.

There will be a somewhat complex procedure to link the two systems, however. Google Talk users will need to add an AOL screen name to communicate with other AOL users.

Google will help drive users to AOL's Web sites by giving it the free advertising and by highlighting AOL's video programming in its growing video search service.

"If AOL is going to become a powerhouse again, it needs to return to growth," said Jordan Rohan, an analyst with RBC Capital Markets. "This is a first step. By partnering with Google, maybe some of the Google magic will rub off." But Mr. Rohan said the likelihood of this deal restoring AOL to its former pre-eminent position online is low.

So far, AOL's effort to promote its Web sites have hardly produced significant results. In November, 70 million people, or 41 percent of the Internet audience, visited, the company's lead Web site, according to comScore Media Metrix. That is down from 48 percent of Internet users a year ago, before AOL started moving much of its better content from its paid service to the free

Time Warner investors appear not to be impressed by the deal. The company's shares have trended down since word that it had selected Google emerged on Friday. Time Warner formally announced its deal about 6 p.m. Tuesday. In after-hours trading, its shares rose by a penny, to $17.75. Google's shares reached $431.25, up $1.51 after hours.

Mr. Parsons has long made a priority of bolstering Time Warner's lagging stock price. Carl C. Icahn, the financier who has assembled a group of investors who own 3 percent of Time Warner's shares, has endorsed Mr. Parsons's goal, but sharply criticized his methods. Mr. Icahn has called for Time Warner to be split apart and has objected to the Google deal as an impediment to a potential spinoff of AOL.

Mr. Parsons said Google's investment in AOL did not reduce Time Warner's flexibility.

"Google's investment has nothing to do with setting the stage for a further action regarding the ownership of AOL, and it doesn't prevent it," he said.

Mr. Schmidt added that Google had made the investment largely because it expects to profit from it.

"AOL is going to do really well as a result of our partnership," Mr. Schmidt said, "and this is a way for us to share in the gain."

Copyright 2005The New York Times Company

The Wall Street Journal story provides further details:

December 21, 2005

Bumpy Road Led to Alliance Of AOL, Google

December 21, 2005; Page B1

Two weeks ago, when Time Warner Inc. was on the cusp of signing a sweeping online deal with Microsoft Corp., a team of executives from the media company's AOL unit traveled to Microsoft's headquarters in Redmond, Wash., to make sure everything was in order.

When the executives returned, they reported back to Time Warner's top deal negotiator, Olaf Olafsson, with some less-than-satisfactory findings. They had found some of Microsoft's technology to be clunky, while the contemplated joint venture with the software king contained what they thought were financial pitfalls.

Mr. Olafsson dismissed their complaints as irrelevant -- a stance that infuriated some at AOL's campus in Dulles, Va. "Nothing in the fundamentals changed on that trip," he said in an interview.

Mr. Olafsson ultimately switched horses and instead reached a deal with Google Inc. That pact, which the two companies formally announced yesterday, appeased AOL. But the process that led up to it is just one more sign of the rocky relations between the online service and its corporate parent.

Although the decision about whether to partner with Google or Microsoft was critical to AOL's future, Time Warner took the negotiations out of AOL's hands and put them under the control of Mr. Olafsson. Negotiators from Microsoft and Google noticed tensions between the AOL camp and the Time Warner camp led by Mr. Olafsson, and occasionally received conflicting messages from AOL executives and Mr. Olafsson, according to people familiar with the situation.

Mr. Olafsson said AOL executives were involved in the talks all along.

Ever since AOL bought Time Warner in 2001, trading the online service's outsized stock price for Time Warner's top-tier media assets, relations between the two sides have been difficult. After the merger, AOL's business began deteriorating as many customers switched to high-speed Internet services offered by cable and phone companies, dragging down Time Warner's share price and ruining the retirement savings of many Time Warner employees.

Since then, nearly all of AOL's executives -- who had hoped to inject AOL's new-media ways into Time Warner's magazine, movie and TV operations -- have been swept out of the company. Richard Parsons, Time Warner's chairman and chief executive, has stabilized the overall corporation's operations, pared down its massive debt and invested in AOL's turnaround plan, which involves transforming into a free "portal" site to compete with Yahoo, Google and others.

But many at AOL believe that Time Warner hasn't been a good parent, most prominently AOL co-founder Steve Case, who made his feelings public after he left the Time Warner board in October. Chief among their complaints is that Time Warner has only recently taken steps toward merging AOL's Internet service with Time Warner Cable's high-speed Internet service. In the intervening four years, AOL has lost millions of subscribers to Internet competitors -- including Time Warner Cable. Similarly, AOL hasn't rolled out its Internet telephone service in Time Warner Cable's markets, to avoid competing with that unit's own Internet phone offering.

AOL officials also weren't pleased when Mr. Parsons publicly floated the idea of selling or spinning off AOL, just as the division was launching the centerpiece of its turnaround plan, the revamped

In addition, they perceived Mr. Olafsson, who is Mr. Parsons' strategy chief, as an outsider. Mr. Olafsson, a 43-year-old physicist and novelist from Iceland, heads a group of 30 strategists. The former longtime Sony Corp. executive, whom Mr. Parsons calls "the Mighty O," had helped hammer out an agreement in 2003 under which Microsoft paid Time Warner $750 million to settle an antitrust lawsuit waged by AOL's Netscape division.

The new negotiations with Microsoft began in January, when Microsoft approached AOL about what it would take to get AOL to switch to using Microsoft's search technology on the AOL site instead of Google's search service.

Mr. Olafsson was aware of the anti-Microsoft feelings at AOL, where referring to Microsoft as the "Evil Empire" is not uncommon. But he found the attitude ridiculous. "Religious wars with companies are not something I subscribe to," he said. After negotiating the Netscape settlement, Mr. Olafsson became Microsoft's primary point person at Time Warner and shepherded the collaboration between the two companies on ways to fight digital piracy.

When he took over the Microsoft negotiations in the spring, Mr. Olafsson helped craft a plan that would have merged AOL and Microsoft's MSN online unit into a joint venture. The plan was contingent on the idea of separating AOL's online-subscription business from its advertising business. Microsoft declined to comment on the talks.

But many in the AOL camp felt the idea of splitting AOL into two was unworkable. Mr. Case felt so strongly about it that wrote a newspaper article opposing it after he quit Time Warner's board. Mr. Case believes AOL should be spun off as a separate company since Time Warner isn't willing to integrate AOL into its other businesses.

Mr. Olafsson then essentially scuttled the joint-venture plan, and instead helped Microsoft put together smaller-scale joint venture proposals, while talking with Google about options as well. In between, Mr. Olafsson received and rebuffed overtures from News Corp. Chairman Rupert Murdoch and Yahoo Inc. Chairman Terry Semel.

As the talks with Microsoft seemed to be nearing a conclusion two weeks ago, Mr. Olafsson changed his mind after receiving what he described as a renewed sense of commitment from Google. During a phone call with Google Chief Executive Eric Schmidt on Dec. 12, Mr. Olafsson said he heard for the first time some commitments about deepening the partnership beyond just using Google's search technology. "It turned it into a strategic arrangement instead of a commercial arrangement," he said. "We said to ourselves, 'This is the element that was missing.' "

Under the terms of the deal, Google will buy a 5% stake in AOL for $1 billion. AOL will continue to use Google's search technology and to share the revenue generated by ads that are displayed with search results. But in a change important to AOL, the online service now will have the right to sell those ads directly to advertisers instead of directing advertisers to Google. AOL also will be able to sell some ads that appear on Google's network of affiliated Web publishers, and Google will promote AOL's content when it displays search results to its users.

Write to Julia Angwin at julia.angwin@wsj.com1

URL for this article:

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The Washington Post article provides additional thoughts and perspectives on it..

$1 Billion AOL Stake For Google Approved

By Yuki Noguchi
Washington Post Staff Writer
Wednesday, December 21, 2005; D01

Time Warner Inc. approved Google Inc.'s $1 billion investment in its America Online Inc. unit yesterday, a deal aimed at giving both companies a greater share of the burgeoning online advertising business.

Company executives also characterized the deal, which gives Google a 5 percent stake in Dulles-based AOL, as an opportunity to cross-pollinate Time Warner's vast media library with Google's highly profitable online advertising business.

As part of the deal, Google also will tap AOL's instant-messaging customer base of 43 million users, integrating it with Google Talk, a recently released product with far fewer users. That pits AOL and Google against rivals Microsoft Corp. and Yahoo Inc., which next year plan to integrate their instant-messaging systems.

Google will also be able to access more of AOL's content, such as music videos and television shows, through its media services.

"There are a lot of aspects of this deal that will have big impact," Google chief executive Eric E. Schmidt said in an interview. "What I like about this deal is that it has an end-user component and an advertising component" with benefits for both, he said.

For months, AOL was courted by Google and Microsoft, both of which wanted to capitalize on AOL's strong consumer brand and its affiliation with Time Warner.

Time Warner chairman and chief executive Richard D. Parsons said yesterday that the company chose to partner with Google because it was more familiar with how AOL's and Google's businesses could dovetail.

"We knew more about how to tease out the opportunities for both sides," Parsons said. Over time, the Time Warner-Google partnership may include digitizing Time Warner's television shows, movies and print news to make them searchable and usable by online viewers, he said.

AOL is already Google's most lucrative advertising partner, because it uses Google search on AOL Web sites viewed by millions of users.

AOL, which built its business in the 1990s selling basic Internet access to consumers, this year shifted gears and -- like Google -- is trying to capture a huge audience for free products so it can make money by selling advertising.

Jonathan F. Miller, chairman and chief executive of AOL, called the deal a "broader alignment" that in the short term will help AOL expand its audience and advertising market share.

The deal gives AOL more freedom in how it sells advertising that appears on its own sites, as well as on tens of thousands of Google-affiliated Web sites. The instant-messaging partnership will also drive more traffic to AOL sites, he said.

Billionaire financier and Time Warner shareholder Carl C. Icahn has criticized the Google investment, which was first reported last week. Icahn, who has been lobbying Parsons to spin off AOL, said the expanded partnership with Google would limit AOL's ability to merge with another partner later.

Parsons flatly disputed Icahn's claim: "Well, you know, he's wrong."
© 2005 The Washington Post Company

Only the first moves have been played out...
Strategy 2.0 is heating up.

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