Comcast, Google Make Play for AOL

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Who wants a piece of America Online? Maybe Comcast Corp., the largest cable-system operator in the country, and Google Inc., the $4.5 billion a year Internet search and information organizer.

Or maybe Time Warner Inc. is trying to drum up interest as it tries to get out from underneath the hurt of its ill-fated 2001 merger with the one-time juggernaut of Internet access. Technically, America Online subsumed Time Warner back then, using an estimated $182 billion in stock and debt.

How interested Comcast actually is in completing a deal is indeed uncertain. The company declined comment through the end of last week. And one cable-industry executive familiar with all three firms told Multichannel News that Google approached Comcast about pursuing a stake in AOL. But Google, he said, could decide to invest in AOL on its own.

The Wall Street Journal first reported Time Warner might try to raise about $5 billion from selling off the part of AOL’s business that is trying to compete with Yahoo! Inc. as a single stop for information, entertainment and shopping services on the Web. A cable executive confirmed talks are taking place, but they are not close to consummation.

ICAHN A CATALYST

The disclosure of talks came the day after corporate raider Carl Icahn, a large Time Warner shareholder, criticized the company’s management in an open letter on Oct. 11. He called the 2001 merger with AOL “disastrous,” and said such assets as Warner Music Group and Comedy Central were let go at “fire sale” prices.

This is not the first time a brand-name partner has been sought for AOL. In September, an AOL executive told the Associated Press news wire that talks were being held with Microsoft Corp. on combining search, instant-messaging and online-advertising efforts.

Also, at the Goldman Sachs & Co. Communacopia conference last month, Time Warner chairman Richard Parsons told reporters that selling a portion of AOL to a company with search technology that the Internet company could use under its own brand was a possibility.

At a luncheon in Hong Kong last week, though, Parsons would not comment on Google or Comcast. He called talk about discussions “market rumors,” according to Reuters.

GOOGLE PLAYS DEFENSE

The talks with Google and Comcast could serve several purposes for Time Warner: spurring Microsoft to accelerate its own talks with AOL; appeasing Icahn by showing him that the company is contemplating even bolder moves than he asked for; and affording AOL access to the search-engine technology it craves.

“It always accelerates conversations when the idea is that someone else is interested,” said Oppenheimer & Co. analyst Thomas Eagan. 

Sanford Bernstein & Co. cable analyst Craig Moffett said the prime motivation for all three parties is the opportunity to gain a bigger chunk of the Internet advertising market. A three-way deal could further highlight AOL’s advertising potential (which would then be reflected in Time Warner’s stock price); would further solidify Google’s lucrative ad relationship with AOL (AOL is Google’s largest customer, representing 12% of Google’s revenue in 2004); and would give Comcast a strong inroad into the Internet advertising market, Moffett said.

“I think that Google’s motivation is crass materialism — 'We’re screwed if we lose 12% of our revenue to Microsoft,’ ” Moffett said. “But I do think that bringing Comcast into the deal was a master stroke. A deal that combines Comcast, AOL and Google for advertisers is a really compelling deal.”

Google is the king of paid search, generating more than $3 billion in advertising last year. AOL reported $1.0 billion in ad revenue in 2004. A spokesman said the Comcast.net portal currently generates minimal ad revenue.

By hooking up with AOL, Google and Comcast also gain access to AOL’s Internet content. Google has been looking to add shows to its video search service (Multichannel News, Oct. 3, page 3). Comcast could use AOL content to drive more traffic to its own Web portal (www.comcast.net) — and could potentially convert some of AOL’s 16 million dial-up customers to its own high-speed Internet service.

Technically, a link-up of Google and Comcast could also be complementary in terms of sifting and delivering video programming. Google has more than 12 data centers, through which it runs billions of search inquiries each day.

Google and Comcast both lease massive amounts of fiber to carry traffic nationwide. But Google lacks the ability to cross “the last mile” to individuals, while Comcast has a network that can carry video into 21 million homes.

And cable companies have been bemoaning the fact that they need the kind of expertise that will allow customers to quickly find a particular video program of interest, from growing warehouses of digital content.

When Google executives spoke at the National Cable & Telecommunications Association’s National Show in April, cable executives openly said system operators need a Google-type search engine to dig through all the programming they want to deliver, at the touch of a few keys, to viewers.

“Search is an absolute requisite’’ for video on demand, said James Kelso, vice president of SeaChange International Inc., a supplier of video-on-demand servers.

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