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Microsoft-Yahoo combo could pressure AOL

NEW YORK — Time Warner Inc. has been trying to figure out what to do with its struggling AOL unit for a few years now. A potential combination of Microsoft Corp. and Yahoo Inc. could put even more pressure on the media conglomerate to take action.

If Microsoft and Yahoo combine, it would eliminate two potential buyers for AOL and create a powerful, deep-pocketed competitor in online advertising, just as AOL is overhauling itself from an Internet access provider into an online advertising company.

On the plus side, the combination puts a high value on Yahoo and its advertising business, and that could raise the price AOL fetched if it were to go on the block.

Another likely contender for AOL would be Google Inc., which already has an extensive search advertising partnership with AOL and holds a 5 percent stake in AOL that it purchased for $1 billion in late 2005.

But Google has the right to trigger an initial public offering of that stake beginning July 1. If it exercises that right, Time Warner would also be able to buy the stake back instead.

Michael Nathanson, a media analyst at Sanford C. Bernstein & Co., said in a note to investors that the potential combination of Microsoft and Yahoo "robs AOL of the two most likely and able suitors," though he did mention another potential buyer — News Corp., the media conglomerate that owns MySpace.

Time Warner spokesman Keith Cocozza declined to comment on what a Microsoft-Yahoo might imply for AOL, while Google spokesman Matt Furman also said it was too early to comment.

Microsoft's offer for Yahoo was disclosed early Friday.

In August 2006, AOL announced a big strategic shift into advertising and opened many of its services to general Web traffic. And Randy Falco, a former senior executive at General Electric Co.'s NBC, took the reins of AOL in November that year.

AOL revenues have plummeted as it has lost dial-up subscribers to powerful high-speed access services offered by cable TV and phone companies. And its online ad business is not growing quickly enough to make up for the lost subscription revenues.

Revenues fell 38 percent in the third quarter, when a 56 percent drop in subscription revenue more than offset a 13 percent gain in advertising. Operating income fell 24 percent to $295 million.

A fresh reading of AOL's financial picture will come Wednesday, when Time Warner reports fourth-quarter and full-year earnings.

Time Warner said in its most recent quarterly regulatory filing that AOL would lose a significant online advertising customer in early January and anticipated taking more restructuring charges in the fourth quarter of 2007 and first quarter of 2008.

Investors have long pressed Time Warner to simplify its sprawling structure and many hope incoming CEO Jeff Bewkes, who took over Jan. 1, will make radical changes, including selling AOL or spinning it out in an IPO.