Yahoo Said to Drop Out of AOL Talks

Yahoo said it will pass on a chance to make a formal bid to acquire part of all of America Online from Time Warner, leaving Microsoft and Google as the main remaining suitors for what has become a hotly sought-after piece of Internet real estate.

Yahoo said it never made a specific offer, but did discuss the potential parameters of a deal with Time Warner executives late last month. Once it learned the terms that AOL was looking for, Yahoo backed out of additional discussions, the company said through a spokesman.

Word that Yahoo was taking a pass may help accelerate the process of having Time Warner make a final decision on how to proceed with AOL, some analysts said, by clearing the field and making it easier for negotiations to go forward.

While it is not know whether either Google or Microsoft has made offers yet, several published reports have put Microsoft in the lead for the rights to strike a partnership with or acquire key assets of AOL, primarily because those talks have been going on longer, having started early this year as talks about AOL possibly using MSN Search to replace Google’s search results.

More recently, though, word has spread that both companies are being given every opportunity to make their pitches to Time Warner executives. The Wall Street Journal reported today that some in the Time Warner camp believe a major deal with Microsoft would be more likely to become bogged down in anti-trust reviews given the company’s past history, causing possibly expensive delays.

New World Order?

The talks may finally be coming to a head. The Wall Street Journal reported that by early next week, Time Warner may choose to enter exclusive talks with either Google or Microsoft. Analysts noted that such negotiations may collapse and say that the jilted suitor will be waiting in the wings if any potential deal goes south.

Other analysts believe the months of rumors and hype may lead to little change in the search engine and portal industry.

Jupiter Research analyst David Card said a likely scenario is for Google to purchase a minority stake in AOL as a way of ensuring that it remains the portal’s search engine for the foreseeable future and strike a deal that allows for possible additional partnerships to be explored.

“That seems a reasonable scenario,” Card said. “What does that deal mean for the big picture of Internet media? Nothing. Status quo is maintained.”

Most agree that AOL has several key assets that the other portals would want, starting with its widely used AOL Instant Messenger (AIM), which is hugely popular among younger Web users.

Its other strong suit is its access to Time Warner content, which has yet to prove the synergistic juggernaut originally envisioned when AOL and Time Warner merged in 2000 but may have growing appeal in a broadband-friendly Internet environment.

On the other hand, its subscription Internet access service continues to bleed users, with the decline recently leading to a decision to shut down a call center for its customers, a move that resulted in some 700 job cuts.

Audience a Draw

Forrester analyst Charlene Li said Google may have the most to lose immediately, with AOL accounting for 12 percent of its annual revenue from paid search. And AOL would give Google instant strength in display advertising, a field it has been tiptoeing toward and one that AOL has a strong foundation in thanks in part to the relationship it has with Time Warner’s print properties.

“Even though AOL is a shell of its former self in terms of subscriber base, the sheer audience size and the fact that many of those users register with AOL is a key benefit for someone like Google,” Li said. “The value of the AOL portal is not as strong to MSN, and even less so for Yahoo because they already have a large base of registered users and have been mining user data for years.”

Li continues to believe that some kind of partnership between MSN and AOL is the most likely outcome and would make the most sense in terms of blending properties and corporate cultures as well as in terms of what they need to stay competitive. “They both need a boost in morale and energy that an acquisition could bring,” she added. “And MSN has the financial wherewithal to make the deal.”

AOL, meanwhile, has not stood pat while the discussions have been under way, indicating to some that it is leaving open the option of continuing to go it alone. For instance, just last week it bought MusicNow from Best Buy in a bid to become more of a player in the digital music subscription space.