Just think of the first generation search and portal businesses, as if they were PC companies thirty years ago and it all kind of makes sense. AOL and Yahoo may strip out useless assets and then merge, says a Reuters piece this week, citing insiders. Pretty much what happened in the PC era which resulted in just Hewlett-Packard, Dell and IBM-Lenovo surviving the early rounds, and extending the war into other technologies, before second generation PC makers like ASUS, Acer, Toshiba and NEC made an entry.
Many of the major portals have now given way to the dominance of Johnny-come relatively-lately, Google, which obviously now dominates the search business, but which is also extending out into other platforms, in order to extend search ‘ on to mobile, tablets, netbook operating systems and cloud based apps.
The shape of the PC industry, along with many others, shows a classic shape of a pure market. More and more people see the benefits of using the market leader, which leads to weaker players and they want to merge for safety and strength ‘ Compaq with HP, and then DEC with HP in the PC market back then, and now AOL with Yahoo in the portal market.
What’s strange is the way so little is risked in the process. Every time you get a new PC you decide whether nor not to import your old bookmarks to a browser, or start again ‘ and this rare occasion is when web sites have the potential to lose a long term visitor. Personally at Faultline we look for share prices and market capitalizations of US public companies on the Yahoo finance site and have done for at least 15 years. What would it take us to change to another site? Well every time they make changes to the site it annoys us and we look for a replacement, but so far haven’t found it, so it would just take a good replacement, but specifically at a time when our favorite makes changes. And this is the reason why Yahoo and AOL so rarely makes any kind of change to their multitude of services ‘ fear of losing existing visitors.
It’s not like a search engine, especially not with a browser bundled search bar linking to it. Sure search is part of what they do ‘ AOL search is powered by Google, and Yahoo Search, although it has its own search technology, uses Microsoft to sell and serve its search advertising. Even together with a new unified search mechanism, they are both far more than a search engine.
AOL is the company which is more used to change, but only because it was a paid portal, which had to move into the free internet era by switching to advertising driven services as recently as 2005. Prior to that it was a source of utter bafflement to us that AOL ever got off the ground in the first place. AOL customers used to pay to see a tiny chunk of the internet, the AOL walled garden version, that was never going to be a long term plan, but it has survived intact for far longer than it deserved, almost a decade. But in its heritage is a business which believes in foisting its view of the world on its customers, for longer than it makes sense. Not good for an internet company, although in the last five years perhaps it has changed its spots.
AOL essentially became a music and video service, with free email back in 2005 and as early as 2006 the idea of a merger between the two was floated on the US stock markets. If it had happened then, with a complete rethink, and a new brand, it might have had a hope, but now all the change that this entails will mostly lose it many habitual visitors.
Since then AOL has continued to lose advertising customers as well as paying subscribers until the decline has almost flattened out, it has taken impairment charges, re-evaluated itself, acquired advertising technology, video indexing technology, more advertising technology. During that time Yahoo lost ground to Google but managed to make itself the default mobile portal, until that is Android came along, dragging Google with it into the mobile world.
AOL was finally extricated from Time Warner last year, and had already sold of its ISP base in Europe, and sold what it considered non-core assets, such as ICQ, DMS, Bebo and its holdings in Kayak ‘ mostly at savage losses. So AOL has acquired more and more technologies, some of which it still retains, such as Truveo, its video search engine and all of its advertising acquisitions (was it three or four companies it bought here?) but mostly it failed to widely introduce new ideas and bring them to its bottom line.
AOL re-organized into a variety of “super networks,” it re-launched MapQuest, expanded its local social network, Patch (as in what’s going on, in your Patch) and migrated the majority of AOL mail users to an improved back-end system. Like we said, of the two it is the one more used to change.
In 2006 Faultline wrote a stinging editorial about its proposed merger with
Yahoo , describing it as ‘hot air and mistaken logic’
And since then Yahoo has been associated in speculation about deals to establish a strong second place current generation portal, a genuine rival to Google in deals with Microsoft and News Corp’s internet properties, including MySpace.
We argued that the respective age of the two site’s regular visitors were different, and that AOL, only recently out of its paid for status, was an unknown quantity which left AOL traffic unquantifiable and unstable. We figured that it was Yahoo who should be the predator and the dominant partner, in value terms.
That position is now borne out by the spin out value of AOL, just $2.7 billion now, against ten times that figure at Yahoo. Under those values, such a deal might make finally sense.
When Time Warner courted Google as a search partner and sold it 5% of AOL’s shares, it claimed a valuation of $20 billion on Time Warner’s books? Today this has been virtually eliminated and a once great American icon needs to do a deal in the next year or so or it becomes a history lesson and little else.
In order to save Yahoo from a similar fate, it needs some of the ‘can do’ attitude which has seen AOL change its business model entirely and completely re-align its technology. That’s a tough management feat, but potentially do-able.
The usual alternatives will be paraded out, a merger or acquisition with MSN, a new type of deal with Google or MySpace, and although this looks like a deal which may have lost its relevance, it may well go ahead if AOL understands that its share price reflects most of its ‘true’ value, which we doubt.
AOL leaked the plan to Reuters and it is due to make a formal proposal to Yahoo, say insiders. The legacy dial up business, that just won’t go away, will be sold off, but given the fact that EarthLink is the most likely buyer (or United Online) why would the price be high. The portal business built around display advertising will be merged into Yahoo.
Carol Bartz, CEO of Yahoo and fresh from Autodesk fame, is known for her turnaround capabilities and her unflappable and sound approach to business and her long association with technology companies. She won’t do a bad deal, but like Reuters said, she hasn’t yet been approached with an offer, and until she is, we won’t know how Yahoo views this deal, but it could be positively.