All Things Digital

QOTD

This is the first major combination of an online company and a bricks-and-mortar media company. It’s the deal that everyone will have to follow.

Together, they represent an unprecedented powerhouse. If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.”

– Ben Rogoff, manager of Aberdeen Asset Management and Bear Stearns analyst Scott Ehrens comment on the AOL-Time Warner merger, circa 2000

The wheels have apparently come off of AOL’s advertising business–not that they were ever really on in the first place. On Wednesday, Time Warner reported a 26 percent decline in second-quarter income as the troubled Internet division continued to weigh on its performance. Revenue at AOL fell 16 percent in the quarter, while ad sales rose just two percent. In contrast, Google (GOOG), Yahoo (YHOO) and Microsoft (MSFT) all reported double-digit ad growth in the same period.

Numbers like that don’t speak well to AOL’s future as a successful advertising venture. And with losses in its access business mounting (604,000 subscribers in the second quarter alone), the division isn’t in the best of health. Little wonder, then, that Time Warner (TWX) announced today that it will indeed split AOL’s dial-up-access business from its advertising and content business. Beginning in 2009, the two divisions will be run independently. “We’ve now made key financial and strategic decisions that will enable us to operate the access and audience businesses separately,” Time Warner CEO Jeffrey Bewkes said on a conference call with investors this morning. “We have the necessary flexibility to do something strategic with either of these businesses today.”

Translation: Either could be sold or merged with another company. And, according to people familiar with the situation, Time Warner hopes to do one or the other with both divisions. The company has recently held informal discussions with Yahoo and Microsoft about AOL’s advertising and content business. And it’s said to be aggressively searching for a buyer for its access business.

AOL is the Rodney Dangerfield of the Web. It don’t get no respect.”

– Time Warner CEO Jeff Bewkes

America Online acquired Time Warner for roughly $106 billion in stock and debt back in 2001. “I don’t think this is too much to say: This really is a historic merger, a time when we’ve transformed the landscape of media and the Internet,” former AOL chairman and CEO Steve Case said at the time. “Time Warner will offer an incomparable portfolio of global brands that encompass the full spectrum of media and content.”

And it did. Problem was, AOL didn’t turn out to be one of them. And now, Time Warner (TWX), which struggled for years to turn AOL into the “digital media powerhouse” it was supposed to be, is planning to divest it. When the company reports second-quarter earnings Wednesday, it is expected to reveal that it’s separated AOL’s declining Internet access and advertising businesses. And that’s the first step in unloading one or both of them.

But who will buy the Rodney Dangerfield of the Web? Well, Time Warner has been and continues to be in informal talks with both Microsoft (MSFT) and Yahoo (YHOO) regarding AOL. Earthlink (ELNK) too is a possibility here. In an interview with The Wall Street Journal last week, CEO Rolla Huff said a merger of AOL’s dial-up business with EarthLink’s would be a wise move. “We think it’s worth aggressively pursuing,” he said of such a deal. “We believe we’re best-positioned to be the consolidator in this industry. When an industry reaches a point of maturation and growth stops, it simply makes good economic sense to consolidate onto one cost platform.”

Microsoft (MSFT) and Time Warner (TWX) are finally getting around to finishing up the joint venture talks they began back in … oh, September of 2005. While no transaction is imminent, the two companies are said to be “casually” discussing a possible combination of Microsoft’s online operations and AOL–perhaps even at this very moment. Silicon Alley Insider reports that executives from both companies were scheduled to meet in Seattle sometime today.

Meanwhile, Yahoo (YHOO) continues to pursue its own discussions with AOL. With its annual shareholder meeting fast approaching, the struggling Internet company is scrambling for something, anything, with which to distract shareholders from the travesty of the past few months.

News of developing talks between Microsoft and AOL, and AOL and Yahoo, was first reported in BoomTown on Monday.

Apparently, Yahoo’s merger discussions with AOL can be reheated two, sometimes even three times–just like leftover pizza. According to Britain’s Times newspaper, Yahoo (YHOO) and Time Warner (TWX) spent the past weekend discussing a deal to combine the Internet operations of the declining Web giant with Time Warner’s AOL–the same deal the two mulled over back in June and a few months before that, as well. As I said back in April, “Yahoo will no doubt spin such a combination as one that would bolster its domestic market position. But rather than a synergistic powerhouse, a merger of these companies is more like two louts coming together to make one cretin. Not exactly a proven formula considering recent history. AOL+Compuserve = FAIL. AOL+Netscape = FAIL. AOL+Time Warner = FAIL. AOL+Yahoo?”

Anything to keep that share price above $20, eh Yahoo?

Much as Yahoo would like to believe otherwise, Microsoft’s not done with the company yet. Just as BoomTown suggested it might, Microsoft (MSFT) has circled back for another run at Yahoo (YHOO) and, if it’s successful, it will seize Yahoo’s search business and sell the rest of the company off for parts. The Wall Street Journal reports that Microsoft has approached Time Warner (TWX) and News Corp. (NWS) (owner of Dow Jones and this site) about joining it in a deal that would effectively lead to to the company’s breakup (see “Murdoch-Blocked?” and “MSFT/YHOO/AOL/ NWS/WTF?“). Seems Steve Ballmer is unwilling to abandon a deal that would more than triple Microsoft’s share of U.S. Web searches.

Yahoo, for its part, is said to be skeptical of a deal that would essentially dismember it, but people close to the company tell the Journal that Yahoo is still open to discussing any proposal from Microsoft. Perhaps even one that would see the software giant acquire Yahoo for $33 to $34 a share. After all, this is exactly the deal Yahoo proposed to Microsoft on May 17–two weeks after the company officially dropped its bid for Yahoo. That’s right, Yahoo CEO Jerry Yang and Co.–after insisting Microsoft’s offer “substantially undervalued” the company, tried to resuscitate a deal after Microsoft CEO Steve Ballmer scrapped the bid. From the Journal:

[On] May 17, two weeks after Microsoft officially dropped its pursuit of Yahoo … Yahoo CEO Jerry Yang, director Ron Burkle and chairman Mr. Bostock met with Microsoft’s Mr. Ballmer. Messrs. Bostock and Burkle told Mr. Ballmer they were prepared to sell Yahoo for $33 to $34 a share, the price range Microsoft had offered before talks broke down, according to people familiar with the meeting. That would have valued the deal at about $47 billion, or $6 billion less than Yahoo’s previous asking price of $37 a share.”

Carl Icahn’s a little quieter than usual today, isn’t he?

After publicly cataloguing Yahoo’s (YHOO) failures of leadership for the better part of the week, he seems to have fallen silent after what may prove to be the company’s greatest failure of all.

Perhaps that’s because he’s still hard at work penning a letter so full of spleen and vitriol it will melt Jerry Yang’s head like Belloq’s in “Raiders of the Lost Ark.”

Or perhaps it’s because he’s not that worried about the Google (GOOG) deal. After all, it’s got all sorts of things going against it. There’s antitrust scrutiny. And then there are its terms. According the deal’s fine print, Google is free to scuttle the agreement in the event of a “change in control.” And that includes changes of control in the boardroom–exactly the sort of thing Carl Icahn proposes.

The services agreement also permits Google to suspend performance of the services under certain circumstances, including a … change in a majority of the board of directors of Yahoo following an annual or special meeting of stockholders if a majority of the new directors did not serve on Yahoo’s board immediately prior to such stockholder meeting and were nominated or solicited for by Microsoft, Time Warner or News Corp. or, solely with respect to Yahoo’s first two annual or special meetings held after the effective date where the election of a majority of directors is before Yahoo stockholders (but not later than Sept. 1, 2009), by any other person or group.”

The Internet filtering agreements New York Attorney General Andrew Cuomo inked with Verizon (VZ), Sprint (S) and Time Warner Cable (TWX) today, while certainly groundbreaking, pale a bit in comparison to the ones announced in France.

There, Internet service providers, and we’re talking all of them, have agreed to block access not just to sites and newsgroups alleged to contain child pornography, but to those alleged to feature materials promoting terrorism or racial hatred as well.

“We can no longer tolerate the sexual exploitation of children in the form of child pornography,” Interior Minister Michele Alliot-Marie said in a speech today. “We have come to an agreement: access to child pornography sites will be blocked in France. Other democracies have done it. France could wait no longer.” And then, pledging her support for the “fundamental liberty that is Internet access,” she added: “This is not a question of creating a Big Brother on the Internet.”

Well, not yet anyway.

John Gilmore once famously claimed that “the Internet interprets censorship as failure and routes around it.” If he’s right, there’s no reason to worry that an agreement by three of the nation’s largest Internet service providers to block access to newsgroups and Web sites that traffic in child pornography might have other frightening consequences. If not, well …

Prodded into action by New York Attorney General Andrew Cuomo, Verizon (VZ), Sprint (S) and Time Warner Cable (TWX) have agreed to block Web sites identified by Cuomo as ones that disseminate child pornography. They’ve also agreed to restrict access nationwide to most, and in the case of Time Warner Cable all, of Usenet’s discussion groups, most of which are not repositories of illegal material. To repeat, Time Warner will now block all of USENET.

“It’s going to make a significant difference,” Cuomo said of the agreement. “It’s like the issue of drugs. You can attack the users or the suppliers. This is turning off the faucet. Does it solve the problem? No. But is it a major step forward? Yes. And it’s ongoing. No one is saying you’re supposed to be the policemen on the Internet, but there has to be a paradigm where you cooperate with law enforcement, or if you have notice of a potentially criminal act, we deem you responsible to an extent. This literally threatens our children, and there can be no higher priority than keeping our children safe.”

Of course. A noble effort, this curtailing of access to child pornography. It would just be unfortunate if it became the first step in widespread Internet censorship.

This year’s D conference had its share of great lines–tired ones, too (we’re all clear on the subject of Facebook and information sharing, right?). Here’s a selection of the former…

Guys like us avoid monopolies. We like to compete.”

–Microsoft (MSFT) Chairman Bill Gates

AOL is the Rodney Dangerfield of the Web. We don’t get no respect.”

–Jeff Bewkes, president and CEO, Time Warner (TWX)

I will probably never be a CEO again.”

–Yahoo (YHOO) CEO Jerry Yang states the obvious

It’s a company that creates technology.”

–Facebook CEO Mark Zuckerberg answers the question, “What is a technology company?”

Read more »

A tough act to follow, last year’s D: All Things Digital 5. How do you best, or even match, a 75-minute joint interview with Microsoft (MSFT) Chairman Bill Gates and Apple (AAPL) CEO Steve Jobs–a history-making history lesson taught by two principal protagonists of tech’s narrative? Summon Thomas Edison, Nikola Tesla and George Westinghouse from the dead to reminisce about the “War of Currents”?

No. Better to let history make itself, as it always has, and focus on making news. And it’s likely there will be quite a bit of it coming out of D: All Things Digital 6. With this year’s lineup, how could there not? Microsoft’s Bill Gates and CEO Steve Ballmer onstage together just a month before Gates steps back from his day-to-day duties as company chairman. Time Warner (TWX) CEO Jeff Bewkes talking strategy as the media giant prepares to spin off Time Warner Cable and tries to figure out just what the hell to do with AOL. Lowell McAdam of Verizon Wireless (VZ) and FCC Chaiman Kevin Martin appearing separately, but together offering an insider view of the telecom industry as it grapples with issues of Net neutrality, open access and early termination fees. And then there’s Yahoo’s (YHOO) Jerry Yang and Sue Decker, who’ve been struggling to right a foundering Internet pioneer as it battles Google (GOOG), Microsoft, investor-agitator Carl Icahn and itself.

And that’s just a sampling. Clearly, there’s much to talk about. Much news to be made.

Sure, we may not have managed to arrange another tete-a-tete as historic as last year’s Gates/Jobs interview.

But we did manage to get Microsoft CEO Steve Ballmer and Yahoo Co-Founder Jerry Yang on the same stage–albeit at different times. Still, no easy feat, that.

And who knows, perhaps we’ll get them onstage together as well.

So join us at d6.allthingsd.com tomorrow for as-it-happens, all-access coverage of the conference. Liveblogs of the sessions and demos. Videos of the speakers. Photos of attendees. You’ll find it all here.

(Photo illustration by Beth Callaghan)