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Microsoft's MSN and AOL May Combine Some or All Operations

Posted on: Sunday, 18 September 2005, 09:00 CDT

Humbled by the surging fortunes of Google Inc. and Yahoo Inc., two titans of the Internet's early days -- Microsoft Corp. and Time Warner's America Online -- might scrap their historic rivalry and join forces.

Microsoft's MSN and AOL are negotiating to combine some or all of their online operations -- including their free e-mail and instant- messaging services as well as widely viewed portal pages, according to people familiar with the talks.

The talks, which are still preliminary, demonstrate how vulnerable both companies feel in the face of competition from Google and Yahoo and how much the once bitter rivals now have in common.

In the 1990s, the two companies vied for control of the emerging market for consumer Internet access. But as telephone and cable companies began rolling out easy-to-use high-speed Internet access, demand for dial-up waned. In contrast to the paid access of AOL and MSN, Google and Yahoo offer free services over the Web supported by advertising.

Executives at Time Warner and Microsoft believe investors are ignoring the potential of their Web businesses. They hope a union will change that.

"If there was a way of putting together a joint venture that had an intelligent mix of assets from both sides, structured in the right way, people would want to do that," one of the sources said.

The dialogue between the world's biggest software company and the biggest media company began early this year and has stopped and started several times. No deal is imminent.

Rob Sanderson, an analyst with American Technology Research, said the rise of Google and Yahoo, which are adding more content and services, was driving the talks.

"In relevance, they're third and fourth behind Yahoo and Google," Sanderson said. "So putting together the No. 3 and No. 4 to make a more relevant entity makes a lot of sense."

Although they are eclipsed by Google and Yahoo, AOL and Microsoft's MSN still have 38 million subscribers between them -- 29 million at AOL and 9 million at MSN. MSN contributed $2.3 billion to Microsoft's $40 billion in revenue last year. AOL accounted for $8.7 billion of Time Warner's $42 billion in 2004 revenue.

More difficult questions include whose technology to use and how to blend two different sets of Web pages. "In theory, it makes a lot of sense to combine the two operations, especially on the back end," Forrester Research analyst Charlene Li wrote on her blog. "But merging the two actual portal consumer experiences into a unified site will be a nightmare."

Source: Buffalo News

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