Tuesday, September 20, 2005


The Motley Fool's Rick Aristotle Munarriz has a good article and thoughts on the possible deal between AOL and Microsoft. I like his last paragraphs:

Microsoft can compare its battle with Google to the way it fought against IBM (NYSE: IBM), but that's naive. That was when Microsoft was in its prime, tackling a dinosaur with broken bifocals. The Microsoft of today is a watchdog magnet. The Microsoft of today is lethargic, having grown sales this past fiscal year by a mere 8%. Beyond its core software competencies, the Microsoft of today is a follower that chases Sony (NYSE: SNE) in the video game market and Apple Computer (Nasdaq: AAPL) in digital music. The one thing that Microsoft is not is the Microsoft of yesterday. It can't just don the gloves and dance around the ring anymore.

And so we come to Microsoft needing AOL -- only it would be doing so strictly for the real estate. AOL needs to be careful here. It still has time to make itself something more than just someone else's fixer-upper.

But I'm not certain if I agree with him. He's hoping for a lot in believing in the possibility that AOL can become more than a dying relic of past mistakes. Too many "whatifs" here since AOL's has made several strategic errors and hasn't taken the necessary steps to transition from a closed system to an open system and from a dial-up service to the broadband provider.

It will be interesting though if Microsoft does close a deal and wipes Google's AOL revenue off its books. Ballmer will be grinning for a week. Microsoft has the cash to do this deal just to hurt Google's revenue projections for the year. Maybe this is a reason why Google bulked up its cash reserves to counter attack Microsoft? How important is their AOL revenue? I assume it is important enough since AOL was approximately 12% of Google's revenues last year, which was $382 million. Some more from Munarriz's article:

You don't need corporate raider Carl Icahn whispering in your ear to know that Time Warner's (NYSE: TWX) America Online division has been a hotbed of blunders in recent years. Just hang out by the logoff screen. Since its usage peaked in September of 2002 with a subscriber base of 26.7 million users, every quarter has seen the once high-flying service's membership slide. Right now, the warm bodies stand at 20.8 million, and the defections are likely to continue in the short term.

Why? Well, while AOL has tried to package value into its premium-priced subscriber plans, it has also done its best to unscrew the training wheels that drove many users to AOL in the first place. Getting rid of its proprietary newsgroup reader or ditching its fast-loading message-board platform in favor of a Web-enabled slowpoke will only further fuel the exodus.

AOL has dared its subscribers to leave to faster or cheaper access elsewhere. The taunts have been successful. As a result, AOL has been hard at work beefing up its AOL.com portal as a catchall destination for all of the wired world's nomads. Internet advertising continues to gain traction with sponsors, and AOL has been served well by broadcasting Google's (Nasdaq: GOOG) paid-search results in exchange for a significant piece of the action.
(full article)

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