Google punting AOL?

Four years ago, Google invested $1 billion in AOL.  Since then AOL’s biz has continued to deteriorate.  Google recently wrote down the investment and is now trying to back out of the deal, or at least renegotiate it. NYT:

Measured strictly in terms of financial returns, Google’s investment in AOL has been a dud. In 2005, Google paid $1 billion for a 5 percent stake in AOL, valuing the Time Warner unit at $20 billion. Last month, Google wrote down the value of that investment by $726 million, which assumes AOL’s new valuation is $5.5 billion.

Now, Google wants what’s left of its money back.

During a conference call with investors, Time Warner executives said that Google notified the company last week that it planned to exercise its “demand registration rights,” which would essentially force Time Warner to buy back Google’s stake in AOL or spin off AOL and take it public. John Martin, Time Warner’s chief financial officer, said that the company was evaluating its options.

But was this deal really a dud? And who killed what’s left of AOL’s business? 1) No. 2) Google.

The $1 billion payment “investment” was Google’s way of keeping hold of AOL’s search traffic. (Serving Google results on AOL.com)  Back then, YHOO and MSFT were still more serious competitors in search.  Google had a big lead, sure.  But it was willing to play hardball to keep YHOO/MSFT from getting any momentum in their search business.

AOL was shopping for an outsourced search provider to provide its search results and had it chosen YHOO or MSFT, it would have given either one a better foothold in search in order to compete with Google.  So Google paid AOL $1 billion in order to keep it out of the hands of competitors.  That’s not chump change, but at 5 months of 2005 cash flow, it wasn’t an exorbitant price to pay.

What has killed AOL’s business?  Well, it had two businesses.  Dial-up internet subscriptions, which was killed by broadband.  And advertising, which has been largely killed by Google.  An internet ad business is driven by page views, kind of like a TV ad business is driven by ratings.  And AOL’s page views have been declining for years.  For one thing, no one uses dial-up anymore.  For another, people continue to drop their old AOL e-mail addresses. What’s a BIG reason folks go to portals like AOL, Yahoo, or MSN?  To check e-mail.  When Google released gmail, which came with 100x more storage space, the others were in deep trouble.  Recent statistics show that gmail is growing much faster than its top three competitors.  In a few years, the others will be in rapid decline.  Why?  The vast majority of folks under 30 now use gmail.

Google probably doesn’t want AOL to die completely.  It’s no longer any threat and it needs a few “competitors” to keep anti-trust authorities at bay…

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