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Time-Warner Inc.'s long struggle to develop a cohesive strategy for its AOL LLC online service might be finally nearing a resolution. New York-based Time-Warner said Wednesday that it is considering separating AOL's online advertising business from its dial-up access business. Bolstered through a number of acquisitions, including that of Advertising.com in 2004, AOL has assembled a network strong enough to potentially be spun off in an initial public offering and operated as a standalone company. Meanwhile, its Internet access business continues to lose customers as people switch to high speed Internet service from cable and telephone companies. Because the company provided few details of options it is considering for the parts of its AOL business, the news triggered a spate of speculation regarding the fate of the assets. "They don't seem to know what they want to do with the Web in general and their dial-up business," said Ashkan Karbasfrooshan, president of WatchMojo.com, a blog that covers the technology industry. "They do have a lot of good things going for them, but they need someone to say, 'this is the plan--let's stick with it,' but I don't get the sense that that's what they're doing." Despite the shrinkage in its user base, the dial-up business remains a valuable cash generator for Time-Warner. As of Dec. 31, Dulles, Va.-based AOL had 9.3 million Internet access subscribers in the U.S., a decline of 740,000 for the fourth quarter and a 3.8 million decrease from the prior year. For all of 2007, revenue from the AOL division declined $2.6 billion to $5.2 billion, due to a $3 billion decline in subscription revenue, though much of that resulted from the sale of AOL's Internet access businesses in France, Germany and the U.K,, along with a change in the company's strategy to offer its e-mail, certain software and other products free of charge to Internet consumers. Forrester Research Inc. analyst Sally Cohen said Time-Warner, which merged with AOL in 2001 in a $164 billion deal, is making the right decision splitting the access business from advertising, but the challenge will be finding a buyer for the dial-up business. She said there are few companies with a nationwide footprint like AOL's that could actually afford to buy it outright, and splitting it into pieces for regional buyers could be "a mess." "The question with the access business boils down to who would they sell it to, and what would they buy it for?" Dinosaur Securities LLC analyst David Garrity agreed. "In a world heading for WiMax over time, who's going to be dialing up to get their Internet access? That's so 1990s." But the advertising business remains a bright spot, and some speculated that removing the dial-up business is part of prepping the unit for a sale. For 2007, AOL's online advertising revenue rose 18% to $345 million. In September 2007, AOL announced a realignment of its business from an access to an ad-supported company, and unveiled its global advertising network, called "Platform A." AOL was ahead of the game in building its advertising platform after acquiring display advertising network Advertising.com for $435 million. It has continued to add properties and has made five advertising acquisitions over the past 12 months. Its most recent was onTuesday, when it acquired buy.at, a British-based affiliated marketing firm. It also has acquired contextual advertising firm Quigo, behavioral targeting firm Tacoda, mobile advertising network Third Screen Media and German ad-serving company AdTech AG. "Platform A is a pretty impressive, rag-tag collection of ad networks that they could spin off into an IPO," Karbasfrooshan said. Some analysts have called for Time-Warner to sell the AOL business, yet the pool of potential acquirers could be shrinking if Microsoft Corp. is successful in its $44.6 billion unsolicited bid to acquire Yahoo! Inc. In a Feb. 7 research note, Merrill Lynch & Co. analyst Jessica Reif Cohen wrote that Microsoft's attempt to buy Yahoo! "underscores the value" inherent in AOL's platform. However, while the deal "could increase its scarcity value," it could also leave AOL with one less potential suitor. "If regulators do not interfere," she wrote, "AOL could still explore a combination with Microsoft-Yahoo! at some point in the future. "Otherwise, it may need to explore a tie-up with either Google or MySpace to improve its scale," she added. Google Inc. in 2005 invested $1 billion in AOL for a 5% stake, valuing the company at $20 billion. The Mountain View, Calif.-based company is not likely to be interested in acquiring the rest of AOL, but could have a say in whether someone else does. Google also has the right to trigger an IPO of its stake beginning in July. Forrester's Cohen said AOL has been making some interesting strategic moves. She said it has formed strong content partnerships, particularly on the video side of the business, that will provide good opportunities to monetize. She said the company won't topple more dominant players like Microsoft's MSN, Yahoo! and Google, but can still be relevant in the sector. "Am I optimistic about AOL? I don't know I would say that necessarily," she said. "But I think AOL is moving in the best direction they can."  Deal Video
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