Big media reconsiders role on the Internet
NEW YORK |
NEW YORK (Reuters) - News Corp NWSa.N and Time Warner Inc's (TWX.N) willingness to make a deal with Yahoo Inc (YHOO.O) is seen as a tacit admission that big media empires will not go it alone on the Internet any more.
Even if they lose Yahoo to Microsoft Corp (MSFT.O) -- as widely expected on Wall Street -- analysts and media industry insiders say the two could explore other combinations including merging Time Warner's AOL with News Corp's MySpace.
"MySpace and AOL are Internet assets that are in either a state of limbo or a state of decline," said Jordan Rohan, founder of digital media advisory company Clearmeadow Partners. "Google's growing faster than you are and it's responsible for the majority of profitability for each of these. You're dependent on your biggest competitor and that's a terrible position to be in."
Both MySpace and AOL depend on Google for search advertising.
As the U.S. economy increasingly looks like it might be in recession, concerns about the long-term growth rate of Internet advertising have forced big media companies to reevaluate their role.
Perhaps the days when they can take on Google or Yahoo by themselves have reached their highest point. Both Walt Disney Co (DIS.N) and General Electric's (GE.N) NBC shut down their ambitious Internet portals in 2001.
Time Warner's stock has suffered through the 7 years since its merger with AOL, even as its restructuring into a one-stop shop for Internet advertising shows early signs of progress.
Meanwhile, News Corp's Fox Interactive Media (FIM), which owns the world's largest online social network MySpace, quietly started to dial back growth expectations late last year, and now expects fiscal 2008 revenue to fall short of News Corp Chief Executive Rupert Murdoch's $1 billion target.
It is against this backdrop that talks with Yahoo are taking place. AOL is discussing a merger with Yahoo, while News Corp is reportedly pondering joining Microsoft's bid as well as pursuing individual talks with Yahoo.
"Who, after all, wants to compete as a sub-scale player -- with a less than complete set of Internet assets -- in a world dominated by Google and Microhoo?" Citigroup analyst Jason Bazinet wrote last week in a research note. "We would not rule out the prospect of AOL/MySpace at some future date."
Most investors and analysts expect Microsoft to prevail in buying Yahoo, although some analysts say rivals could possibly turn up a better offer for the Web pioneer, which has rejected the software giant's $42 billion bid as too low.
In one scenario, Bernstein Research estimated a potential deal to combine AOL and Yahoo, with a side pact to rely entirely on Google Inc (GOOG.O) for Web search advertising, could top Microsoft's initial $31-per-share offer for Yahoo.
Bernstein Internet analyst Jeffrey Lindsay said under that scenario, Time Warner's stock and cash offer could be worth up to $37.01 per share and eliminate up to $800 million in costs.
"We think the AOL-Yahoo proposal is a viable alternative to Yahoo and, given the deal terms leaked to the press, could actually in a best-case scenario be more attractive," he said, but added such a deal would face big hurdles with regulators.
MYSPACE FUTURE IN QUESTION
As for News Corp, there's no question that Murdoch's $580 million investment to buy MySpace will rake in big returns -- any deal involving MySpace would value it at a rich multiple.
But making MySpace's continued traffic growth pay off in terms of a boost in ad revenue is the key concern.
"The social network inventories are being sold at pennies to the dollar," Richard de Silva, a general partner at venture capital firm Highland Capital Partners, said of social networks. His firm has sought out companies focused on helping social networks sell their advertising space more efficiently "The next wave is about pricing that inventory at full value."
Two analysts cut their target price on News Corp shares on Monday, citing concerns about the future of FIM.
Bernstein Research, which downgraded the stock to "Market-Perform" from "Outperform", estimated FIM's fiscal 2008 revenue to grow about 30 percent, only a third of last year's rate, while costs are also estimated to jump 46 percent.
A combination with AOL could help News Corp come closer to solving that "monetization" challenge.
For the past year, Fox Interactive Media has worked to better match ads to users and has restructured its ad business.
But results could take longer. New ad-targeting strategies "do not have the incremental impact that are assumed in many of the business plans," said Dave Moore, chief executive of WPP Group Plc's (WPP.L) digital marketing company 24/7 Real Media.
That's where AOL could come in. AOL has spent nearly two years rapidly buying up ad technology firms including content-targeted ad company Quigo, and Tacoda, which displays ads based on a Web surfer's online habits.
The moves helped AOL win a deal to exclusively represent Verizon Communications Inc's (VZ.N) online ad inventory. ComScore on Monday also rated AOL's Platform-A as the top U.S. ad network in March, beating Yahoo, Google and 12 others. AOL's ad network reached 9 out of 10 U.S. web users.
Both News Corp and Time Warner have said they could prosper on their own without major deals. But in a consolidating digital ad world, soon to be polarized by two big players -- Microsoft with Yahoo, and Google -- Murdoch and Time Warner Chief Executive Jeffrey Bewkes can ill afford to wait.
"This is not about creating a new growth juggernaut," Rohan said. "All the companies involved in these discussions are missing their financial targets."
(Editing by Tim Dobbyn)
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