Big media reconsiders role on the Internet

By Kenneth Li - Analysis

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