AI
Wednesday, December 21, 2005 3:49:25 AM
Bumpy Road Led to Alliance Of AOL, Google
By JULIA ANGWIN
Staff Reporter of THE WALL STREET JOURNAL
December 21, 2005; Page B1
Two weeks ago, when Time Warner Inc. was on the cusp of signing a sweeping online deal with Microsoft Corp., a team of executives from the media company's AOL unit traveled to Microsoft's headquarters in Redmond, Wash., to make sure everything was in order.
When the executives returned, they reported back to Time Warner's top deal negotiator, Olaf Olafsson, with some less-than-satisfactory findings. They had found some of Microsoft's technology to be clunky, while the contemplated joint venture with the software king contained what they thought were financial pitfalls.
Mr. Olafsson dismissed their complaints as irrelevant -- a stance that infuriated some at AOL's campus in Dulles, Va. "Nothing in the fundamentals changed on that trip," he said in an interview.
Mr. Olafsson ultimately switched horses and instead reached a deal with Google Inc. That pact, which the two companies formally announced yesterday, appeased AOL. But the process that led up to it is just one more sign of the rocky relations between the online service and its corporate parent.
Although the decision about whether to partner with Google or Microsoft was critical to AOL's future, Time Warner took the negotiations out of AOL's hands and put them under the control of Mr. Olafsson. Negotiators from Microsoft and Google noticed tensions between the AOL camp and the Time Warner camp led by Mr. Olafsson, and occasionally received conflicting messages from AOL executives and Mr. Olafsson, according to people familiar with the situation.
Mr. Olafsson said AOL executives were involved in the talks all along.
Ever since AOL bought Time Warner in 2001, trading the online service's outsized stock price for Time Warner's top-tier media assets, relations between the two sides have been difficult. After the merger, AOL's business began deteriorating as many customers switched to high-speed Internet services offered by cable and phone companies, dragging down Time Warner's share price and ruining the retirement savings of many Time Warner employees.
Since then, nearly all of AOL's executives -- who had hoped to inject AOL's new-media ways into Time Warner's magazine, movie and TV operations -- have been swept out of the company. Richard Parsons, Time Warner's chairman and chief executive, has stabilized the overall corporation's operations, pared down its massive debt and invested in AOL's turnaround plan, which involves transforming AOL.com into a free "portal" site to compete with Yahoo, Google and others.
But many at AOL believe that Time Warner hasn't been a good parent, most prominently AOL co-founder Steve Case, who made his feelings public after he left the Time Warner board in October. Chief among their complaints is that Time Warner has only recently taken steps toward merging AOL's Internet service with Time Warner Cable's high-speed Internet service. In the intervening four years, AOL has lost millions of subscribers to Internet competitors -- including Time Warner Cable. Similarly, AOL hasn't rolled out its Internet telephone service in Time Warner Cable's markets, to avoid competing with that unit's own Internet phone offering.
AOL officials also weren't pleased when Mr. Parsons publicly floated the idea of selling or spinning off AOL, just as the division was launching the centerpiece of its turnaround plan, the revamped AOL.com.
In addition, they perceived Mr. Olafsson, who is Mr. Parsons' strategy chief, as an outsider. Mr. Olafsson, a 43-year-old physicist and novelist from Iceland, heads a group of 30 strategists. The former longtime Sony Corp. executive, whom Mr. Parsons calls "the Mighty O," had helped hammer out an agreement in 2003 under which Microsoft paid Time Warner $750 million to settle an antitrust lawsuit waged by AOL's Netscape division.
The new negotiations with Microsoft began in January, when Microsoft approached AOL about what it would take to get AOL to switch to using Microsoft's search technology on the AOL site instead of Google's search service.
Mr. Olafsson was aware of the anti-Microsoft feelings at AOL, where referring to Microsoft as the "Evil Empire" is not uncommon. But he found the attitude ridiculous. "Religious wars with companies are not something I subscribe to," he said. After negotiating the Netscape settlement, Mr. Olafsson became Microsoft's primary point person at Time Warner and shepherded the collaboration between the two companies on ways to fight digital piracy.
When he took over the Microsoft negotiations in the spring, Mr. Olafsson helped craft a plan that would have merged AOL and Microsoft's MSN online unit into a joint venture. The plan was contingent on the idea of separating AOL's online-subscription business from its advertising business. Microsoft declined to comment on the talks.
But many in the AOL camp felt the idea of splitting AOL into two was unworkable. Mr. Case felt so strongly about it that wrote a newspaper article opposing it after he quit Time Warner's board. Mr. Case believes AOL should be spun off as a separate company since Time Warner isn't willing to integrate AOL into its other businesses.
Mr. Olafsson then essentially scuttled the joint-venture plan, and instead helped Microsoft put together smaller-scale joint venture proposals, while talking with Google about options as well. In between, Mr. Olafsson received and rebuffed overtures from News Corp. Chairman Rupert Murdoch and Yahoo Inc. Chairman Terry Semel.
As the talks with Microsoft seemed to be nearing a conclusion two weeks ago, Mr. Olafsson changed his mind after receiving what he described as a renewed sense of commitment from Google. During a phone call with Google Chief Executive Eric Schmidt on Dec. 12, Mr. Olafsson said he heard for the first time some commitments about deepening the partnership beyond just using Google's search technology. "It turned it into a strategic arrangement instead of a commercial arrangement," he said. "We said to ourselves, 'This is the element that was missing.' "
Under the terms of the deal, Google will buy a 5% stake in AOL for $1 billion. AOL will continue to use Google's search technology and to share the revenue generated by ads that are displayed with search results. But in a change important to AOL, the online service now will have the right to sell those ads directly to advertisers instead of directing advertisers to Google. AOL also will be able to sell some ads that appear on Google's network of affiliated Web publishers, and Google will promote AOL's content when it displays search results to its users.
http://online.wsj.com/article/SB113512960036228044.html?mod=yahoo_hs&ru=yahoo
By JULIA ANGWIN
Staff Reporter of THE WALL STREET JOURNAL
December 21, 2005; Page B1
Two weeks ago, when Time Warner Inc. was on the cusp of signing a sweeping online deal with Microsoft Corp., a team of executives from the media company's AOL unit traveled to Microsoft's headquarters in Redmond, Wash., to make sure everything was in order.
When the executives returned, they reported back to Time Warner's top deal negotiator, Olaf Olafsson, with some less-than-satisfactory findings. They had found some of Microsoft's technology to be clunky, while the contemplated joint venture with the software king contained what they thought were financial pitfalls.
Mr. Olafsson dismissed their complaints as irrelevant -- a stance that infuriated some at AOL's campus in Dulles, Va. "Nothing in the fundamentals changed on that trip," he said in an interview.
Mr. Olafsson ultimately switched horses and instead reached a deal with Google Inc. That pact, which the two companies formally announced yesterday, appeased AOL. But the process that led up to it is just one more sign of the rocky relations between the online service and its corporate parent.
Although the decision about whether to partner with Google or Microsoft was critical to AOL's future, Time Warner took the negotiations out of AOL's hands and put them under the control of Mr. Olafsson. Negotiators from Microsoft and Google noticed tensions between the AOL camp and the Time Warner camp led by Mr. Olafsson, and occasionally received conflicting messages from AOL executives and Mr. Olafsson, according to people familiar with the situation.
Mr. Olafsson said AOL executives were involved in the talks all along.
Ever since AOL bought Time Warner in 2001, trading the online service's outsized stock price for Time Warner's top-tier media assets, relations between the two sides have been difficult. After the merger, AOL's business began deteriorating as many customers switched to high-speed Internet services offered by cable and phone companies, dragging down Time Warner's share price and ruining the retirement savings of many Time Warner employees.
Since then, nearly all of AOL's executives -- who had hoped to inject AOL's new-media ways into Time Warner's magazine, movie and TV operations -- have been swept out of the company. Richard Parsons, Time Warner's chairman and chief executive, has stabilized the overall corporation's operations, pared down its massive debt and invested in AOL's turnaround plan, which involves transforming AOL.com into a free "portal" site to compete with Yahoo, Google and others.
But many at AOL believe that Time Warner hasn't been a good parent, most prominently AOL co-founder Steve Case, who made his feelings public after he left the Time Warner board in October. Chief among their complaints is that Time Warner has only recently taken steps toward merging AOL's Internet service with Time Warner Cable's high-speed Internet service. In the intervening four years, AOL has lost millions of subscribers to Internet competitors -- including Time Warner Cable. Similarly, AOL hasn't rolled out its Internet telephone service in Time Warner Cable's markets, to avoid competing with that unit's own Internet phone offering.
AOL officials also weren't pleased when Mr. Parsons publicly floated the idea of selling or spinning off AOL, just as the division was launching the centerpiece of its turnaround plan, the revamped AOL.com.
In addition, they perceived Mr. Olafsson, who is Mr. Parsons' strategy chief, as an outsider. Mr. Olafsson, a 43-year-old physicist and novelist from Iceland, heads a group of 30 strategists. The former longtime Sony Corp. executive, whom Mr. Parsons calls "the Mighty O," had helped hammer out an agreement in 2003 under which Microsoft paid Time Warner $750 million to settle an antitrust lawsuit waged by AOL's Netscape division.
The new negotiations with Microsoft began in January, when Microsoft approached AOL about what it would take to get AOL to switch to using Microsoft's search technology on the AOL site instead of Google's search service.
Mr. Olafsson was aware of the anti-Microsoft feelings at AOL, where referring to Microsoft as the "Evil Empire" is not uncommon. But he found the attitude ridiculous. "Religious wars with companies are not something I subscribe to," he said. After negotiating the Netscape settlement, Mr. Olafsson became Microsoft's primary point person at Time Warner and shepherded the collaboration between the two companies on ways to fight digital piracy.
When he took over the Microsoft negotiations in the spring, Mr. Olafsson helped craft a plan that would have merged AOL and Microsoft's MSN online unit into a joint venture. The plan was contingent on the idea of separating AOL's online-subscription business from its advertising business. Microsoft declined to comment on the talks.
But many in the AOL camp felt the idea of splitting AOL into two was unworkable. Mr. Case felt so strongly about it that wrote a newspaper article opposing it after he quit Time Warner's board. Mr. Case believes AOL should be spun off as a separate company since Time Warner isn't willing to integrate AOL into its other businesses.
Mr. Olafsson then essentially scuttled the joint-venture plan, and instead helped Microsoft put together smaller-scale joint venture proposals, while talking with Google about options as well. In between, Mr. Olafsson received and rebuffed overtures from News Corp. Chairman Rupert Murdoch and Yahoo Inc. Chairman Terry Semel.
As the talks with Microsoft seemed to be nearing a conclusion two weeks ago, Mr. Olafsson changed his mind after receiving what he described as a renewed sense of commitment from Google. During a phone call with Google Chief Executive Eric Schmidt on Dec. 12, Mr. Olafsson said he heard for the first time some commitments about deepening the partnership beyond just using Google's search technology. "It turned it into a strategic arrangement instead of a commercial arrangement," he said. "We said to ourselves, 'This is the element that was missing.' "
Under the terms of the deal, Google will buy a 5% stake in AOL for $1 billion. AOL will continue to use Google's search technology and to share the revenue generated by ads that are displayed with search results. But in a change important to AOL, the online service now will have the right to sell those ads directly to advertisers instead of directing advertisers to Google. AOL also will be able to sell some ads that appear on Google's network of affiliated Web publishers, and Google will promote AOL's content when it displays search results to its users.
http://online.wsj.com/article/SB113512960036228044.html?mod=yahoo_hs&ru=yahoo
