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An Autumn of Unholy Alliances

October 2005

An Autumn of Unholy Alliances

By Joanna Glasner Oct. 19, 2005

Internet businesses may appear to evolve at light speed. But for the past 10 years, success has consistently required a firm handle on the same two things: content and distribution.

Content consists of the blogs, news, games and other enticements that keep eyeballs glued to computer screens. Distribution includes the search engines, portals, browsers and ISPs that people use to find that content. Much like automobiles and highways, neither can thrive without the other.

In recent weeks, a spate of new alliances, public grudge matches and rumored deals-in-the-making seem to indicate a shift in the balance of power among the powerhouses in both areas.

Signs of a changing competitive landscape include the recent decision by Microsoft and Yahoo to team up on instant messaging, Google's backing of Sun Microsystems' StarOffice platform and the reportedly feverish bidding by internet and media giants for a piece of AOL.

"What's really happening is in the '90s, there were a number of people who were in the technology business who thought they should be in the content business and a lot of people in the content business who thought they should be in the distribution business," said Ken Marlin, managing partner of the investment firm Marlin & Associates. "By and large, it isn't working."

Marlin casts the emergence of new alliances and the drawing of new battle lines as "a realignment so that people can play to their core strengths."

Perhaps. Below are a few of the new friendships and animosities, along with industry analysts' input on what they're about.

AOL: Hot or Not?

The situation: Time Warner reportedly wants to sell its AOL assets, and buyers are lining up. Suitors reportedly include Microsoft, Yahoo, Google, Comcast and News Corp.

Significance: Veteran internet users like to scoff at AOL. Time Warner's decision to tie its fate to the internet service provider is widely considered one of worst moves in business history. In a broadband world, its subscription service is mostly dialup, and the number of AOL subscribers has been declining for several years.

But in much the same way that New York liberals derided President George W. Bush's chances of re-election because no one they knew was voting for him, Marlin said, people underestimate AOL. It still has 27 million subscribers, and its ad revenue continues to surge. In the second quarter of this year, AOL took in $320 million in advertising sales, up 45 percent from a year ago. AOL also has a wealth of quality original content.

All these things, Marlin believes, make AOL a good match for Microsoft, particularly if the software firm eventually intends to spin off its internet assets as a separate, publicly traded company.

While Google has also reportedly shown interest in AOL, Rick Summer, a stock analyst at Morningstar, sees such a move as inherently defensive. AOL currently accounts for more than 10 percent of Google's revenue, and the search firm would pay handsomely to protect that income stream.

MSN and Yahoo: Hitched at the (IM) Altar

The situation: Microsoft and Yahoo, which run two of the three most popular instant messaging platforms, agree to make their services interoperate.

Significance: There are three major instant messaging platforms: Yahoo Messenger, MSN Messenger and AOL Instant Messenger. The decision by Yahoo and MSN to interoperate puts pressure on the most widely used messenger, AOL's AIM, to do so as well.

But whether it will or not is a different matter. AOL is the biggest gorilla in the IM space, so it's under less competitive pressure to make alliances.

Meanwhile, Google's launch of a competing messaging service a few weeks ago is a minor consideration, said Matt Anderson, market analyst at research firm Radicati Group. And Yahoo and MSN's interoperability agreement won't help Google's odds of success.

"What reason did users have to switch to a much smaller IM network with Google that had a lot less features?" he asked. "Now that MSN and Yahoo are together, I don't think it's going to be any easier for them."

MSN and RealNetworks: Burying the Hatchet

The situation: Microsoft settles a long-standing antitrust dispute with RealNetworks for $761 million.

Significance: Microsoft, a $260 billion company that owns the operating system on most of our desktops, and RealNetworks, which sells online media services and offers downloads of video and audio players, were never competitors in a level playing field.

Nonetheless, the announcement a week ago that the two companies would settle indicates a desire by Microsoft to play nice with a former adversary. For one, the settlement puts RealNetworks in a significantly more stable financial position, thus making it easier to compete with another Microsoft rival, Apple Computer and its ascendant QuickTime software.

Google and Microsoft: Mortal Enemies?

The situation: Google and Microsoft, which are Nielsen/NetRatings' No. 1- and No. 3-ranked search engines, have long been competitors. But recently the rivalry appears to have escalated, as evidenced by lawsuits; a Google joint venture with Sun Microsystems, a long-standing Microsoft foe; and both firms reportedly vying for AOL.

Significance: No one's predicting Google will lose its crown as leader in online search any time soon. If history is any lesson, however, internet users' tastes can be fickle. Search alternatives to Google are abundant.

"If you're king of the hill today, it's a lot harder for investors to envision a scenario in which you're not," said Morningstar's Summer. Still, threats to Google are mounting.

Microsoft is a major one. Since spring, the company has been testing a keyword advertising service, MSN adCenter, that competes with Google's AdSense.

Google and Microsoft have also been busy suing each other. Google is suing Microsoft in an attempt to lift job restrictions on a high-level employee it hired away from the software giant -- Kai-Fu Lee. Originally, Microsoft sued Google, claiming its hire violated terms of an agreement the employee signed earlier with Microsoft.

Outside the courtroom, Google played up its role as rival by touting a joint effort with Sun Microsystems to promote StarOffice, a software package that competes with Microsoft Office.

Analysts don't see the deal posing much of a threat to Microsoft, given that StarOffice has been available for a long time. Google's enthusiasm in delivering the news, however, left some wondering.

"We didn't feel there was a lot of meat behind it," said Summer of the StarOffice announcement. "Still, it was interesting how public that was."

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