Outside the Lines

I never thought that Microsoft's unsolicited bid for Yahoo could get so interesting. It's taking on Shakespearian dimensions, with various factions lobbying, forming alliances, and establishing dowries for Yahoo's favor. In addition, News Corp. may be lending aid to Microsoft in its quest to acquire Yahoo.

Over the weekend, Steve Ballmer gave Jerry Yang three weeks to capitulate, or Microsoft would take its case directly to Yahoo shareholders. Today, 69 days into the negotiations and posturing, with Microsoft seemingly in the driver's seat, prognosticators are scratching their heads.

Yahoo and AOL are reportedly in deep talks to join forces. Also note that the Time Warner unit recently acquired the social-networking site Bebo.

According to The Wall Street Journal:

Under the terms being discussed between Yahoo and Time Warner, the latter would fold its AOL unit into Yahoo and make a cash investment in return for about 20 percent of the combined entity, people familiar with the situation said.

The deal, which wouldn't include AOL's dial-up access business, would value AOL at about $10 billion. As part of the deal, Yahoo would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range, between $30 and $40 a share, the people said.

Yahoo is also testing the use of Google ads on a small percentage of its search pages. This could lead Yahoo to outsource its core ad search business to Google. As you might recall, Google and AOL have a connection. Google invested $1 billion in AOL in 2005 for a 5 percent stake, and it powers AOL search.

Rafat Ali of PaidContent said AOL and Google working together could help Yahoo stay independent:

If Yahoo can logically show that it gets a 30 percent to 40 percent revenue lift on the test, then they have a story to tell--that, if combined with AOL, they have enough scale, cut down costs by outsourcing search and search ads to Google, and add to that a possible share buyback with Time Warner supplying the extra cash, the combination has earned the right to stay independent.

At the same time, The New York Times is reporting that News Corp. (and its MySpace.com) may be considering throwing in with Microsoft to help acquire Yahoo.

The question for Yahoo shareholders will be which deal is best. AOL needs to find a home, and the combined AOL-Yahoo user base would be large. Getting leverage from the two audiences presents similar problems and overlapping to that of an MSN-Yahoo combination.

Google would benefit by the Microsoft block, its AOL relationship, and potentially a partnership with Yahoo, which would mean that Google is the big winner. Microsoft would be the big loser, if it doesn't succeed in acquiring Yahoo. Of course, the antitrust regulators might have a say in the matter.

In some ways, Yahoo could be a loser as well, in that Microsoft would technically and financially be a stronger mate than AOL, especially in battling Google over the long-term.

Given all the recent activity, Yahoo's fate is less clear than when Microsoft was the only option. Perhaps, Yahoo has created an elaborate illusion to convince Microsoft to increase its bid.

We may find out soon whether AOL is really an alternative to Microsoft for Yahoo, and salvation for Time Warner, and whether Rupert Murdoch wants to get in bed with Microsoft. What we know, at this point, is that Jerry Yang is not saying, "Alas, poor Yorick."

Mark Zuckerberg describes Facebook as a service designed to help people communicate better, primarily through the social graph, which is the network of connections and relationships between people.

The social graph, he said, is the reason Facebook works. The popular social applications, such as Flirtable, FunWall and SuperPoke, built on the Facebook platform, are only a small part of Facebook's bigger ambition to help people communicate better.

In fact, Facebook is on a collision course with the more mature Web colonies--AOL, Google, Microsoft and Yahoo.

One of the key metrics of a major portal is stickiness--the number of applications used per member and time spent on the site. Communications services, such as e-mail, instant messaging, group chat, and forums, have proven to be very sticky.

Facebook is about to introduce a basic chat service and have some rudimentary e-mail capabilities. While Facebook executives have been cagey about specific plans to build more capable communications applications, they will evolve to be competitive with what AOL, Google, Microsoft, and Yahoo offer.

I would also expect Facebook to include Web search that takes advantage of the social-graph concept. For example, Facebook could implement a search for friends that also surfaces public information about them from the Web, or Web search results, that factor in what friends in an extended social graph click on for similar queries.

Facebook may even take on Google, possibly working with investor Microsoft, to deliver a comprehensive search service with a social dimension. Facebook could also acquire or partner with one of the semantic search start-ups, such as Hakia and Powerset.

Monetizing billions of pages and applications is part of developing a huge Web footprint. While Facebook has an ad deal with Microsoft, the company is developing its own socially aware ad technology, which is critical for extracting the full value of its network. The big players have all pursued a similar strategy.

AOL recently announced its acquisition of social network Bebo for $850 million in cash. The company has Web mail, instant messaging via AIM and ICQ, and a search deal with Google.

Google started with search and has expanded out to e-mail, IM, and a suite of productivity applications. It also spawned Orkut, a fledgling social network popular in Brazil.

Yahoo started with a directory, and later discovered e-mail and instant messaging, but it hasn't yet made its social-networking play, other than an attempt to acquire Facebook. The company has given hints that it will use its massive e-mail audience as a pivot point for integrating social networking into its platform.

Microsoft started with e-mail via its acquisition of Hotmail and has added IM and a variety of other applications, but no social-networking application, with exception of its $240 million investment in Facebook (for 1.5 percent of the company).

Looking out a few years, Facebook could grow its membership from 67 million to more than 200 million unique users per month, many of whom might use the service at the exclusion of the big four.

Of course, the big four are not going to stand still while Facebook tries to steal their thunder. Several scenarios could play out, including one of those major sites making an offer Facebook could not refuse.

This week on the EIC Squared podcast Larry Dignan and I discuss the merits of AOL's $850 million Bebo acquisition and the status of Microsoft's pursuit of Yahoo. Apparently the Microsoft and Yahoo are holding informal talks. The general consensus among industry watchers is that Yahoo should take the money and run, especially if its first quarter earnings are going to disappoint Wall Street. Larry explains the role IT played in helping to turn Eliot Spitzer into an ex-governor of New York, and I outline the latest developments in the Semantic Web, including Yahoo's efforts in this emerging area.

When the media talks about the Web giants these days, it's Google, Yahoo, Microsoft, MySpace.com, and Facebook, with AOL as an afterthought.

Since its merger with Time Warner in 2001, AOL has been an odd duck among the swans, trumped by competitors despite its more than 100 million U.S. users, according to ComScore (below).

Speaking at a Bear Stearns Media Conference on Monday, Time Warner CEO Jeff Bewkes said AOL's ad revenue is flat, advertising has slowed, and the shift from paid subscriptions to free membership has cut into search ad revenue.

Bewkes also he would consider making an acquisition to strengthen AOL's market position.

"Would something added to AOL, or AOL added to something else, make it stronger and more valuable? We can't rule it out, and we wouldn't," Bewkes said at the event. "It's our obligation to make sure AOL gets into whatever configuration that makes it the strongest and most valuable."

I guess he knew something we didn't. The company on Thursday announced its acquisition of social network Bebo, which has 40 million members (mostly in the United Kingdom, Ireland, New Zealand, and the United States) for $850 million in cash.

AOL can now claim to have 80 million "socially networked" members by adding its AIM and ICQ instant-messaging users. AOL's spin is that Bebo helps the company in growing internationally and among a younger demographic.

Bebo does give AOL a credible social network, which already has some integration with AIM and ICQ, and lots of ad inventory. In the U.K., Bebo and AOL rank about the same in unique users, according to ComScore.

The combination of AOL and Bebo, which has adopted both Google's OpenSocial and the Facebook platform for its application developers, will be a much stronger competitor versus the other major players in the social-networking arena. At this point, Google and Microsoft lack a strong social network, though Microsoft is in bed with Facebook, and Google is expected to bring its Orkut social network, which rules in Brazil, to OpenSocial.

AOL has been investing heavily to go more international and revive its brand, which has struggled to move from Web 1.0 to 2.0.

The big question is whether the addition of Bebo to AOL will equal 2 or 3. If AOL can manage to integrate Bebo into the fabric of the AOL portal experience, such as with AIM and what's left of AOL mail users, it could be a 3. But it won't do much to slow down MySpace and Facebook.

Read more of News.com's coverage: "What Bebo means to AOL"