The Wall Street Journal-20080204-Microsoft Throws Time Warner a Curve- Play for Yahoo Alters Media Firm-s Options For Recharging AOL

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Microsoft Throws Time Warner a Curve; Play for Yahoo Alters Media Firm's Options For Recharging AOL

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In his first weeks on the job, Time Warner Inc.'s new chief executive, Jeff Bewkes, has been busy plotting a future for AOL. His job just got harder.

Microsoft Corp.'s $44.6 billion bid for Yahoo Inc. Friday threatens to undermine AOL's competitive standing and suck two obvious partners for the company out of the market. Now Mr. Bewkes must navigate a new, more uncertain landscape.

One big question is whether Google Inc., a 5% shareholder in AOL, decides to respond to the Microsoft-Yahoo deal by strengthening its ties with AOL. That could be an attractive deal for Mr. Bewkes. Google declined to comment.

Mr. Bewkes, who took the reins from Richard Parsons at the start of the year, is under pressure to make some bold moves to jump-start Time Warner's stagnant share price. He is due to outline his initial thoughts on his strategy for Time Warner -- including how he sees AOL's future -- when he addresses investors for the first time on Wednesday, during the company's fourth-quarter earnings conference call.

While he hasn't settled on specifics, Mr. Bewkes is expected to lay out the broad direction in which he is headed. One of the priorities he will outline is his intention to reduce Time Warner's stake in its separate, publicly traded Time Warner Cable affiliate below 50%, from about 84% currently.

On AOL, he is expected to flag his intention to separate the online business's declining Internet-access-subscription business from its Web portal and advertising operations, the parts of the company seen to have growth potential. Such a split is seen as a precursor to the sale or spinoff of the Internet-access business.

That also would make it easier for Mr. Bewkes to combine AOL's portal and ad businesses with another company, one of several ideas he has been weighing in his early analysis of AOL's long-term options, according to people familiar with the situation. A combination would make it easier for AOL to compete with Google's increasing might.

Until Friday, two potential merger partners were Microsoft and Yahoo. Time Warner had discussed possible AOL combinations with both of the companies in the past, most seriously in 2005 when it talked to an array of suitors that included Google and Comcast Corp. Time Warner ended up selling a 5% stake in AOL to Google, which put a value of $20 billion on AOL.

The alliance with Google may not be broad enough to protect AOL from being marginalized if Microsoft succeeds in its Yahoo bid. Not only could AOL's portal business find it harder to attract advertisers, but its ad firms, including Advertising.com and Tacoda, could be squeezed, ad executives said.

Neither Time Warner nor AOL will talk publicly about the impact of a possible Microsoft-Yahoo deal, though in the past company executives have played down the idea that a combination of the two companies would cause AOL problems. They predicted that combining those companies, with their starkly different cultures, would be disruptive and could even give AOL an initial competitive advantage.

The real "wild card" now is what Google does, said Henry Ellenbogen, a portfolio manager at T. Rowe Price. Mr. Ellenbogen said Google may try to deepen its partnership with AOL on the display-advertising side, where AOL has a dominant position and Google isn't as strong. He doubts that Google would feel the need to buy AOL, however, unless another suitor emerged.

It is always possible that other online players could emerge as suitors down the road, particularly those that had shown interest in Yahoo before, such as News Corp. (owner of Dow Jones & Co., publisher of The Wall Street Journal) or IAC/InterActiveCorp., parent of search engine Ask.com. People close to those companies said it wasn't clear that AOL makes sense as a partner, although some could be interested in specific AOL assets such as online mapping site Mapquest and celebrity gossip site TMZ.com. And there is currently no sign AOL is contemplating unloading specific assets such as these.

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Emily Steel contributed to this article.