The digital dance begins
As News Corp and Time Warner join the scrum surrounding Yahoo, it's clear that big media is not content to leave Google or Microsoft alone on top of the digital mountain.
LOS ANGELES (Fortune) -- Jason Bazinet, a media analyst with Citigroup Global Markets, put it nicely in a research note Thursday: "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?"
News Corp. (NWS, Fortune 500) is talking to Microsoft (MSFT, Fortune 500) about joining its bid for Yahoo (YHOO, Fortune 500) by folding in MySpace with Yahoo and MSN, while Time Warner (TWX, Fortune 500) is angling to merge its AOL into Yahoo as a kind of white knight move. One big difference between these approaches is that News Corp. chief Rupert Murdoch is taking the longshot approach that he could end up controlling the combined new entity.
What News Corp. and Time Warner have in common, though, is that both are so-called traditional media titans anxious to sort out their digital future. A few years ago, the thinking was that Internet companies would use their comparatively rich stock market valuations to buy traditional media companies - and, indeed, that's exactly what happened when AOL swallowed Time Warner at the height of the dot-com bubble. (Time Warner owns Fortune and CNNMoney.com.)
There was of course a swift and bitter lesson learned there, and no reason to recount it here for the umpteenth time. Lately, the game has shifted to digital players spending money mainly to buy more of their own ilk - which is exactly what Microsoft is trying to do with Yahoo. The thinking now is that the real riches are in consolidating the digital space, where technology, reach, community, utility and cost-efficiency for advertisers seem to trump conventional notions of programming. (Google = Exhibit A).
Although the basic motivation of News Corp. and Time Warner - not to be marginalized - are similar, they have very different approaches and ambitions. At News Corp., Chairman Rupert Murdoch hit paydirt in buying MySpace three years ago for under $600 million, but he's been looking for ways to translate its huge Internet audience into major advertising dollars. Although MySpace is clearly a high-growth asset, the Web still doesn't merit a separate entry in News Corp.'s financial statements; MySpace and its other online properties are listed in the statements' "other" category.
Murdoch has broached folding MySpace into Yahoo for some time - and did so again recently - but moving his efforts from Yahoo to its suitor Microsoft is a new and bold wrinkle. MySpace clearly adds an important component - social networking - that neither Microsoft's MSN nor Yahoo have much of. What's interesting is that, according to someone close to Murdoch, he is for now insisting on management control of a combined MyMicrohooSpace. How this would fly with Microsoft is iffy and unclear: News Corp. would have to kick in significant cash to get to that level. And cash is one thing that Microsoft is not lacking. What it shows, though, is that Murdoch is determined to continue to expand, rather than diminish, his online efforts. Bazinet opines that with MySpace, News Corp. is "facing a more daunting long-term battle for relevancy than even AOL." For now, though, Murdoch is playing his hand from a position of strength.
By contrast, Time Warner's ambition to combine AOL into Yahoo seems more of a calculated retreat. The plan that was first reported in the Wall Street Journal (owned by Murdoch, incidentally) would have Time Warner put AOL into Yahoo at a relatively modest valuation and also some cash to fund a buyback of Yahoo shares. Time Warner would end up with 20% of the new YahAOLoo, but presumably not have management control. For new Time Warner CEO Jeff Bewkes, this would accomplish three things in a stroke: remove the AOL albatross that's been punishing Time Warner's share price, combine the company with its most logical partner (and away, for now, from Microsoft or Google), and keep a sufficient equity position so that if Yahoo did rebound, Time Warner wouldn't look like a chump for selling too low.
Both of these new scenarios are much more complex than Microsoft buying Yahoo on its own. And if that's how it plays out, it's now clear that both News Corp. and Time Warner will still be looking for a deal with their big Internet businesses, maybe even with each other - though I doubt it would end there. This dance is just getting going.