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AOL Battle Turns on Video

Jonathan Berr

As tech titans tussle over AOL, the big prize is leadership in the emerging online-video marketplace.

Industry observers say Time Warner's (TWX) America Online has gained a lead in Internet video. Google (GOOG) and Microsoft (MSFT), bidding to join AOL in a search advertising venture, are eager to exploit that prowess.

With businesses ranging from CNN to Warner Bros., New York-based Time Warner has plenty of video to put on the Web and continues to add new content to its existing stockpile of 180,000 so-called video assets. AOL and Telepictures Productions this week announced the launch of tmz.com, an on-demand entertainment news service on the Web. In addition, AOL has started original programming, including reality shows and self-help programs, and has been adding to its archives of music videos.

"Both of these companies would benefit from what AOL is trying to build," says Cory Treffiletti, senior vice president and strategist at Carat USA, a New York-based advertising agency, in an interview. "The future is video. More importantly, it's video that can be transmitted to any number of devices. They are poised to almost leapfrog anybody else from a video perspective. They have finally figured out how to leverage that Time Warner relationship."

Both Google, the No. 1 search engine, and Microsoft's MSN would benefit from AOL's expertise in video search as they try to expand into mobile devices, he says. Google is testing a video search offering. MSN's video search, which includes music videos, lags AOL Music in popularity, according to data from comScore Media Metrix. AOL's videos are spread in several areas, so it's difficult to measure their popularity.

"It's top of mind for everyone inside of the industry whether you a supplier of content, whether you are a buyer of advertising or a marketer," says Brian Wieser, senior vice president and director of industry analysis at Interpublic Group's (IPG) Magna Global. "Advertisers are interested in being associated with searchable video."

Internet video is soaring in popularity, buoyed by AOL's broadcast of last July's Live 8 concerts. Those efforts won kudos from critics and fans who were disappointed by the television coverage. The program, which attracted 5 million unique visitors that day and tens of millions of viewers throughout the summer, also caught the attention of advertisers, who are continuing to shift their spending away from traditional media and onto the Web. That was a watershed moment, according to advertising executives.

"It just proves that the Web can generate large audience that view simultaneously, similar to what you find in television," says David Moore, chief executive of 24/7 Real Media (TFSM), an online advertising agency.

Negotiations over AOL's fate may be starting to wind down. The Wall Street Journal has reported that Time Warner could decide this week whether to enter into exclusive talks with Microsoft or Google. Sources familiar with the talks confirmed that the discussions are ongoing but stressed that any timetable talk is premature. This summer, news emerged that several companies were bidding to take a stake in AOL, but since then the focus has turned to a joint venture in which cash wouldn't change hands.

Some analysts and investors have suggested that Redmond, Wash.-based Microsoft would be a better partner for AOL than Google. The stakes also are higher for Microsoft, which lags behind both Google and Yahoo! (YHOO) in the search market. Microsoft chief Steve Ballmer recently told an audience at a conference that the world's largest software company has a "keen interest" in online advertising, according to press reports.

Any AOL combination probably won't have much of an effect on prices in the online advertising market because demand is soaring. Magna Global estimates that online advertising spending will be on par with network television this year.

"What's going to happen in advertising is going to be driven more by what advertisers want to do, and secondarily what the Internet companies are able to offer," says Chuck Jones of Atlantic Trust Stein Roe in San Francisco, who follows the tech sector.