AOL Bidding: Give Me Liberty

This column was originally published on RealMoney on Nov. 15 at 3:35 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Gaming the winners and losers of a potential deal for AOL is a two-step process. You need to first understand what is being fought for, and second, who is fighting for it.

Here then are the "crown jewels" of AOL that people are willing to pay upward of $15 billion for in aggregate.

Narrowband subscribers: This portion of AOL probably is worth a small amount of the eventual sale price, because it's a severely declining business despite the tremendous cash flows generated. Broadband subscribers are less attractive, as they are not a very competitive pie, and Time Warner(TWX Quote) has never aggressively pursued this as much as it could have. For instance, why did it take so long for them to do a deal with AOL and Time Warner Cable?

Advertising: Clearly all of the major players are making a land grab for search-engine advertising revenue. AOL makes up approximately 11% of Google's(GOOG Quote) revenue, and that revenue is all up for grabs if AOL does a deal with Yahoo!(YHOO Quote) or Microsoft(MSFT Quote).

Voice over Internet Protocol: AOL is the No. 1 instant messaging service. Yahoo! and MSN's agreement to let IM be interoperable, as well as Yahoo!'s acquisition of Dialpad and MSN's acquisition of Teleo, make this a hot area, particularly with eBay valuing Skype at upward of $2.6 billion. Google has fallen a bit flat with its Google Talk service. A Google/AOL deal would catapult Google to No. 1 in the IM/VoIP space -- an area from which Google has been surprisingly absent, even if you include its municipal WiFi initiative as a step in this direction.

Content: This one is big. Let's look at the extremes on the content spectrum. You have Google, which has some content beyond search -- Google Maps and Google News -- but it's nothing compared with what companies like Yahoo! (Personals, Jobs, Finance, etc.) and News Corp.(NWS Quote) (MySpace has a millions of blogs, band pages, etc.) offer. But really, AOL takes the crown here. It has all of Time Warner's content at its disposal, and I, for one, am in heaven over the planned In2TV effort to bring classic TV shows from my childhood to broadband. (Note to AOL: please make this iPodable). Does anyone care about content in a peer-to-peer dominated universe? I think the answer is "yes," but that's just speculation.

Playing the Players

So to recap, the players here are Google, Microsoft, News Corp. and IAC/Interactive (IACI Quote). And although Yahoo! is thought to be out of it, I wouldn't bet the house on that fact. So this is really a two-step exercise: first identify what's at stake, and then determine what is ultimately the best trade.