Search Engines Are Lousy Investors

This morning's bleak quarterly report from Time Warner's (NYSE: TWX  ) AOL unit reminds me of something I wanted to get off my chest: Leading search engines, for all their glossy brainpower and high-margin goodness, are crummy investors.

Microsoft (Nasdaq: MSFT  ) , Yahoo! (Nasdaq: YHOO  ) , and Google (Nasdaq: GOOG  ) have their occasional hits, but they're usually at the right place at the wrong time. They sell too soon. They buy too late.

Allow me to illustrate.

  • Yahoo! may be getting warm fuzzies over its timely Asian purchases in Alibaba, Yahoo! Japan, and Gmarket (Nasdaq: GMKT  ) , but let's talk about the ones that got away. It was an initial investor in Google, but then unloaded the shares shortly after Big G's IPO. Silly Yahoo! -- Google shares wound up appreciating several times over. Then there was its decision to play hardball with Facebook last year. Reports indicate that Yahoo! balked at Facebook's $1.2 billion asking price. Now we see Microsoft buying a stake in Facebook that values it at $15 billion.

  • Microsoft? Well, if we can blame Yahoo! for failing to buy Facebook low, then surely we can chastise Mr. Softy for buying high. Microsoft did get some bang for its buck, though; it secured global advertising rights on the site with the minority stake purchase, and it's still rich. But paying $6 billion for aQuantive? Have you gone mad, Steve Ballmer?

  • Google blew it, too. Last year, it sold its 2.3% stake in Baidu.com (Nasdaq: BIDU  ) at $80. The argument goes that Google needed to do so in order to be less conflicted about growing its own search-engine presence in China. That may be so, but those Baidu shares have jumped fivefold in price since Big G let go.

This brings us to Google and America Online. Google paid $1 billion for a 5% stake in AOL nearly two years ago, just months before it bailed on Baidu too early. Like the Microsoft-Facebook deal, this purchase was more about landing precious dot-com real estate than making an actual investment, but where is AOL now?

Time for Time Warner
Results don't look pretty at AOL, even if Time Warner's third-quarter report seems solid on the surface. Revenue climbed 9% to $11.7 billion. Adjusted earnings from continuing operations clocked in at $0.24 a share. That may be lower than the $0.33 per share it generated a year earlier, but certain one-time items inflated last year's showing by $0.14 a share. Back that out, and Time Warner's tweaked bottom line climbed by 26% on a per-share basis.

There were healthy top- and bottom-line gains at four of Time Warner's five subsidiaries -- cable, filmed entertainment, networks, and publishing all delivered robust gains. The lone holdout? AOL.

Revenue fell by 38% to $1.2 billion at AOL. Subscription revenue dropped 56%, as the company sold off its access business overseas and turned its core email and content offerings into a free platform.

The method behind the freebie madness
AOL's rationale is that its access business has been bleeding subscribers since peaking five years ago. That much is true. The move was supposed to pay off with a surge in ad revenue and an explosion in visitors. No one expected overnight miracles, but those gains just aren't happening at the moment. The $820 million decline in subscription revenue was barely improved upon by a $61 million gain in ad revenue.

Sure, the margins are higher in online advertising. Operating profits dipped just 24%, despite the 38% haircut on top.

AOL is still an eyeball magnet. The company delivered 48 billion domestic page views during the quarter, to an average of 113 million unique monthly visitors. It's easy to see why Google would want a piece of that action, but paying $1 billion for a 5% slice of a diminishing subsidiary won't leave anyone confusing the decision-makers at Google with the likes of Warren Buffett anytime soon.

So take heart, fellow investor. The next time you find yourself blowing a trade by selling too soon or buying too late, you're not alone. You've got company. Big, fat search-engine companies.


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