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AOL & Microsoft: Not So Crazy

http://www.fool.com/investing/general/2005/12/06/aol-amp-microsoft-not-so-crazy.aspx

Seth Jayson
December 6, 2005

One of the great things about the Internet is the speed with which we can get information and respond. This morning, I noted a very interesting take on the latest rumors regarding the love triangle of Google (Nasdaq: GOOG  ) , Microsoft (Nasdaq: MSFT  ) , and Time Warner (NYSE: TWX  ) . Not surprisingly, it came from my colleague Rick Munarriz, whose ability to spot trends and sniff out the next big thing is one of the reasons he's on our Motley Fool Rule Breakers newsletter team.

Rick makes some good arguments that Time Warner would be wrong to choose Mr. Softy over Google. Based solely on the numbers he's got, I'd agree. But I think there's more to consider than those numbers.

I suspect that if Microsoft really is winning this relationship derby, it may have less to do with Google's current stature than with the direction of tomorrow's Web-enabled entertainment technology. I'm going to paint a blurry picture in some pretty broad strokes, but here's how things look to this geek and investor.

Is Google old-school?
In my view, Google has been the world's most successful data leech. (And I mean leech in only the best way, I assure you.) Quite simply, it beat the pants off other search engines through better handling of the Web's raw material. Props to Google for that. But, at its core, Google's expertise lay in sorting the work of other people's Web sites, and delivering the distillation to consumers and advertisers.

Google's incredible growth and profitability depends on this expertise -- and, more or less, on free or cheap access to all that data out there. Google Earth satellite images and the controversial Google Print initiative are two of the ways Google has spent money in attempts to expand its reach beyond what's typically on the Web.

In a relatively open Internet information economy like the one we're used to, I'd bet on Google's success any day of the week. And I would argue that Time Warner should do the same. But when I ponder the Net's next generation, I think I see a different beast on the horizon.

Data comes of age
To begin with an idea I borrowed (and believe in) from Fool co-founder David Gardner, traditional Internet sites are beginning to realize the potential that their user data holds, especially when it's properly structured and studied. How long will they continue to let someone else profit at their expense?

Not long. At least, not for all of them, I'd argue. Instead, I believe they will likely try to exploit their content on their own terms. As such, currently successful outsiders like Google may become less relevant if they're not able to keep capitalizing on others' content with their current degree of efficiency. David even mentions the Yellow Pages as an example of an information aggregator that's fallen by the wayside in the face of the technological shift; it's interesting to note that Verizon (NYSE: VZ  ) is said to be trying to shed its yellow pages.

The entertainment Web
A more extreme example of the diminishing returns for the upstart Internet outsider might come in what I think of as the upcoming entertainment Web -- which I believe may change our lives in more fundamental ways than Internet 1.0. As I read books like Howard Rheingold's dizzying and thought-provoking Smart Mobs, and witness the evidence in stores and in the stock market, I see an upcoming convergence of today's computers with network-enabled handheld devices, on-demand music, TV, and movies, plus interactive games. True, many or most of these will depend on the Internet as the backbone for data transfer. But they will not be the wild and wooly open-ended communities, untouched by commercialism, that the early Web promised and that many hoped it would deliver.

Instead, I think we'll see these networks increasingly characterized by big clusters of sites and applications, built on proprietary schemes,streaming non-text entertainment data, and subject to varying levels of restriction by the for-profit businesses in charge of them. A few examples of what I'm talking about include the valuable user communities at places like Netflix (Nasdaq: NFLX  ) or Apple's (Nasdaq: AAPL  ) iTunes, the pay-to-play game networks of Xbox Live or Vivendi's World of Warcraft, or shared TV reruns over an internet chat client as offered by AOL's upcoming In2TV.

Please note that I don't claim to be able to predict what these future networks and data protocols will eventually look like. I won't even try. I will simply reiterate my belief, based on nothing more than observation of good ol' capitalistic urges, that the companies creating this networked content and controlling its delivery through the wires are going to try to squeeze as much value out of their position as possible. That's why I think the entertainment Web will be an increasingly difficult place for an "outsider" like Google to leech.

Now, if these hybrid user communities end up fulfilling most (if not all) of the potential inherent in more open peer-to-peer (P2P) networking, while simultaneously denying much of that valuable raw material to companies like Google, what then? If Google's current, deep understanding of the typical Netizen is the key to smart ad placement, and thus the engine of its advertising dominance and economic success, what happens if the habits of all these media users begin to reveal themselves more strongly not on the Web we've got, but on the entertainment Web?

How can Microsoft be the future?
Those who take a dim view of Microsoft's contributions to the computing world (everyone with a keyboard, perhaps?) are likely asking themselves "But why Microsoft? Didn't it already lose the search war? Didn't it already lose the online music market? Isn't it always the follower? How can it possibly be the right choice for AOL?"

The answer would seem simple: It's got a fundamental presence in most of the right spaces, and it is joining the game in entering many others. Although Microsoft stil