I really didn't know how to react when I read yesterday that JPMorgan Chase put out a report valuing Time Warner's AOL division at a mere $4.2 billion, while a Pali Research analyst pegged it at $4 billion. I wasn't sure whether I should laugh, grimace, or just shake my head in dismay. I think I ended up doing all three of these things.

Like many Americans, I was introduced to the Web through AOL and saw it become the biggest darling in an Internet bubble that defied all expectations. So in 1999, there's no way I would have believed anyone predicting that AOL might finish this decade with a valuation less than one-fifth that of Yahoo! (NASDAQ:YHOO), one-seventh that of eBay (NASDAQ:EBAY), and one-ninth that of Amazon.com (NASDAQ:AMZN). Not to mention less than one-thirty-seventh that of a search company that had been founded only the year before: Google (NASDAQ:GOOG).

It has been a collapse of epic proportions, and it goes without saying that no one deserves more blame for it than AOL itself.

A comedy of business errors
In fairness to AOL, the migration from dial-up to broadband Internet access was bound to present a major challenge. The company tried forming partnerships with cable and DSL providers to deal with the threat, only to learn that as the consumer market evolved, these companies felt little need to share subscription revenues with AOL. But that's just it. If AOL had played its cards right, it could have been the kind of company that broadband Internet service providers (ISPs) actually felt they had to partner with.

Back in its heyday, AOL offered a lot of original content that couldn't be found elsewhere on the Internet. The company was actually ahead of its time here. Today, many broadband ISPs view the offering of premium Web content as a key part of their sales pitch -- witness Verizon and AT&T's (NYSE:T) deals with Disney (NYSE:DIS) to provide access to its ESPN360 service. But none of these ISPs have the clout and the national reach that AOL had at its peak. If developing a premium content platform had been AOL's focus, cable and DSL providers would have still had a good reason to partner with the company -- even as consumers became more comfortable browsing the Web on their own.

But instead, AOL kept promoting itself as nothing more than the Internet on training wheels. And as we all know, training wheels are meant to come off. With a business strategy like that, AOL's ISP business was doomed to gradually fade into irrelevance.

Of course, even if AOL had failed to develop a premium content platform that could appeal to consumers and ISPs, it could have still remained a major player on the Web, had the company shown a little more foresight. With a market cap that once hit $180 billion, AOL could have snapped up companies like Google, Amazon, eBay, and Priceline.com without much trouble. And even in the post-bubble years, there was a time when it still had the resources to acquire a MySpace, Facebook, or YouTube.

Instead, the company's Web purchases, from its 1998 buyout of Netscape to its 2008 acquisition of also-ran social networking site Bebo, have mostly proven to be duds. And the deal that AOL will best be remembered for, of course, is its merger with Time Warner -- a union with a cable/old media conglomerate that made little sense when you looked at AOL's history as an independent ISP, and even less sense when you considered the clash in business cultures.

How much value is left?
Now, the suits at Time Warner, having long taken full control over their acquirer, are trying to salvage what money they can from AOL by spinning the division off in an IPO. Only they're finding that the going rate for this fading star is a lot less than anyone could have imagined a short while ago. But at such a depressed valuation, might AOL be a good value play?

I'm not sold on that, given the issues that AOL still has to deal with. The company's ever-dwindling dial-up ISP business might decline even faster than the market expects if the White House gets serious about pursuing its goal of universal broadband access. Mapquest, arguably the biggest gem among AOL's Web assets, is steadily giving up market share to Google Maps. AOL's Web advertising business, pieced together through several acquisitions, has its work cut out competing against a dominant Google and a hungry Microsoft (NASDAQ:MSFT). And though AOL does have a few other Web properties with some value, such as its Weblogs Inc. blog network, nothing there screams potential.

Seen in that light, Time Warner would be well-advised to swallow its pride and take the $4 billion or so in value that the market might afford AOL. With this one-time giant, there always seems to be another shoe to drop.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Google is a Motley Fool Rule Breakers pick. Amazon.com, Walt Disney, eBay, and Priceline.com are Stock Advisor recommendations.The Motley Fool has a disclosure policy.