Devil's Advocate: The fate of AOL

As rumours circulate that Time Warner may sell off AOL to another big-name internet player, Martin Brampton wonders if this age of mega-mergers is good for anyone in the long run.

Once seen as a leader of the new connected world, AOL now seems to be a waif looking for a good home. The merged company that now prefers to be known only as Time Warner saw its share price rise sharply on talk of selling AOL. Google or Microsoft were mentioned as possible buyers.

With the benefit of hindsight, Steve Case's claim to fame is the most massive reduction in shareholder value ever seen. He engineered the merger of AOL with Time Warner at a time when optimism was at a peak and the traditional Time Warner assets seemed old fashioned. Fashions quickly change, and now Time Warner has corporate raider Carl Icahn snapping at their heels looking for radical change.

It is hard to know exactly which trend Case exemplifies. While people like him and Carly Fiorina have presently withdrawn from the limelight after presiding over disastrous mergers, the trend continues. Huge deals continue despite all the evidence that shareholders are worse off afterwards. So if we were to suppose their actions might have triggered a reaction to unproductive financial engineering, we would be mistaken.

Yet most of these disasters were largely anticipated. It has long been established that very large corporate takeovers lose money for most shareholders. And most mergers are takeovers behind the polite front. Building ever-bigger companies seems to serve executive egos and pockets far better than it serves the interests of ordinary shareholders.

But ordinary shareholders have, like ordinary customers, very little say in what happens. At the same time as the shareholders' money is being squandered in the creation of mega-corporations, competition is being driven out by dominant players. At one time, AOL was seen as a focus of power that could challenge Microsoft's domination. When it bought Netscape, it might even have challenged the dominant Internet Explorer web browser.

All that is a thing of the past now, as markets speculate over whether Google or Microsoft might pick up what remains of AOL. While both are playing down any interest, Microsoft seems much the more likely to make a move.

Google is still basking in the warm glow that it deservedly received from its innovative approach to search engine operation. There are two reasons for supposing that Google might buy into AOL, both of them bad. One is that Google has a large bank balance since its stock market offering. The other is that Google needs to find ways to retain its favoured position and justify its share price.

The history of companies having money burning a hole in their pockets while having no clear idea of what to do with it is as cheering for investors as the history of large mergers. And while it is true that Google cannot sustain its present position without developing new sources of revenue, it is not the least clear that owning all or part of AOL would be a helpful step to solving that problem.

Microsoft, on the other hand, both has the cash and the motivation to extend its already significant grip on the internet. Clearly, both AOL and MSN appeal only to the internet users who feel they need somewhere cosy from which to view the wider world. It seems this is a very large group, and even if some people fall out of it, there are still new arrivals. Moreover, Microsoft is using it as a lever to further consolidate its grip on the desktop operating system market.

It is all very speculative at this stage. But it would not be very surprising if AOL were to disappear into being just another part of the growing MSN umbrella. That will not be a good outcome for diversity and innovation.