NEW YORK—As the overall U.S. economy goes through tumultuous times, the Internet sector finds itself in similar throes.
The industry is currently going through a stormy period of market consolidation unseen in several years—which is eons in the Internet age. Events over the last week underscore the importance of corporate alliances during an economic downturn.
AOL LLC, formerly called America Online, Inc., was once a market-leading web portal. The company, which has been floundering since its merger with Time Warner, Inc., announced that it had bought number three social networking site Bebo.com for $850 million in cash.
Meanwhile on the West Coast, senior executives at Microsoft Corp. and Yahoo Inc. continued to meet and discuss a potential Microsoft takeover of Yahoo.
The merger and discussions may not shake up the landscape on the Internet in the short term, but recent news signifies that the Web is going through a major transformation.
Both Yahoo and Google announced disappointing results last quarter, indicating a slow down in online advertising spending from companies pinched by the economic downturn. Even though Google is far ahead of its competitors in search engine reach, its disappointing results show that Internet giants are vulnerable to the swings of the economy.
To boost its advertising revenue, Google acquired Internet ad service firm DoubleClick last year for $3.1 billion.
Meanwhile, AOL's disappointing returns has weighed on the economic fortunes of parent Time Warner. Warner has seen its $240 billion market capitalization in free fall, and experienced a steep drop in AOL's number of subscribers from a peak of close to 27 million in early 2002 to less than 10 million today.
Warner has tried in the past, albeit unsuccessfully, to sell AOL to another Internet company. Last week's acquisition of Bebo shows the desperate nature of today's Internet market, which allows no room for anyone in second place.
It remains to be seen whether AOL plans to keep its independence with the new advertising base of Bebo's subscribers, or will the acquisition make the company seem more attractive for potential buyout suitors.
Meanwhile, Microsoft and Yahoo executives met to discuss Microsoft's plans to take over the ailing portal giant. Even with the merger, the two Internet giants will still lag far behind Google, which controls 54 percent of the search engine market, according to Nielson.
Will we see more consolidation in the works? It is still too early to tell, as recent history has shown how "killer apps" can quickly shift the fortunes of Internet companies.
Starting in early 2004, the abrupt and astonishing rise of social networking sites such as MySpace, Facebook, YouTube, Flickr, among others have caught Internet giants unaware and forced them to re-evaluate their strategy.
For Internet companies caught in an economic downturn, that strategy seems to be further consolidation.
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