The Stakes in the Fight for AOL
Both Google and Microsoft have deep pockets,
and each sees a deal as its chance to dominate the Web
NEW YORK CITY (By Steve Rosenbush, Business Week) November 7, 2005 —
In the
battle between Microsoft and Google for a stake in Time Warner's AOL
division, both companies clearly have the means to win. Analysts say AOL is
worth about $20 billion. Google, with a market value of $108 billion, is
angling for a minority stake in AOL in combination with cable giant Comcast.
Microsoft is considering taking a stake in the AOL business, too. The
software giant has a market cap of $283 billion. Since either company could
do it, the real issue is which suitor wants — indeed, needs — AOL more.
In this contest of wills, Microsoft may have the edge, Internet executives
say. The software giant is well aware that the source of its power,
dominance of the computer desktop, isn't enough anymore. The focus of the
computing world has been shifting from the PC to the Web for years.
Microsoft acknowledged as much on Nov. 1, when it unveiled Microsoft Live,
which includes online counterparts to its Windows and Office software
franchises.
That transition is picking up speed, thanks to the rise of faster Internet
connections and other improvements in technology. Says one Internet
executive: "Microsoft believes it has to have AOL."
Microsoft's motivation reflects an interest in a form of Internet
advertising known as paid search, which lets advertisers bid for prominent
display when people search topics relevant to their brands. For example, a
car dealer in San Antonio might win the right to appear as the top search
item when people hunt for car dealers in that city.
The potential for paid search is huge. Net surfers increasingly use search
engines as their primary tools for navigating the Web. Once a service
offered by larger portals, there's a growing number of engines that allow
surfers to search for specific topics, such as video, music, and images.
Search is becoming increasingly broad and sophisticated, and it could
eventually replace the remote-control as video, TV, and the Internet merge.
As local search engines become more refined, they could provide an
alternative to classified ads offered by local newspapers or Web sites like
Craigslist.
Microsoft believes paid search is absolutely crucial to its future, people
familiar with the company say. Google is equally committed to paid search,
but it's more inclined to think it can reach its goals by itself.
By teaming up with AOL, Microsoft would achieve enormous scale on the Web.
It would combine its 114 million monthly MSN users with AOL's 112 million
unique users. That would dwarf Yahoo and Google, which have 121 million and
80 million, respectively. Microsoft would add users from the Web site
associated with Microsoft Live.
It could also pressure Yahoo's paid search business. MSN's paid search tool
is powered by Yahoo's Overture division. MSN could yank away up to 30% of
Overture's revenue, weakening its business. That would make Overture a
potential takeover target for Microsoft. By acquiring Overture and linking
up with AOL, Microsoft could clear the way for a one-on-one battle with
Google for dominance on the Web.
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