Microsoft Looks Beyond AOL

December 26, 2005 0

AOL deal loss is not the end of the search affair says the Redmond Vole!

Time Warner has chosen Google as the most suitable partner for its America Online Internet unit–but the game isn’t over for jilted suitor Microsoft.

Microsoft plans to leverage its desktop market dominance to compete with Google on search and advertising, analysts said – despite losing out to Google in the race to become the partner for Time Warner’s AOL unit.

After spending much of this year wooing AOL in an attempt to get its search business, the Redmond, Washington, software giant was pipped at the post by Google. Google and AOL announced that Google will invest $1bn for a five per cent stake in AOL under a broad partnership that expands their existing search engine deal to include collaboration on advertising, instant messaging and video.

But given that AOL and Google have had a search engine agreement for three years, ‘at the end of the day, nothing much has really changed’ for Microsoft, said Michael Gartenberg, an analyst at JupiterResearch. "From Microsoft’s perspective, the ability to do a deal with AOL would have been a good thing, but it was not a critical thing."

Google also is offering a $300 million credit that AOL can use to buy keyword-based ads from Google, and AOL will be able to sell all types of ads on Google sites and its publisher sites that display ads powered by the search giant. In addition, Google will help AOL better expose its content to Google’s Web crawler.

Microsoft plans to integrate desktop search into the upcoming version of Windows, code-named Vista, and eventually extend that to the Internet, Gartenberg said. "When search becomes an integrated part of the Windows experience, that will put Google on the defensive," he said.

Adam Sohn, an MSN director, said the fact that the search business is still in its infancy and online ad spending is booming means it is anybody’s game going forward.

Yeah, it would have been nice to bootstrap that (AOL) ad network, sure. But, do we need it? No, he said. This is a long-term strategic bet for us, and we are going to continue on with the plan we have today.

Microsoft also is expected to gain traction with its brand-new AdCenter pay-per-click advertising service that is being tested and its year-old search engine, said Rob Helm, director of research at independent research firm Directions on Microsoft.

It is definitely a lost opportunity for Microsoft, but also Microsoft is looking at this as a long-term process and still has assets to deploy such as integrated search in Vista, Helm said. So Microsoft, in a sense has not really started the competition yet.

Microsoft could bundle different Internet advertising types and pricing together to try to compete with Google’s ad business, said Charles Di Bona, an analyst at Bernstein Research. It also could offer minimum revenue guarantees or more favorable revenue-sharing terms, he said.

Microsoft "remains in a better position to sell a bundled Internet advertising offering, including display and search, which could be appealing to advertisers as they expand their nontraditional spending and, frankly, feel their way through the issues of mix and methodology in approaching the Internet medium," Di Bona wrote in a research note.

We continue to view Microsoft’s competition with Google to be a prolonged, multi-move game, and while Microsoft has slipped in the first few rounds, we expect the company to move into the next round relatively swiftly and most certainly aggressively, he wrote.

Meanwhile, Sohn did not dismiss the possibility of striking a deal in the future, though. "We would never preclude ourselves from a partnership that makes sense," he said.