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December 6, 2005

Buzz: AOL and Microsoft near ad deal

Posted by David Hunter at 9:38 AM ET.

It’ll be an AOL and Microsoft alliance according to the Wall Street Journal, but see below for an alternative view. Reuters:

Time Warner Inc is closing in on a deal with Microsoft Corp. to team up on an online advertising service to compete with Google Inc, the Wall Street Journal reported on Tuesday, citing people familiar with the talks.

The paper said the two companies were now focusing on a deal that would combine their advertising-related assets, with little or no money changing hands.

The Journal said that, under negotiations between Time Warner and Microsoft, AOL would drop Google as its main Internet search provider and switch to Microsoft’s MSN service.

Under their current agreement, Google derived about 11 percent of its first-half revenue from AOL, which also generates substantial revenue from the contract.

The Journal said Microsoft and Time Warner are also negotiating to create a joint advertising sales force to sell online ads across both the AOL unit and Microsoft’s MSN. Both services would remain under the control of their current owners, according to the report.

A deal with Google is still a possibility according to the report, but if all goes well, the Microsoft/AOL agreement would be announced in the 3rd week of December. This deal would certainly be significant, but it’s quite a bit less than the AOL acquisition rumors that had been floating around a month ago. One reason for that:

Billionaire investor Carl Icahn, who has been critical of Time Warner’s strategy, has also said that he would hold Time Warner board members personally responsible if they forged a deal for AOL that valued the Internet provider too cheaply.

Saul Hansell at the New York Times has some background and presents a different view of the likely outcome:

By this account, Google, which values its neutrality, is making proposals that do not involve an investment in AOL at all. It would offer to give AOL an even greater share of the revenue – currently about 80 percent – from search-based advertising placed on AOL sites. Google would also find ways to drive traffic from its sites to AOL.com.

Microsoft’s bid to AOL is in flux, one executive briefed on the negotiations said, but most of its proposals no longer involve its taking an ownership stake in America Online.

In addition to Microsoft’s search technology, some options involve a joint venture between AOL and Microsoft in advertising sales. The companies are also said to be discussing linking their instant-messaging systems, but since these systems are seen as critical drivers of customer loyalty, it is a delicate area.

Jordan Rohan, an analyst with RBC Capital Markets, said he felt that Mr. Parsons had always preferred to keep substantial control of America Online and was mainly seeking the best terms for the right to provide search on AOL.

“Parsons has done a masterful job of making it look like AOL was for sale when I don’t think it was,” he said. “The most likely outcome is simply an improvement in the terms AOL gets from Google.”



Filed under AOL, Advertising, Alliances, Coopetition, General Business, Google, MSN

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One Response to “Buzz: AOL and Microsoft near ad deal”

  1. Microsoft News Tracker » Blog Archive » Time Warner CEO Says AOL Is Not for Sale Says:

    [...] This confirms the basic thesis of today’s earlier rumor, but still leaves us guessing as to the likeliest suitor. Microsoft and Google may be in the dark too.   [Permalink] [...]

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