In the battle between Microsoft (MSFT) and Google (GOOG) 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 (see BW Online, 10/13/05, "AOL's Growing List of Suitors"). Google, with a market value of $108 billion, is angling for a minority stake in AOL in combination with cable giant Comcast (CMCSA).
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.
BROADBAND'S CATALYST. 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 (see BW Online, 11/02/05, "Why Microsoft is Going 'Live'").
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."
LOCAL FOCUS. 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.
EYES ON OVERTURE. 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. (see BW Online, 9/20/05, "Can Microsoft Land AOL?". 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.
ACQUISITIVE INSTINCT. Teaming up with AOL, a one-time enemy, would be a classic Microsoft move. "Microsoft has a history of becoming a partner to former enemies," says Scott Cleland, chief executive of tech researcher The Precursor Group. "It's the company that saved Apple (AAPL)."
Microsoft also could be driven by sheer rivalry. Microsoft insiders view Google as a huge threat. And to the extent that they perceive Google wants AOL -- and make no mistake, it does -- it may just be in Microsoft's nature to want it more.