Google, AOL deal leaves Microsoft spurned

America Online (AOL) has sealed a late deal with Google to deepen their relationship, while leaving Microsoft as the spurned suitor.

The software titan’s failure to woo AOL away from Google in favour of its own search technology highlights the uphill battle Microsoft faces as it tries to gain traction in the lucrative business of selling online ads.

Yet industry analysts say the lost bid also shows that Microsoft, its fiercely competitive culture notwithstanding, wasn’t willing to go to unreasonable lengths to make a deal work.

“I think they’ve learned that you don’t do a deal at any price just to do a deal. You do a deal that makes sense for you,” said analyst Michael Gartenberg, with Jupiter Research.

AOL parent Time Warner and Google announced a broadening of their search and advertising partnership late on Tuesday. The deal followed a long courtship in which Yahoo was also, for a time, a suitor.

Under the deal, Google will pay $1-billion for a 5% stake in AOL and continue to provide search technology for AOL.

Among other terms, Google also agreed to integrate AOL’s video clips in its fledgling video service.
AOL also will sell graphic ads that will appear on the Google network, and AOL gets credits to promote its websites and content through the search engine’s keyword ads, known as sponsored links.

Also, people who use the Google Talk instant-messaging system will be able to communicate with people using AOL’s instant-messaging program—as long as they sign up for a free AIM screen name. That part of the deal could mark another blow to Microsoft, which has long hoped to strike a deal with AOL to make its MSN Messenger work with AOL’s market-leading messenger.

Cash investment

Microsoft, by contrast, wasn’t interested in a cash investment in AOL, say officials familiar with both sides of the talks. The software maker had tried to persuade AOL to set up a shared online advertising business in which both companies held a stake, according to a person familiar with the Microsoft camp. The officials spoke on condition they not be named because the discussions were confidential.

That doesn’t ease the sting to Microsoft, which was late to develop its own search-engine technology and only recently launched its own platform for the lucrative business of selling paid ads that often accompany search results.

A deal with AOL would have jump-started both efforts.

“It slows their progress. It doesn’t eliminate their progress,” said Marianne Wolk, research analyst with Susquehanna Financial Group.

The deal also would have been a coup if only because it would have meant a loss for Google.

White-hot in the eyes of investors, Google is showing early success in profiting from the movement of computing from the desktop to the web. That could eventually pose a massive threat to Microsoft’s core businesses.

“It clearly would’ve given them bragging rights and it would have done Google a lot of damage,” said analyst Rob Enderle.

High stakes

On the other hand, Enderle said, the stakes were significantly higher for Google to make a deal work.

AOL is Google’s biggest customer, accounting for about $420-million, or about 10%, of Google’s revenue during the first nine months of this year, according to regulatory filings. Losing the deal would have represented a blow to both the company’s revenue and its image as the search market leader.

Also, while online search technology is at the centre of Google’s business, Microsoft’s MSN online unit represents just a portion of its business and the company still makes the bulk of its money from its Windows and Office franchises.

“For Microsoft it was kind of a nice-to-have,” Enderle said. “For Google it was a must-have.”

A deal with Microsoft would have been considerably riskier for AOL since Google’s online advertising business is more firmly established and Microsoft is the relative newcomer.

“Given that there was a fairly successful relationship already established between AOL and Google, the old maxim of ‘if it ain’t broke, don’t fix it’ certainly would be coming into play,” said David Garrity, director of research for Investec’s United States operations.

Still, Garrity thinks Microsoft’s inability to strike a deal shows that the software giant, which recently announced a big push into web-based software and services, still has work to do if it wants to compete effectively with Google, Yahoo and others online.

As it moves to launch a new set of internet-based offerings for things such as checking e-mail and doing business tasks, Microsoft is weathering criticism that it is losing ground to younger, more nimble competitors.

The software giant recently announced a reorganisation that was aimed in part at addressing such bureaucratic woes.

“I do think from a cultural standpoint that Microsoft is not yet quite thinking in the way that they need to competitively,” Garrity said.—Sapa-AP

Associated Press reporter Anick Jesdanun in New York contributed to this report

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