MS and AOL, what good can come of this?

Thought this was interesting, from the wall street journal online.


Microsoft Considers Taking Stake
In Time Warner's America Online

By JULIA ANGWIN and ROB GUTH
Staff Reporters of THE WALL STREET JOURNAL
September 15, 2005 1:47 p.m.

Microsoft Corp. is in talks with Time Warner Inc. about taking a stake in the media giant's America Online unit, as part of a broader discussion about the two companies working together, according to people familiar with the matter.

The conversations have centered on whether AOL would switch to using Microsoft's search engine, these people say. AOL currently uses Google Inc.'s search technology and was Google's single largest source of revenue last year.

The talks, which were described as "preliminary," have also included discussions of combining the advertising sales forces of AOL and Microsoft's MSN, these people said.

Time Warner and Microsoft spokesmen declined to comment. The talks were first reported by the New York Post.

The discussions between once fierce rivals, AOL and Microsoft, illustrate how much has changed in the Internet industry. Just a few years ago, AOL and Microsoft were locked in a fierce battle to win dial-up Internet customers. Now the dial-up business is in decline and the big prize in the Internet industry is advertising revenue -- and both AOL and Microsoft are lagging behind Google and Yahoo Inc. in that arena.

Microsoft is obsessed with overtaking Google, which has built a $3 billion business selling ads on its popular search engine. Microsoft has been chasing Google for three years in Internet search, building a viable search engine in short order but not making the advances in market share and other areas that executives have hoped, according to people familiar with MSN.

At Microsoft's annual meeting with financial analysts in July, Microsoft Chief Executive Steve Ballmer likened his company's pursuit of Google to Microsoft's mostly successful fight to best International Business Machines Corp. in business software over a decade ago. Mr. Ballmer said in July Microsoft will "do what it takes to keep coming and coming and coming and coming on this front."


The thaw between Microsoft and AOL dates back to 2003, when Microsoft agreed to pay $750 million to settle an antitrust lawsuit brought by AOL's Netscape division. At that time, the two companies also agreed to cooperate on the development of new copyright-protection technology.

Since then, the two companies have worked together on fighting spam and other technology issues. In January, Microsoft briefed AOL executives about its new search engine, according to a person close to the situation. At that meeting, this person says, Microsoft said it would try to make it financially beneficial for AOL to switch to its technology. A person close to the discussions says the discussions have been "on and off" since January and many different proposals have been floated.

Although AOL's Internet access business is in decline, AOL still generates a lot of traffic -- making it a rich prize for search engines that thrive on huge volumes of traffic. AOL counts 110 million unique visitors to its online service and network of Web sites each month.

Since 2002, AOL has been using Google's search engine for its properties. Under the agreement, Google pays AOL a portion of the advertising revenue generated from searches by AOL users. In 2004, AOL received about $300 million in revenues from the arrangement. Google says in filings with the Securities and Exchange Commission that AOL accounted for 12% of revenues in 2004. No other customer accounted for more than 10%, it said.

--Kevin Delaney contributed to this article

Write to Julia Angwin at [email protected] and Rob Guth at [email protected]



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