The Battle for AOL Heats Up - Impact on the Search Market
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Let’s fantasize for a moment. As of August, 2005, according to Forbes.com, Google sits atop the #1 spot with 37.3% of search engine queries, up from 36.5% reported in July, 2005, with Yahoo a close second at 29.7%, down from 30.3% in July. Spots three and four are only separated by one percentage point, and are occupied by MSN, with 15.8% of the offering, up from 15.5% in July; and AOL Search, with 9.6%, down from 9.9% in July. An AOL-MSN team-up would put give them about 26% of the searchers, an even closer third to Google and Yahoo than it is currently, and on its way up. AskJeeves and AltaVista take positions 5 and 6, with 3% and 1.6% respectively.
While merging with MSN would throw the search engine industry into a tail-spin, close to unseating Yahoo from the #2 spot, the battle for AOL has really only just begun. MSN is seeing its numbers increase on its own, thanks in part to its new RankNet technology, while Yahoo’s numbers are declining. But MSN still needs some help. Time-Warner’s CEO, Dick Parsons, understands how important a merger would mean to MSN, and they are not going to finalize any deal without walking away with a big prize. So what does MSN have to offer AOL that Google does not? And what would AOL gain from a merger or even a co-op with MSN? According to David Card, an internet analyst at Jupiter Research, a hookup between the two "is risky for AOL unless there's a big payoff." Analysts say that while an outright buyout of AOL is probably unlikely, a partnership could bring some benefits to AOL, if the price is right.
Google states in its latest 10-Q quarterly filing with Securities and Exchange Commission (SEC), "We rely on our Google Network members for a significant portion of our revenues, and we benefit from our association with them. The loss of these members could adversely affect our business...advertising and other fees generated from one Google Network member, America Online, Inc., primarily through our AdSense program, accounted for approximately 12% and 11% of our revenues in 2004 and in the six months ended June 30, 2005, respectively." What is ironic is that AOL sold some of its stake in Google for $195 million, in May of 2004, retaining 5.1 million shares; then almost a year later, sold off the remaining shares for a cash amount totaling $940 million, reported in the second quarter of 2005. (Figures are from the Washington Post.)
In a second SEC filing, Google also says, "We expect that Microsoft will increasingly use its financial and engineering resources to compete with us....They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers and web sites. Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate Internet portals with a broad range of content products and services."
While this may be considered educated guesswork on the part of Google, no one is really fooled here. AOL had presumably also talked with both Yahoo and Google, so it’s highly likely that Google may have an insider’s view into what AOL is looking for. Google’s insight writing in its secondary filing would certainly indicate a good motive for MSN wanting to acquire AOL. But is there more to it than simple financial competition?
As the battle for AOL heats up between Google and MSN, it’s a pretty good position for AOL to be in. While AOL may go to the highest bidder, you can probably expect that this will continue well into next year, even though executives at MSN say they would like to have this wrapped up in the next couple of months. Further, with the hotheads over at Microsoft, chair-throwing CEO Steve Ballmer in particular, Google’s rumored bid attempts of AOL cannot be going over well. In fact, the once considered chess-match has seemed to escalate into an all out war.
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