WHY MICROSOFT NEEDS AOL DEAL MORE THAN GOOGLE

Redmond Giant Lags Behind in a Search-Intensive Ad World

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NEW YORK (AdAge.com) -- If Microsoft Corp. trumps Google in the battle to be Time Warner’s AOL business partner, no one in Web world will be surprised. Most observers agree Microsoft needs the gig way more than Google does.

Although both Google and Microsoft can give AOL the two things Time Warner CEO Richard Parsons said it needs -- a wider audience and better technology -- the stakes are higher for Microsoft, which wants to become a significant player in search advertising online.

Google is the No. 1 search engine, which puts Microsoft in a category it doesn’t often find itself in. “Microsoft, in an unusual role for them, are the underdog in search,” said Jeff Lanctot, VP-media and client services, Avenue A/ Razorfish. “The underdog has to fight a little bit harder.”

As important, Microsoft is in the midst of a company makeover to try and derive more revenue from advertising rather than remain strictly a technology business. This week, Steven A. Ballmer, Microsoft CEO, said that online advertising spending is of “keen interest” to his company. Microsoft’s Windows Live Web-based software products for consumers are the first major play in that direction.

And, the company is desperate to prove the efficacy of its new AdCenter service, which 500 U.S. advertisers are currently testing. The service will ultimately expedite ad placement of all sorts, but has rolled out in beta with just a paid-for-performance, auction-type, paid search offering. The MSN Search engine (which will presumably become Windows Live Search), started up last February, but has yet to demonstrate its mettle.

Search is a central part of consumers’ Internet time. Only 4% of adult Internet users never use search, according to an eMarketer study.

“Winning AOL as a big client might make it a little easier to sell the search,” said Joe Wilcox, senior analyst and Microsoft specialist at online market research firm Jupiter Media. Before AdCenter moves out of beta sometime next year, “it would be great to have a showcase customer in place. And AOL would be quite a showcase customer.”

Now that deal talks are reportedly focusing on non-financial arrangements, media buyers speculate that the only reason AOL is still holding discussions with Google is because AOL wants to hammer out better terms than the 80% revenue split it currently gets for sponsored link clickthroughs. (An AOL executive would not verify that split, but said it’s in the ballpark.) Then, AOL could demand Microsoft improve on those terms, dump Google and partner up with Microsoft.

Google, however, would not be happy to lose the 11% of its online ad revenue that AOL pays for its search engine power each year. But for Google to morph its AOL relationship from vendor to a full-on business development deal would mean a huge cultural shift, said David Hallerman, senior analyst at online market research firm eMarketer. “Google either builds up services from the inside or buys small companies and grows that service,” Mr. Hallerman said. “The idea of having such a large partnership goes against anything Google has done up to now.”

For Microsoft to make its new ad-directed strategy work, search is crucial. “This is Microsoft’s first and best chance to show they can build a great ad product and marry technology in a way both consumers and advertisers respond to,” Mr. Lancot said. “If they can have success here, it will be an indicator that they can have success in any area. If they fail, they need to take a look at their ad strategy.”

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