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You've got scale: Why MSN is courting AOL

By Published on .

A deal to combine Microsoft's MSN and Time Warner's America Online would not only enable the two to together battle their biggest problem-Google-but also has the potential to deprive that rival of 11% of its revenue in one fell swoop.

As reports surfaced last week that made public what had been rumored for months-that Microsoft was looking for a way to position MSN to challenge Google and had begun discussions with Time Warner about constructing a deal with AOL-many saw potential in the combined strengths of Microsoft's No. 2 and Time Warner's No. 4 portals.

If the two behemoths were eventually to carve out a deal that enabled them to combine search advertising capabilities, it would almost certainly impact Google, the power behind AOL's paid and organic search. AOL is probably Google's largest AdSense client. According to a recent Google filing with the Securities and Exchange Commission, AOL accounted for 11% of Google's revenue for the six months ended June 30.

Another plus for Microsoft: A deal could give it access to what many view as AOL's killer app, its video-search product Singing Fish. "Singing Fish is a sexy application, especially when people talk about the next generation of advertising," said Joshua Stylman, managing partner, search marketing agency Reprise Media. MSN does not have a video-search tool.

Big property

Talks were first reported in The New York Post. Time Warner and Microsoft both declined to comment.

A deal between AOL and MSN could create one of the biggest properties on the Internet, posing a big threat to Google and Yahoo. According to Nielsen/NetRatings, AOL and MSN had an unduplicated audience of 120 million in August, dwarfing Yahoo's 100 million and Google's 80 million.

If AOL and MSN entered a partnership in which MSN powered AOL's search engine, and AOL dumped Google, that would give MSN access to a heavy stream of AOL traffic-75 million unique visitors, according to Nielsen/ NetRatings. From an advertising point of view, AOL visitors loiter on the site's pages for over six minutes-longer than visitors on any of the other big three. And as for AOL's money pressure? Microsoft would pay handsomely to step into this role, analysts believe.

Even better, "That would be a direct shot at Google," Mr. Stylman said. "Losing your biggest distribution partner is never a good thing."

Some hurdles

As for MSN, a possible trade for all that nice search traffic might be a chance to share in AOL's rich content. While MSN lacks a clearly defined content strategy, AOL, now offering its Web services for free, has a well-defined plan involving content provided by Time Warner siblings and developed exclusively to truss up the site.

Google will rake in nearly 25% of the projected $12.9 billion online ad spending this year, online market research firm eMarketer predicts. MSN and AOL had nice ad revenue growth so far this year, but nothing like Google's land grab. Google also dominates with 40.5% market share based on visits, according online competitive intelligence service Hitwise.

Several hurdles stand in the way of a deal. "You don't want to do a MSN-MSNBC remake where [the partners] are fighting over who is in control," said Tolman Geffs, managing director, Jordan Edmiston Group. Another issue: clashing of ancillary partnerships. One competitive problem might be between CNN [which feeds AOL] on air and MSNBC.

And then there's the possibility that Google may enter the fray. "It is entirely possible that Google could consider making a bid for AOL as well," according to a Merrill Lynch research report. "This would certainly protect Google's revenues from AOL as well as enable Google to keep 100% of the search advertising revenues as well as gain a significant amount of content," the report said.

Contributing: Nat Ives, Abbey Klaassen

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