Microsoft, AOL Sign 10-Year Search, Display Deal to Rival Google's Ad Dominance

Microsoft Usurps Google as AOL's Search Provider; AOL Assumes Microsoft's Ad Sales

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Once again Microsoft is making a run at Google by forging an alliance with one of the web's biggest portals.

Microsoft and AOL have inked an exclusive 10-year deal that will see Microsoft's Bing replace Google as the search engine providing 100% of the organic search results and search ads when people search on AOL's sites. But the deal, which starts on Jan. 1, 2016, doesn't only target Google's search dominance. As part of the arrangement, AOL will now handle display, mobile and video ad sales for all of Microsoft's properties -- such as MSN, Xbox and Outlook -- in its top nine global markets, which include the U.S., U.K., Canada, Brazil, France, Germany, Italy, Spain and Japan.

Executives from Microsoft and AOL declined to comment on the terms of the deal, such as how the companies will split ad revenue, and how else money may be changing hands between the two tech giants.

The deal between Microsoft and AOL appears to be aimed squarely at Google, which has dominated the search-and-display ad market for years and has provided search results and search ads for AOL's sites since 2002.

Of the $81.6 billion eMarketer expects advertisers to spend on search ads worldwide this year, 54.7% is expected to go toward Google and 4.2% to Microsoft. And of the $27.1 billion that eMarketer expects advertisers to spend on digital display ads in the U.S. this year, 13% is expected to go to Google. Microsoft is expected to receive 1.7% of that money, and AOL 3.5%.

Obviously Microsoft and AOL have a lot of catching up to do, but the companies are banking on the tie speeding up the process.

"Our clients will benefit from a very scaled solution to distribute media money at a global scale on the ads side, but also we're going to get a comprehensive search offer out of the deal that we think brings exceptional search capabilities, a great consumer experience and something that Microsoft continues to invest in," said AOL President Bob Lord.

In addition to increasing the ad supply that Microsoft and AOL can sell to advertisers, the deal should grow the number of people -- or "reach" in industry parlance -- that the two companies can sell. Microsoft and AOL are still ironing out details to make sure they don't violate their respective users' privacy, but the companies plan to eventually combine their user data as well as AOL parent company Verizon's customer data, so that brands will be able to target their ads based on that data.

AOL and Google most recently renewed their search agreement in 2010, but that renewal expired this year. AOL wasn't looking to re-up with a standalone search deal, but was instead "looking for an enterprise-wide deal," Mr. Lord said. He declined to say whether AOL had broached the idea of a similar-in-scope deal with Google, though that may have been difficult, since Google has built its own massive display, video and mobile ad-sales organization.

A Google spokeswoman was not immediately able to comment on the news when contacted on Monday.

The search deal between Microsoft and AOL is similar to the alliance Microsoft struck with Yahoo to supply organic search results and automate search ad sales for that portal's properties. However that alliance isn't as strong as it once was. Earlier this year Microsoft and Yahoo renewed their deal in a way that loosened ties by removing the exclusivity clause so that Yahoo could provide its own search results and ads or source results and ads from another company like Google.

The Microsoft-AOL deal is yet another blow to the search empire Google has built beyond its own sites. Late last year Yahoo replaced Google as the default search engine on Mozilla's Firefox web browser, and the portal is reportedly jockeying to also usurp Google as the default search engine for Apple's Safari browser; the deal between Google and Apple is set to expire this year. However it's unclear how big of a blow the Microsoft-AOL tie-up may be to Google's search dominance.

"It sounds like a good deal if any customer base is actually using AOL. I guess that would be my first thought. But I like the notion of competition. I think Google needs some," said Forrester analyst Shar VanBoskirk.

"I still think it will be just a blip," said one search agency exec when asked whether the Microsoft-AOL deal may lead advertisers to reallocate their search budgets and potentially take money from Google to give to Microsoft-AOL. Google still offers a lot of untapped search inventory that the effort to shift not only budgets but internal ad-buying processes to another search engine "becomes prohibitive."

"I think you'll see more budget go in [Microsoft's and AOL's] direction, but I don't think it will be any sort of game-changer," the exec said.

Google accounted for 64.1% of the desktop search queries conducted in the U.S. in May 2015, according to comScore, which does not release mobile search figures. By comparison Microsoft accounted for 20.3%, Yahoo for 12.7% and AOL for 1.2%.

Google has a similarly large share when it comes to searches powered by its technology, whether that happens on its own sites or other sites that use its search technology. Google provided the organic search results for 65.2% of all U.S. desktop searches in May, compared to 31.4% that were powered by Microsoft's Bing, according to comScore.

But when it comes to search, any increase in volume is a win because the primary way to improve search results and therefore get more people to use a given search engine is to have that engine process more search queries. The more queries, the more opportunities for a search engine to learn what are the best responses to those queries.

The deal with AOL effectively marks Microsoft's exit from the ad-sales business. A "big number" of employees from Microsoft's ad sales and marketing organization will join AOL as a result of the deal, said Frank Holland, corporate VP of Microsoft's advertising and online division. He said that over the next couple of days he'll be "working the phones pretty hard with the most senior clients around the world" to discuss what the deal means for them. An AOL spoksperson said 1,200 people will be moving from Microsoft to AOL.

Microsoft's automated search ad-buying tool will handle ad sales for searches conducted on Microsoft's and AOL's sites. Mr. Holland and Rik van der Kooi, Microsoft's corporate VP of its advertiser and publishers solutions group, have discussed the possibility of syndicating those automated search ads as display ads -- like how Google does with its AdWords product -- but haven't committed to any plans.

In the 10 global markets that AOL will not be handling Microsoft's display ad sales, Microsoft-backed AppNexus will take over the duties, said Mr. van der Kooi.

This isn't the first time Microsoft and AOL have teamed up to take on Google. In 2011 the two companies and Yahoo joined together to sell each others' leftover ad inventory in hopes of spurring more demand from advertisers by offering more ways to reach as many, if not more, people that brands could get through Google's ads. However that deal took a while to get off the ground and never seemed to get as much traction as initially expected.

Mr. van der Kooi described that three-company partnership as "deliberately a toe-in-the-water approach" to see if the companies could increase demand from advertisers. "If we wanted to do something meaningful for customers and in response to their requirements of reach and sacle and targetability around larger audiences," he said, "we knew we had to make a much bigger leap." Now it has.

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