Digital Thoughts – AOL-MSN or is it MSN-AOL?

AOL earned more than a billion dollars last year on advertising revenues and will earn even more this year. A healthy chunk of those ad revenues come from search, and no surprise to those in our industry, AOL’s search revenues come from Google. The two companies’ relationship began in 2002, when Google successfully replaced Overture as AOL’s pay-per-click listings provider, breaking up the monopoly Overture had on the top three sites, Yahoo, MSN, and AOL. Besides aggressive revenue shares, AOL received north of seven million shares of Google stock. The revenue share gave AOL upwards of 85% of the $380 million they earned Google, and their shares, even at close to IPO price, gave AOL an additional billion dollars. All of which makes AOL of interest not just to Google but Google’s archrival, MSN.

The battle between Microsoft and Google is over two things, the Internet and search. Despite their being Google’s largest pay-per-click partner, Microsoft’s eyeing AOL has seemingly nothing to do with search. It’s all about the battle over Internet supremacy and even more so about trying to damage Google (AOL still accounts for at least 10% of their revenues). The potential damage to Google aside, AOL has assets that could help Microsoft narrow the gap between Yahoo and Google and their own MSN. AOL’s, often battered and seemingly beleaguered by the press, subscription service still has enough users to generate $7 billion in yearly revenues. Their instant messenger program still leads all others with 54 million installs, and an MSN/AOL partnership would create an entity with a combined 90 million users.

The timing of an MSN/AOL deal works well too. MSN recently launched their own advertising platform, which leaves AOL as the last of the big portals unable accept direct search buys. The one billion dollars plus of Google stock owned by AOL have all been sold, leaving the company free to explore its options. The Google/AOL search contract signed in 2002 most likely comes up for renewal in a year or two. Were MSN to step in before the contact ended, it might seem awkward, but it would not be unfamiliar territory, as the same thing happened when Yahoo purchased MSN’s pay-per-click search listing supplier, Overture. And, now that MSN has its own pay-per-click engine, it can fully leverage the user base of both sites, including contextual possibilities, helping MSN greatly with respect to product parity. For example, they could come closer to Google and Yahoo who both have contextual advertising programs, the former with a large network, the second just starting to grow its network.

For all their differences, Google and Microsoft share, at some level, the same mission. They both want to play a key role in the way users manage digital information. And, they are both a product of their times. Twenty-five or so years ago when Microsoft formed, the Internet wasn’t the emerging medium for digital information. The personal computer was. To own the desktop was to wed oneself to the user. Fast forward to 1998 when Google was just launching. The desktop was powerful, but it wasn’t the hot place to be for either growth or digital information. The Internet was. And while there isn’t an OS for the Internet, search and/or the browser come close. Google probably could have decided they wanted to make a better web browser; fortunately, their research led them down the path of search. And, while, they most likely had a feeling about the power of search, chances are, at first, they didn’t know what that instinct would mean. They probably knew that if done well it could lead to a run-in with Microsoft but probably only with respect to searching the Internet. It’s unlikely they could have guessed seven years ago that they could threaten Microsoft not just with respect to the Internet but the desktop as well.

Whether they intended to or not, Google has changed the way we interact with information, and it’s a change that has Microsoft concerned. The best illustration comes by comparing Outlook to Gmail. As far as robustness goes, Outlook is a much more feature rich product (as it should be given that Gmail is free and Outlook not). With respect to corporations, Outlook Exhchange, in order to have those features stores email accounts separately, thus requiring a lot of space. Gmail, is the opposite, and when it came out effectively turned email on its head. Rather than storing each user’s information separately, Google stores emails anywhere they can. They rely on their search technology to quickly retrieve all messages flagged for a particular user id and recreate the display every time a user logs in. That is what Google means when it says, “Search don’t sort.” In fact, there is no sorting. And, the same holds true for their desktop application. While I use Yahoo’s X1 powered desktop search, the impact is the same. These tools are so good at indexing and finding the information on your desktop, you don’t need complex folder systems. You just need a name, phrase, i.e., keyword of something in the piece of information you want retrieved. In other words, you aren’t looking, you are searching.

Successfully, changing user behavior towards searching and not filing was Google’s first big achievement. Their second was unsuspectingly hooking users on web-based applications, ones that could run from any machine so long as it had an Internet connection. Not only that, but Google made these programs often fun, unique, viral, and most importantly, best of breed, not to mention free. Google was the first to offer an obscene amount of email storage with Gmail, upwards of 1000 times more than what some sites offered, giving it away for free where others charged a yearly fee. Not only that, but they continue to increase not just the amount of storage (more “every day!”) but the features Gmail offers… all of which help not just attract users but get them more comfortable and confident in their web based applications. This is something Google’s recent distribution deal with Sun’s Java should continue to do. The agreement certainly sparked plenty of web-based Microsoft Office replacement chatter, quickly dubbed Open Office, and if possible, it’s a topic, along with Google’s WiFi release, worth exploring next time.

At the end of the day whether MSN partners with AOL and whether that partnership yields the Internet gains each company wants almost doesn’t matter. Microsoft is on a mission, and when someone is on a mission, it’s hard for them to let go. Microsoft wants to punish Google. The torrid snippets of dialogues from internal meetings and memos have done more than enough to establish that. The big question from Microsoft’s point of view is, in their quest to win this battle have they lost sight of the war? Lucky for Microsoft, they still have a more than enviable cash position. That, however, wasn’t enough to save IBM when they finally realized the power of the company they helped set in motion. And chances are it won’t be enough for Microsoft; although whether Microsoft undergoes similar struggles and winds up a services company remains to be seen. Microsoft has made it big once, and Google is on their way. Both know that once a company controls your information by empowering you, it’s hard to live without them. Hard to say who will win. Either way, we’re seeing history being made.