Microsoft looks beyond AOL

Time Warner has chosen Google as the most suitable partner for its America Online Internet unit--but the game isn't over for jilted suitor Microsoft.

The Redmond, Wash., software giant plans to leverage its desktop market dominance to compete with Google on search and advertising, analysts said Wednesday.

After spending much of this year wooing AOL in an attempt to get its search business, Microsoft lost out to Google. Google and AOL announced Tuesday that Google will invest $1 billion for a 5 percent stake in AOL under a broad partnership that expands their existing search engine deal to include collaboration on advertising, instant messaging and video.

Google also is offering a $300 million credit that AOL can use to buy keyword-based ads from Google, and AOL will be able to sell all types of ads on Google sites and its publisher sites that display ads powered by the search giant. In addition, Google will help AOL better expose its content to Google's Web crawler.

But given that AOL and Google have had a search engine agreement for three years, "at the end of the day, nothing much has really changed" for Microsoft, said Michael Gartenberg, an analyst at JupiterResearch. "From Microsoft's perspective, the ability to do a deal with AOL would have been a good thing, but it was not a critical thing."

Microsoft plans to integrate desktop search into the upcoming version of Windows, code-named Vista, and eventually extend that to the Internet, Gartenberg said. "When search becomes an integrated part of the Windows experience, that will put Google on the defensive," he said.

Microsoft also is expected to gain traction with its brand-new AdCenter pay-per-click advertising service that's being tested and its year-old search engine, said Rob Helm, director of research at independent research firm Directions on Microsoft.

"It is definitely a lost opportunity for Microsoft, but also Microsoft is looking at this as a long-term process and still has assets to deploy" such as integrated search in Vista, Helm said. "So Microsoft, in a sense, hasn't really started the competition yet."

Adam Sohn, an MSN director, said the fact that the search business is still in its infancy and online ad spending is booming means it is anybody's game going forward.

"Yeah, it would have been nice to bootstrap that (AOL) ad network, sure. But, do we need it? No," he said. "This is a long-term strategic bet for us, and we're going to continue on with the plan we have today."

Sohn did not dismiss the possibility of striking a deal in the future, though.

"That being said, we would never preclude ourselves from a partnership that makes sense," he said.

Microsoft could bundle different Internet advertising types and pricing together to try to compete with Google's ad business, said Charles Di Bona, an analyst at Bernstein Research. It also could offer minimum revenue guarantees or more favorable revenue-sharing terms, he said.

Microsoft "remains in a better position to sell a bundled Internet advertising offering, including display and search, which could be appealing to advertisers as they expand their nontraditional spending and, frankly, feel their way through the issues of mix and methodology in approaching the Internet medium," Di Bona wrote in a research note.

"We continue to view (Microsoft's competition with Google) to be a prolonged, multi-move game, and while (Microsoft) has slipped in the first few rounds, we expect the company to move into the next round relatively swiftly and most certainly aggressively," he wrote.

[SystemsJunky]

The Empire Strikes Back

Bill and Silent Ballmer will strike back. Its just a matter of time.

The question is. Will it be hard enough?

Judging by Microsofts past competitive tendencies.
I'd say, they'll strike pretty damn hard.
MS is alot of things, but you should never underestimate their
ability to come from behind when need be.

[Venkatbu]

Empre Strikes Back

I agree...the game is far from over.

[Intelrules]

re: The Empire Strikes Back

Systems junky

Behavior of MS has always been wait & see before they get into another industry or compete with another product that MS isnt in yet. Another thing to fear about MS is when they set their sites on business segment that they are not a major part of or not a part of they will persist year after year until they catch up to the market leader.

I agree with you MS will strike back mighty hard possibily.

Every Dog Has His Day

Google's on top right now, but for how long. Every company that underestimated Microsoft's marketing prowess and went up against them agressively now lies in the ash heap of history. But things have changed significantly this time around with Web 2.0, and I think we're going to see a titanic battle erupt between this two software giants in 2006. Hooray for good old American style competition or more precisely--business! ;-)

[folsco]

For How Long?

"Google's on top right now."

How true is that? In what sense is Google on top? A clearer pix will be appreciated pls.

So far as Google Desktop Search, Google Earth, Google Talk, etc still run on Windows, can we really say Google's on top right now? If u say they are on top Webwise, do they have any solid framework for building scalable, SECURE, powerful, and very stable WEB applications like...M$ (.Net) (oooh sorry for being that specific).

Well, u said it all! Though Google may be on top, we can say "... for how long".

[Domino Ireland]

A Look Beyond Standard

When I think of Google, I think of simplicity. AOL make me think of the word "childish" which has nothing to do with simplicity(could it be the LOOK of AOL?). Microsoft, on the other hand, has that "standard" feeling of being everywhere; whether you want it there or not. Seems none of these three belong in the same bed together but, I have seen some strange bedfellows that get along great out in the open. So, Microsoft should look beyond standard and even the childish look of the old internet and start looking to be more of a friend that is sought out, not a buddy that is always around. $.02

[bilols]

MS and AOL was a bad fit

AOL is a very short-sighted company (i.e. more 'tactical').

Make no mistake about it. Microsoft has proven to have a very good long term strategy. That is why I say this would not have been a very good match.

With a strong asset base, and some of the smartest people in the world, Microsoft has a much better hand of cards to work with. Understand that Google is still a young company and has not yet had to go through the growing pains that MS has endured (MS is 30 years old!).

On the flip side, Google has proven to be very agile at getting innovation out the door ahead of MS. As a result, I think Google has woken up the slumbering giant.

Either way, we consumers will win with this newly revitalized competition.

[NWLB]

Maybe, but maybe not.

I'm not sure Microsoft was slumbering. I think Google can keep a step or two ahead of MS regardless of what they do in Redmond. Google is the first company to fully understand how MS goes about its business. I suspect they can dual with MS for a very long time. MS has to defend a lot of positions which in the long-term either won't exist, or require the kind of quick change they just don't have ability to beat Google at.

[alucinor]

Schmidt knows MS

I think Google's CEO was chosen on the basis of "who knows competing against MS the best?"

Of course, Schmidt lost out to MS twice already, while he was at Sun and Novell.

[bobj123]

Not Always a FRONT-RUNNER

If history holds true we can look at countless applications that were far beyond MS, mainly because they were specialized in that area, while MS is generalized. You could say MS is the regular doctor that charges you 100$, while Google is the specialized doctor in the area your needing and will charge you 1000$, how long with it last indeed...