Can Microsoft Land AOL?

LINDSAY LOHAN stepped out from head to toe in chic CHANEL Tuesday night, as she was honored with the Chanel spotlight award for emerging talent at the Premiere magazine's 12th Annual Premiere Women in Hollywood event at the Beverly Hilton hotel.


An MSN-AOL linkup could benefit both sides. But Gates & Co., eager to catch Net giant Google, may have the most to gain from teaming up.
It's long been part of AOL lore that in 1993, Microsoft Chairman Bill Gates made a threat to AOL's then-CEO Steve Case. At one of their first meetings, the software billionaire cavalierly said to Case, struggling then to build the online service: "I can buy 20% of you or I can buy all of you."
Now, more than a decade later, that scenario may finally come about. Since January of this year, AOL, now part of Time Warner, and Microsoft's MSN online service have been in talks about combining operations, according to sources close to the companies.
Microsoft has used the overtures to push AOL to use MSN Search instead of Google, while AOL wants to combine the companies' ad-sales staffs to crank up pressure on arch-rival Yahoo!.
"RISKY FOR AOL." If the two team up, the resulting behemoth -- with more than 200 million unique Web visitors a month -- would realign the top players in a market now dominated by Yahoo and Google. "AOL and MSN have felt left behind," says Jeff Lanctot, a vice-president at interactive agency Razorfish/Avenue A, a division of Seattle-based aQuantive. "The combination of AOL and MSN would turn the industry on its ear and make us reassess the assumptions of the power players."
But there's no guarantee that the talks, momentarily suspended, will end in an agreement. For one, a hookup "is risky for AOL unless there's a big payoff," says David Card, Internet analyst at Jupiter Research.
Microsoft, which made the first approach, seems to have more to gain. By wresting AOL's large audience in one fell swoop, Microsoft has a chance to unseat Google as top dog in the lucrative paid-search business.
Today, AOL uses Google as its search engine, keeping some 80% of the revenue that those searches yield. In the second quarter, about one-tenth of AOL's $320 million in ad sales came from paid search. It could lose a key revenue source if the relatively untested MSN Search is unable to match Google's proven track record in generating sales and attracting loyal users.
WHICH GAME PLAN? Meanwhile, AOL is at a pivotal juncture in a turnaround. As paying subscribers to its online service continue to defect, the Time Warner unit is now betting its future on growth in online-ad revenue. This summer, it relaunched a beefed-up aol.com Web site. With the new aol.com as an anchor, AOL hopes to attract an ever-bigger audience -- and more advertisers -- to all of its Web sites, including AIM, MapQuest, ICQ, AOL Music, and the like. Today, those sites boast 112 million unique monthly visitors, according to comScore Media Metrix.
AOL hopes that by combining ad sales over AOL Web properties and MSN, which attracts about 114 million unique monthly visitors, it would top Yahoo, with 121 million unique monthly visitors. But even without such a move, AOL is expected to increase ad revenues to $1.35 billion this year, vs. $1 billion last year, according to Internet analyst Richard Greenfield of Fulcrum Global Partners.
If Microsoft needs AOL more than the reverse, it's up to Time Warner CEO Richard Parsons to command a princely sum for his division or take a pass. Indeed, Parsons is the wild card. While he has professed confidence in AOL's new Web strategy, he may ultimately decide that spinning out a part of the troublesome online unit may help jack up a stock price that has been languishing ever since AOL merged with Time Warner in 2001. If that's the case, Gates' prophecy may come true.