AOL On the Block?



As you may know, the AOL unit at Time Warner has been thrashing around for the last year while trying to find a way to remain relevant. The problem for AOL, of course, is the continually decreasing use of dial-up modems as a method for accessing the Internet. Depending on the study you look act, dial-up modem access now accounts for approximately 40 percent of all Internet users. This number is consistently dropping as DSL and cable Internet access systems become more popular. The resulting struggles at AOL are having an interesting impact on the search engine wars.

Google and MSN are trying to position themselves to dominate online search. The situation boils down as follows: Google is the king, MSN wants to be it. This situation takes on particularly interesting impact when one considers that Google now supplies ads and search results to AOL. In doing so, Google derives roughly 10 percent of its revenues from the AOL relationship.

In the summer of 2005, rumors started that AOL was for sale. MSN and Google were obvious buyers. The only problem was both companies realized AOL was a good short term play, but a terrible long term one given the death of dial-up modem systems. So who would buy AOL and how much would they be willing to pay? Would Google let MSN swipe 10 percent of its business? If so, how high could Google drive up the price of AOL for MSN?

Google Makes Major Mistake

If rumors are to be believed, MSN and Time Warner have reached a deal on the AOL platform. So, how much will MSN pay Time Warner for AOL?

Nothing. Not one penny.

By the end of December 2005, MSN and Time Warner are expected to announce a partnership wherein the two companies will intertwine their Internet units and pursue joint advertising efforts. In turn, Google will be kicked off all AOL listings, to be replaced by MSN or some AOL-MSN mix of search results and advertisements.

The executives at Google are making a major mistake, a critical blunder. Google will lose 10 percent of its business to MSN without MSN being required to expend any resources for the business. The Google Adwords program, the primary revenue source for Google, will no longer be on AOL. Surely Google could have come up with something more enticing to AOL or at least forced MSN to pay some serious cash for the acquisition. Instead, it failed on both accounts.

Google is a great search engine, but this is just one in a number of business mistakes made by the Internet giant. How could it lose 10 percent of its business without making MSN pay for it? If MSN pulls this off, one will wonder who is at the controls at Google and what they could possibly be thinking.