Wednesday, July 01, 2015

MSFT and AOL to Take On GOOGL With New Microsoft Bing Deal

Microsoft is handing over ad sales responsibilities to AOL

On Monday, Microsoft (MSFT) announced in a blog post that, beginning in January 2016, it will transfer the majority of its ad sales business to AOL. Microsoft’s entire advertising division workforce — approximately 1,200 employees — will be offered positions at AOL. Additionally, AOL has agreed to replace Google with Microsoft Bing as its default search engine for the next 10 years.

The ramifications of the MSFT-AOL partnership will be far-reaching and impact both Microsoft and the current king of search, Google (GOOGL, GOOG). The question, though, is whether Microsoft’s partnership with AOL will help or hurt these companies.

Handing over the reigns to AOL will give MSFT some much-needed breathing space and allow management to focus on products and services that actually turn a profit.

Microsoft’s advertising efforts never yielded significant revenue results, and over the years, management made multiple attempts to compete with Google, none of which were very successful. Yet, Monday’s announcement concluded with the statement, “We remain as committed today as we have been in the past decade to digital advertising.”

Microsoft Bing Hasn’t Had It Easy

MSFT took a $6.2 billion writedown in 2012 because the 2007 acquisition of digital marketing company aQuantive “did not accelerate growth to the degree anticipated.” The following year, Microsoft sold Atlas, one of aQuantive’s leftover advertising platforms, to Facebook (FB). In Q4 of 2014, MSFT laid off 18,000 employees, including the bulk of its global ad sales force.

That being said, Microsoft’s exit from the ad sales arena comes as no surprise. Clearly, the writing has been on the wall for quite some time. Eliminating the burden by partnering with AOL will free up resources that could be better used to hone other (profitable) divisions of the company.

So, while Microsoft Bing is unlikely to threaten Google in terms of organic Internet searchs, searches from within popular AOL-owned websites (i.e., Huffington Post, Engadget, TechCrunch) will statistically increase the number of people utilizing the Bing search engine — even if that fact isn’t immediately apparent to users.

This behind-the-scenes switcheroo could go largely unnoticed, as the vast majority of searches not directly related to those websites will be initiated from a search engine.

Considering that approximately 64% of all Internet traffic originates from organic searches, and Google is the No. 1 most popular search engine in the world, the fallout from Microsoft’s partnership with AOL isn’t likely to be too damaging to GOOG. All told, Microsoft sites account for slightly more than 20% of the search market, while Google sites account for nearly two-thirds of Internet search. AOL, on the other hand, represents a barely visible 1.1% of searches.

If searches conducted on Yahoo (YHOO) websites — which make up 12.7% — are also included in the total search engine market share for Microsoft Bing, MSFT will actually account for 27.8%. Since 2010, all searches from Yahoo properties have utilized Microsoft Bing, but this past April the agreement between MSFT and YHOO was amended to reduce the percentage to 51% and remove Bing completely from Yahoo’s mobile platform.

Microsoft’s director of search, Stefan Weitz, said last year that, “We can’t compete with Google on pure search.” Rather than continue wasting money attempting to market a search engine that relatively few people use, the deal with AOL will simply force people to use the Microsoft Bing engine by installing it as the default vehicle on AOL properties.

While the move will surely increase usage of Microsoft Bing, how much traffic actually stems from searches on AOL’s websites compared to traffic originating directly from the or search pages?

Specific details about the revenue-sharing portion of the MSFT-AOL deal have been withheld, but both companies describe the arrangement as win-win. Beginning next year, display ads and marketing messages from AOL’s advertising clients may begin to appear on Microsoft-owned brands such as Outlook, Skype, and MSN, as well as on Xbox gaming consoles.

What This Means for MSFT and GOOG Stockholders

At this stage, the news that MSFT will begin offloading its ad sales responsibilities to AOL in January isn’t likely to have any impact on the share prices of either company’s stock. There’s still half a year left before the change goes into effect, and plenty of other, more significant, areas of Microsoft’s business that warrant attention.

So, for shareholders (or potential investors), AOL taking over Microsoft Bing ad sales won’t tip the scales either way — at least not yet. In the end, this deal will probably be more beneficial for AOL than MSFT, as the agreement opens the door to a host of venues that were previously inaccessible.

Article originally appeared on InvestorPlace (07/01/2015)

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