As Microsoft Corp.ís (MSFT) pursuit of Internet portal Yahoo Inc. (YHOO) drags on, Wall Street analysts are increasingly speculating the software giant may be focusing on a Plan B: Tying up with internet service provider AOL.
The speculation was revived on Wednesday when The Wall Street Journal reported Microsoft executives met with representatives of Time Warner Inc. (TWX), AOLís parent company, to discuss a possible union. Microsoft has reportedly been in informal discussions in recent months to explore an AOL deal, which the Redmond, Wash.-based company sees as a potential way to boost its Internet presence.
The talks come against a backdrop of mounting pressure on Microsoft to boost the proportion of revenue it gets from the Internet. A combination of Microsoft and AOL would immediately position Microsoft as an online powerhouse by bringing it significant online traffic and scale to its display advertising, both of which could help it monetize its own Web properties. In 2007, AOL had about 11% of total U.S. online advertising revenue, according to eMarketer, an Internet research firm. Microsoft also had around 11%.
Whether a deal with AOL will happen remains an open question. Among the reasons for skepticism about such a deal is the fact that acquiring AOL would do little to turn around Microsoftís currently weak position in Internet search advertising, the largest and fastest growing segment of the online advertising economy. AOLís search advertising is outsourced to Google Inc. (GOOG), the market leader, and itís unclear whether Google would continue to support this arrangement if AOL was owned by Microsoft, arguably the Mountain View, Calif.- based Internet companyís biggest rival.
Still, many analysts increasingly see the benefits of combining the two companyís online operations. The combined Web properties of the two companies, which would include AOLís celebrity gossip site TMZ and social networking company Bebo, several online display advertising networks including Advertising.com and Tacoda.com, as well as Microsoftís Hotmail email service, would be larger than industry leader Google Inc.ís, in terms of unique users, according to ComScore, another Internet market research firm.