Dear Reader, thank you for all the wonderful comments you’ve posted about my blog. I appreciate the feedback. I’ll respond to some of your questions soon. I hope you don’t mind if I take a detour today and talk about something related to technology and finance. Now that I have MSN’s attention, I want to write my thoughts on recent speculation that Microsoft will buy a stake in Internet service provider (ISP) America Online (AOL), a division of Time Warner. I’m hoping that this blog entry will catch the attention of someone in Redmond who is deciding right now whether or not to buy into AOL. I’m convinced that many Microsoft employees, including market movers, read blog postings on MSN Spaces to guage the pulse of the blogosphere. My cousin and a couple friends who are Microsoft employees read my blog all the time. Microsoft isn’t trying to be Big Brother by reviewing on our not-so-private blog entries. It makes good business sense for Microsoft to listen to its customers. I’m hoping Microsoft will listen and forgo spending billions dollars for a partial stake in an ISP that has fallen on hard times. I will contrast the news of a possible MSN-AOL tie-up with two other recent technology announcements–Google’s new Blog Search beta and eBay’s purchase of Skype, the VoIP (voice over Internet protocol) provider.
Analysts speculate that there are two main reasons why Microsoft/MSN wants to invest in AOL. First, AOL’s instant messaging program, AIM, is the market leader in instant messaging. MSN/Windows Messenger and Yahoo! Messenger are its main rivals. (Google’s new instant messaging program, Google Talk, just entered the instant message market.) Currently, AOL’s, MSN’s, and Yahoo’s instant messaging programs are generally incompatible, although the three companies have all explored improving compatibility. In their 2003 settlement over anti-trust issues stemming from the Web browser war between Netscape (a subsidiary of Time Warner) and Microsoft’s Internet Explorer, Microsoft and Time Warner agreed to work together on AOL-MSN instant messaging compatibility. A stake in AOL would accelerate integration between the two programs. I question this motive, however. Time Warner has already agreed to cooperate with Microsoft in its $750 million settlement with Microsoft. Is Microsoft merely throwing more money at Time Warner to woo it into doing what it should already be doing? In the past, Microsoft has invested in rivals such as Apple to improve cooperation. However, if Microsoft has already paid Time Warner $750 million for this privilege, why pay more?
Secondly, analysts have pointed out AOL’s primary search engine is Google. They speculate that Microsoft is investing in AOL to substitute Google’s search engine with MSN Search. In July 2005, AOL had 110 million visitors, a very large potential audience. It is a shrewd move on Microsoft’s part to add 110 million potential customers. However, I question whether an investment in AOL provides the best avenue for MSN to acquire new customers. The money may be better spent accelerating MSN Search’s page indexing. Earlier this year, on the same day that MSN announced its new MSN Search beta featuring 4 billion indexed Web pages, Google announced that it had indexed 11 billion Web pages. Google searches three times as many Web pages as MSN Search does. Microsoft should use the money it wants to invest into AOL to develop a better search engine and expand the MSN brand globally, rather than spend it on attracting a shrinking AOL customer base. AOL’s customer base continues to shrink because the ISP never successfully jumped from dial-up Internet access to broadband. Microsoft would be better served by trying to chip away at Google’s 37% share of the Internet search market.
AOL and MSN could also benefit from content sharing. In addition to E-mail and instant messaging, AOL’s forte is providing online content. MSN and AOL could potentially share content, reducing the price they each pay for content. However, as I’ve previously mentioned, Microsoft is moving away from providing content. Earlier this year, it sold its online magazine Slate to the Washington Post. It may dissolve its MSNBC partnership with General Electric/NBC. MSN has traditionally had trouble excelling at content delivery. AOL has done a better job. However, AOL’s failed merger with Time Warner shows that partnerships and mergers based on providing improved content usually perform poorly. Time Warner and AOL thought they could partner traditional media with online media, and they failed. Microsoft and AOL would probably do no better.
Contrast this news with the announcement that Google is entering the blog search market, directly competing with Technorati and other blog search engines. This makes sense to me. This is an extension of Google’s core business, search. In fact, analysts were asking for months why Google hadn’t entered the blog search market. It purchased Blogger as an initial foray into blogging, but Google waited to launch Blog Search. I think it’s interesting that Google decided to launch its own blog search engine in lieu of buying Technorati, the king of blog search engines. Google will easily give Technorati a run for its money. Also this week, eBay announced that it will buy Skype, the VoIP provider, in a $4.1 billion deal. eBay’s growth has slowed, and it needs new growth opportunities. Skype is a small company in a hot market. I wonder whether eBay overpaid to buy Skype, but the purchase makes sense strategically. eBay is an online community, and its basic mission is to connect people. In this respect, eBay is merely expanding the kinds of services it offers its community. It did the same when it bought PayPal, which turned out to be an outstanding acquisition. Rumor has it that eBay will buy craigslist.com, a popular online classifieds site in which eBay holds a small stake. These acquisitions fit into eBay’s business model. The key for eBay will be to enlarge its community by leveraging Skype to bring in new members.
Google’s and eBay’s recent moves make more sense from a business perspective than does the Microsoft’s proposed investment in AOL. Microsoft should consider purchasing AOL from Time Warner outright and integrate MSN and AOL into a single, gargantuan Internet service provider. Microsoft may have concerns about surviving antitrust scrutiny, something that inevitably comes up whenever Microsoft purchases another company outright. However, I believe that the markets AOL serves, ISP, E-mail, instant messaging, and content, are diversified enough that an MSN-AOL merger would be approved by the Securities & Exchange Commission (SEC). AOL is a tarnished property and can be purchased for a song. It is still the leading American ISP, and it has greater brand recognition than MSN. I hope that someone in Microsoft will read this and take it to heart before it decides to spend billions on AOL. Microsoft may have billions in spare cash, but that does not justify making unwise investments. Microsoft should reconsider.