In September, I criticized Microsoft’s MSN for pursuing an investment in America Online (AOL), a division of Time Warner. I argued that AOL is a fading brand that adds little to MSN and that Microsoft would be better off investing the money it would have spent on AOL into research and development in order to improve MSN Search. I also mentioned the market buzz that Google could also be a potential suitor. Now that Google appears to be the likely winner of the AOL sweepstakes, should I come down hard on Google for investing in AOL?
Yes and no. First of all, I reiterate that it is preferable that Microsoft not invest in AOL. It is a strategy Microsoft has tried before with modest success. Rather than disbursing the $1 billion saved in a shareholder’s dividend, Microsoft needs to capitalize on the moment to improve its homegrown search engine. It also needs to focus on building its own brand rather than add AOL to its roster. Google’s share of the search market continues to grow unabated, as evidenced by its ever-climbing stock price ($430.15 per share as of Friday’s close). MSN Search faces a difficult battle in the search arena even without worrying about linking MSN and AOL.
When one considers the fact that AOL’s share of Google’s revenues shrunk from 12% in 2004 to about 8% in 2005, spending $1 billion to retain AOL as one of its primary customers does not make much sense for Google. Google has about $7 billion in excess cash to spend, and spending 1/7th of this horde on AOL makes less sense than spending it on adding new services or extending its market reach. However, when faced with the prospect of losing one of its primary customers to one of its main rivals, MSN, it makes sense for Google to invest in AOL. As a defensive measure, it makes more sense because Google is still very reliant on generating revenues from search. Losing 8% of its revenues would be disastrous to its share price in the short term. In contrast, MSN and Microsoft are far less reliant on search. Google also gains further access to Time Warner’s media content, and it can marry its beta Google Talk instant messaging program with AOL’s popular Instant Messenger. For a younger, smaller company such as Google, these moves are more valuable than they are to a large, cash-rich company such as Microsoft.
Would Google’s money be better spent elsewhere? Of course. It seems as if each week Google announces a new beta program or feature in an effort to become the nerve center of the Internet. $1 billion would be enough to develop one or two new, potentially lucrative Google products. Still, in light of manuevering by Microsoft and other technology companies to divert one of Google’s revenue streams, Google had little choice but to invest in AOL. I only hope that the Google-AOL combination, which I affectionately call "GoAOLgle," won’t distract Google from building on its search capabilities.