Google-AOL deal has silver lining for Microsoft

Though losing the high-profile AOL deal to Google is a major blow to Microsoft, the software company could still benefit from the union because customers may see it as a case of Google playing favorites, analysts said Tuesday.

Giving AOL expanded rights to banner advertising on Google could help Microsoft win more advertising business for its search service because it could rub existing Google customers the wrong way, they said.

Google has always portrayed itself as a level playing field for customers to display their advertising, said Rob Helm, research director with Directions on Microsoft in Kirkland, Wash. But by giving AOL a deal to display banner ads and to directly sell Google search advertising, the search engine company opens itself up to more criticism from industry pundits as well as customers who may feel slighted by the move. “It’s going to weaken Google’s claim on being the neutral front end [to search],” he said.

Joe Wilcox, senior analyst with Jupiter Research, agreed that in the deal, “Google goes from a position of neutrality to appearing to play favorites. If I were Microsoft, I’d certainly want to play up the fact that it is neutral with respect to search and search placement,” he said.

Overall, analysts said the deal works out best for AOL, which stands to gain not only a large chunk of change, but also much-coveted access to banner advertising on Google’s search site for itself and its customers.

And while Google definitely will benefit by retaining AOL’s lucrative ad business – which brings in as much as 12% of Google’s revenue, by some estimates – it’s not getting that business for free. The fact that Google is throwing $1 billion AOL’s way, in effect to buy the company’s continued loyalty, doesn’t exactly sweeten the deal for the search company, Helm said.

“In some sense, the deal is simply expands the arrangement Google had with AOL, making it more costly for Google,” he said.

The fact that Microsoft lost a much sought-after deal – by some reports it wooed AOL as hard as Google – could serve as impetus for Microsoft to rethink its strategy against Google, Wilcox added. “It’s going to force the company to re-evaluate,” he said.

Microsoft has only in the past year upped the ante on making its online search engine comparable to Google’s. Yet MSN Search is still widely viewed as inferior.

AOL’s decision to go with Google means the company thinks Google’s search engine will attract the visitors that their portal needs to be more successful, which leaves Microsoft with some serious work to do in this area, analysts said.

With the loss of the AOL deal behind them, Microsoft might want to refocus its efforts on winning more business for its burgeoning online advertising platform from service providers such as Verizon and Comcast, Helm said.

“The next phase in this battle will be getting placement for search and search results on providers’ [portals],” he said. “That will become increasingly important.”

Still, AOL’s decision to go with Google instead of Microsoft may prove to be a strategic misstep for the Internet service provider. The combination of AOL’s online programming and Microsoft’s technology may ultimately have been a more lucrative combination in the long run than the Google-AOL union, according to Jupiter’s Wilcox.

“AOL has great programming and knows how to program content,” he said. “Microsoft has great technology and knows how to distribute content. Put the two together and it’s potentially powerful set of online services. They may have missed a great opportunity there.”