AOL-MSN Link Intrigues

NEW YORK As rumors swirled about a potential partnership and/or merger between AOL and Microsoft’s MSN, most observers were more than intrigued by possible synergies offered by a relationship between two of the Internet’s biggest players.

While reports of possible business arrangements between the two companies varied widely, ranging from talk of an all-out merger, to a relationship limited to sharing tsearch or instant messaging tools, analysts were generally bullish on prospects of a deal, as each company seems to have what the other company needs.

If true, a deal “makes an enormous amount of success for both parties,” said Tolman Geffs, managing director of The Jordan Edmiston Group. “It solves a big problem for Microsoft and it solves a big problem for Time Warner.”

Many believe that Microsoft’s motivation for such a deal is driven by its well-chronicled quest to cut into Google’s search dominance. “More than 10 percent of Google’s revenue comes from AOL,” said Geffs. If MSN were to snatch that business, “that’s pretty material.”

Meanwhile, for Time Warner, Geffs said that such an arrangement would help add more value to AOL, a brand which has shown improvement of late but is still bleeding subscribers from its dial-up service.

Also, both companies could save considerable operational overhead if they were to combine their sales forces, analysts noted.

Merrill Lynch media analyst Lauren Rich Fine took things even further, speculating on the impact any sort of merger would have on the Web’s two biggest brands. “We believe the implications could be large for Google and Yahoo,” she wrote in report released Friday. “Should such a deal between AOL and MSN materialize, it could pose serious competition for Yahoo as well as Google in terms of audience reach and comprehensiveness of content.”

Another Merrill analyst, Jessica Reif Cohen, wrote that “partnering with MSN could take AOL to another level.” Fine also speculated that Google might not stand by and watch. “We believe it is entirely possible that Google could consider making a bid for AOL as well,” she wrote. “This would certainly protect Google’s revenues from AOL as well as enable Google to keep 100 percent of the search advertising revenues as well as gain a significant amount of content.”

While Time Warner is certainly under a great deal of pressure to make something out of the disastrous AOL merger of a few years ago, the timing of these discussions is curious, given the investment the company has made over the last few months in relaunching the AOL.com portal for a general, non-subscriber audience. With its dial-up subscriber business in trouble, AOL has just begun to gain some momentum among advertisers, who were particularly impressed by the site’s coverage of the Live 8 concerts earlier this year.

Also curious are several reports that Microsoft may be willing to forgo the popular MSN portal, which is increasingly being cited by advertisers as a worthy competitor to Yahoo. MSN has recently had tremendous success in building an audience for online video.