What If Web Darlings AOL, MSN Struck A Deal?

As talk swirled late last week about a potential partnership and/or merger between America Online and Microsoft’s MSN, most observers were 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 the company’s search or instant-messaging tools, analysts were generally bullish on prospects of a deal, as each company seems to have what the other needs.

If true, a deal “makes an enormous amount of sense 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 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 add more value to AOL, a brand that has shown improvement of late but is still bleeding subscribers from its dial-up service.

Merrill Lynch media analyst Lauren Rich Fine speculated on the impact a merger would have on the Web’s two biggest brands. A deal “could pose serious competition for Yahoo! as well as Google in terms of audience reach and comprehensiveness of content,” she wrote in a report released on Sept. 16.

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

While Time Warner is certainly under pressure to make something out of the disastrous AOL merger, the timing of these discussions is curious, given the investment the company has made over the past few months in relaunching the AOL.com portal for a general, non-subscriber audience. 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 Yahoo! competitor. MSN has had tremendous success in building an audience for online video.