Is Time Warner's (NYSE: TWX ) America Online division throwing over Google (Nasdaq: GOOG ) to make Microsoft (Nasdaq: MSFT ) its new online advertising partner? The Wall Street Journal and The New York Times are reporting that a brokered deal to leave Google out in the cold is nearly complete.
It's not exactly news that Microsoft's MSN.com has been pining for some AOL.com loving. Those negotiations have been reported on for three months now. It's just surprising that Google would be willing to give up so easily, and that the eventual partnership may not involve Motley Fool Inside Value pick Microsoft buying a stake in AOL.com.
After all, Time Warner was originally peddling a minority stake in its online arm to raise money and beef up its balance sheet. If it's simply looking for a partnership that will produce lucrative returns in the interactive advertising space, it's highly unlikely to find Microsoft a more rewarding partner than Google.
AOL accounted for 12% of Google's revenues last year, but Time Warner was supposedly getting about 80% of that back for hosting Google's AdWords text ads as a third-party publisher. Microsoft is just starting up its AdCenter, and it may be a while before it can create its own a network of the same sort of high-paying keyword advertisers who have trusted Google's ability to generate quality traffic in the past.
When iVillage (Nasdaq: IVIL ) announced that it would be ditching Google in favor of Yahoo! (Nasdaq: YHOO ) back in August, it seemed feasible. Overture, which Yahoo! went on to acquire, pioneered the paid-search space. Despite Microsoft's big-name presence, it was still relying on smaller contextual marketers like LookSmart (Nasdaq: LOOK ) to sell its virtual ad slots until just last year. It's quite possible that even a 100% cut from Microsoft may add up to less than 80% of Google's take if Mr. Softy can't successfully attract high-end advertisers.
Microsoft may not mind yielding a bigger piece of its ad revenues, because it still has a brand in interactive marketing to establish. That's what should worry Google, and it's why Google shouldn't give up on AOL, even if it provided a low-margin return. The same sponsors who were drawn to the search giant after seeing "Ads by Google" wallpapered over the Internet will now have a new name to nibble away at their marketing dollars.
If AOL truly is considering a deal that doesn't involve actual stakes being sold, this may also open the door for Yahoo! to come back and give it a shot. Yes, AOL.com is probably staring at some attractive alternatives right now from the Microsoft camp, but the real crime here is how it's trying to fix something that wasn't broken. Time Warner is a huge media conglomerate, but its fastest-growing segment was its Google-fueled online advertising segment.
The kind of chance it's taking here, and its willingness to risk so much for a transaction that doesn't involve financial compensation, doesn't exactly make this seem like Time Warner's brightest move.
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Longtime Fool contributor Rick Munarriz has been an AOL subscriber since 1992, but he doesn't own any of the stocks mentioned in this story.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.