Who says that incumbents are doomed this year?
This partnership originally seemed to be headed nowhere. Google paid $1 billion for a 5% AOL stake in 2005, securing the original deal in the process. The world's leading search engine eventually dumped that stake at a loss, and AOL's current enterprise value of roughly $2 billion shows that it's worth just a tenth of the implied $20 billion price tag at which Google bought in five years ago.
In a nutshell, AOL's real estate is less valuable than when the first deal was drafted. However, AOL remains a traffic magnet. It still runs one of the more popular portals, serving up a ton of page views. Google still can't afford to yield that turf to Microsoft
Where was Microsoft's Bing in all of this, by the way? I figured that Microsoft would leap to overpay for the right to gnaw away at Google's industry-leading market share, by either fulfilling AOL's search needs or just swallowing down AOL whole.
Surely, Microsoft can't believe that it can take on Google with only the Yahoo! deal under its belt. Its 2007 deal with Facebook was a move of visionary brilliance, so making a play for AOL's eyeballs should have been a no-brainer.
It takes a lot of gumption to renew a five-year deal in these fast-changing times. The same crux is taking place at Sirius XM Radio
We can place the blame on AOL's original access business, which sheds subscribers on a quarterly basis. AOL figured that it could make up for the defections with higher-margin online advertising, but drawing a crowd isn't all that easy when folks don't have to start their surfing sessions on your landing page. Even IAC's
However, the new five-year deal expands on the original terms to cover mobile search as well. AOL will also feed original content to Google's YouTube.
How can a cash-rich Microsoft allow this to happen? Its Bing search engine simply can't afford to miss more opportunities like this one.
Is this more a victory for Google than a defeat for Microsoft? Post your thoughts in the comment box below.
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Longtime Fool contributor Rick Munarriz wonders whether AOL will ever party like it's 1999 again. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it's got mail.
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