July 17, 2008, 5:07 PM — While it still would present some integration challenges, AOL might be easier for Microsoft to absorb than Yahoo from a cultural and political perspective now that Microsoft's battle for Yahoo has gotten so ugly.
Though Yahoo's search business is the crown jewel Microsoft has been after, the quest to acquire it has degenerated into a string of taunts, threats and mudslinging for which there seems little chance of an amicable ending. This could pose some serious cultural and integration problems if the companies ever do merge, analysts said.
Purchasing AOL -- a smaller business that would still give Microsoft a host of popular online properties to bolster its advertising business -- could save Microsoft integration grief and the hassles of dragging out negotiations with Yahoo while Google continues to take market share from both companies. It would also be less expensive and wouldn't preclude Microsoft from also buying Yahoo's search business at a later date, analysts said.
"If you take the search piece out of the equation, there are a lot of similarities between AOL and Yahoo," said Greg Sterling, principal analyst for Sterling Market Intelligence. AOL and Yahoo have major online finance, shopping and entertainment destinations, as well as popular instant-messaging and e-mail services, so there would be similar overlap in online services if Microsoft bought either one, he said.
However, Sterling noted that there is "a lot of bad blood" between Microsoft and Yahoo that would make the process of integrating the two companies more difficult, even if Microsoft only purchases the search business. "That's not to say it couldn't be done, but it would be more challenging," he said.
Microsoft also wouldn't have to tussle with AOL over whose back-end technologies will power the online channels, while with Yahoo -- because of the power of its brand and the sophistication of its infrastructure -- that fight would likely ensue, added Sterling. He also noted the strength of AOL's popular Mapquest service as part of its appeal.
"You'd have Microsoft infrastructure and in some cases you'd have the AOL brand preserved," he said. "But ultimately you'd have a Microsoft back end."
Forrester Research analyst David Graves likened Microsoft buying AOL and its online properties to a company like Viacom owning different media networks. Even without a major search business like Yahoo's, AOL has obvious benefits for Microsoft because it could sell ads against all of those online channels, he said.
"Distribution is distribution," Graves said. If you have multiple channels on which to advertise, it would give Microsoft more leverage with advertisers, he said.
AOL also claims to have the largest advertising network reach on the Internet, Sterling said, so by purchasing the business, "Microsoft would get the benefit of that."
Still to some, a purchase of AOL would be a consolation prize for Microsoft, which really needs Yahoo's search business to compete effectively with Google.
"Microsoft has proven wholly incapable of closing this gap [with Google] internally, despite its massive resources," said Neil MacDonald, a Gartner analyst.
In the meantime, "Google is minting money to go after Microsoft's core businesses by targeting low- to no-cost applications and cloud-based services to businesses and consumers," he said.
A purchase of AOL could position Microsoft slightly better against Google, but it "pales in comparison to Yahoo's search business," MacDonald said.
He also suggested, as some have noted, that Microsoft is using its reported discussions with AOL to put pressure on Yahoo's leadership to close a deal.