Commentary

Google Likely Candidate To Power AOL Search

Tim Armstrong

Will Google continue its long-term partnership with AOL, powering search across all of the company's properties? During AOL's fourth-quarter 2009 earnings call Wednesday, the company's Chairman and Chief Executive Officer Tim Armstrong provided insight into its decision-making process, but did not give a final answer.

Armstrong read off a variety of goals for 2010. One will see the company "complete a new search deal that addresses AOL's long-term strategic vision and financial needs," he said.

That long-term strategic vision runs across "distribution" and "referral traffic," which no longer depend solely on search. The traffic also comes from real-time Twitter feeds and Facebook status updates. Armstrong said he looks at content distribution as combining search, social networks and real-time communications with content on AOL's properties.

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"Internally we say fragmentation is our friend, and we are building a distribution system based on that fragmentation," Armstrong noted.

Discussing the decision on a search partner, Armstrong first pointed to the AOL's "great" eight-to-nine year relationship with Google, but admitted that requirements continue to change. In this next round, Armstrong expects a longer-term partnership. The history with Google remains a plus, he said, because its employees are familiar with the search landscape and AOL's business model. AOL has a clear mission going forward, "and the search deal will be a pillar underneath that strategy."

Google plans to aggressively outbid Microsoft to power AOL search, writes Silicon Alley Insider's Nicholas Carlson, but back in December a source close to the deal told MediaPost Google won't have to try too hard. In fact, the Mountain View, Calif.-based company remains the favored engine to power AOL search, according to the source.

Handing the deal to Microsoft would give Bing a much-needed lift - but Bing still does not have the traffic to help AOL survive.

Even with Google powering search, AOL still might need some help. Search advertising revenue fell 19% to $145.4 million in the quarter, but the company managed to eke out a slight profit. Net income came in at $1.4 million, or 1 cent per share, compared with a loss of $1.96 billion, or $18.52 per share, in the year-ago quarter.

AOL's fourth quarter 2009 summary presentation provides insight on the decline of the subscriptions, and search and contextual revenue from the prior year.

Despite the fact that AOL Properties global display advertising revenue declined 3% to $176.4 million, domestic display advertising revenue grew 1% to $151.7 million, signifying the first quarter of year-over-year growth in eight quarters, the company reports.

AOL reports the decline in advertising revenue reflects a downward trend in search queries and lower revenue per search, due primarily to a 27% year-over-year decrease in domestic AOL subscribers, who tend to search more frequently and typically convert at a higher rate than non-paying visitors.

Weak earnings also points to a decline in international display revenue, offset in part by growth in the domestic display market. International display revenue declines reflect weakness in the U.K., Germany and France, while domestic display revenue grew slightly for the first time in eight quarters, driven by growth in consumer packaged goods, finance and retail.

Third-party network advertising revenue decreased slightly for the quarter, reflecting revenue declines in AOL's international operations and the search engine campaign management and lead generation affiliate products, largely offset by growth in the core Advertising.com network, the company says.

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