Grabbing a bigger share of online advertising spending is "of keen interest" to Microsoft Corp., chief executive Steven A. Ballmer told a Washington area gathering yesterday, outlining the business strategy behind his company's ongoing talks with Dulles-based America Online Inc.
Ballmer, speaking at a forum for Microsoft customers that was hosted by local technology groups, declined to comment specifically on a potential deal with AOL but explained what other officials said is the basic rationale for a partnership.
"Online advertising is of keen interest to us," Ballmer said. "If you ask particularly for our consumer-facing businesses, what will be the most rapidly growing revenue stream at Microsoft, it's absolutely going to be advertising. So we're very focused on what it means to do a better job in display advertising, what it means to do a better job in paid listings and sponsored search advertising."
Microsoft is offering to guarantee AOL substantial annual payments of hundreds of millions of dollars if the Dulles-based Internet service adopts MSN Search and drops Google from its service next year, according to people who demanded anonymity because of the confidential nature of negotiations. In response, Google Inc., which has a long-standing relationship with AOL that has been lucrative for both parties, appears willing to find ways to direct more computer users to America Online's network of Web sites, which in turn would produce more ad revenue for the parties to share.
Under the current arrangement, AOL keeps about 80 cents of every ad dollar generated by Google's presence as a search engine and provider of ads on the AOL service. That adds up to hundreds of millions of dollars for AOL, which is Google's biggest advertising partner.
Google is the leader in online search, the place more computer users turn than any other site as they navigate the Internet. By being on the AOL service, Google is the search engine of choice for AOL's more than 20 million paying subscribers, as well as millions of others who visit America Online's free sites, including Moviefone and Mapquest.
But Ballmer said Microsoft is eager to compete with both Google and Yahoo Inc., the two leaders in Internet search and advertising.
"We have today a business that's closing in on $2 billion of ad revenue," Ballmer said, adding that this was about 15 percent of total estimated online ad spending.
"We are smaller than Google and Yahoo, but we are the number-three player in the online ad market, and that's a lot of money. You know, anything north of a billion dollars certainly registers with me. . . . But of course, we're a $40 billion company, so it's a much smaller percentage of our revenue than it is some other guys in the business."
Google and Yahoo give away search technology and e-mail accounts free and then derive virtually all of their revenue and profits from online advertising. The biggest portion of this involves ads related to searches for information by computer users.
In addition to wanting to ramp up ad revenue through MSN search, Ballmer said the company is looking at the potential for ad dollars to support some of its upcoming software offerings.
"We're asking: 'How will advertising fit in the context not only of MSN, but does it fit in the context of Windows Live, does it fit in the context of Office Live? How do we let third-party developers use our engine to support their own advertising-funded sites?' "
Google -- which also has ongoing negotiations with AOL and its parent, Time Warner Inc. -- traces its emergence as an Internet powerhouse to exposure from being on AOL in the United States.
"AOL is a valued partner, and we intend to continue working with them," a Google spokeswoman said.