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Is Microsoft (NSDQ: MSFT) changing its approach to online spending? The company, which had said as recently as a year ago that it was willin…

Is Microsoft (NSDQ: MSFT) changing its approach to online spending? The company, which had said as recently as a year ago that it was willing to invest 5 percent to 10 percent of its operating income on its search business for up to five years, wasn’t willing to spend enough to become AOL’s search partner. In fact, Microsoft’s bid wasn’t even competitive enough to bring negotiations down to the wire — and AOL chose Google as its partner months before its contract with the company was even up.

In losing out to Google (NSDQ: GOOG), Microsoft lost a chance to build up its search market share fast — something it has said is its top online priority. AOL (NYSE: AOL) accounts for about two percent of total searches in the U.S., making it one of only five companies in the country with a notable share of online searches, according to comScore (NSDQ: SCOR). IAC’s Ask.com is more popular, but its own deal with Google does not expire for another two years. Add AOL’s share to that of Microsoft’s Bing and its new partner Yahoo (NSDQ: YHOO) and Microsoft would have passed the 30 percent mark.

AOL CEO Tim Armstrong tells us his company is sticking with Google in part because of familiarity; it’s already been working with AOL for five years and gets to avoid the disruption of a complete change. But while Google might have been the favorite for those reasons, Armstrong also says other offers “were not at the same level of scale or magnitude … there was a significant enough gap for us in the overall value of the deal that made it reasonable to close the negotiations down months before the deadline.”

That’s a change from how Microsoft has acted in the past when it is competing with Google for search advertising deals; a year-and-a-half ago, for instance, the company outbid Google, offering more than $500 million — twice what Google was willing to pay — to become the default search engine on Verizon phones. It has spent millions too to get its search bar pre-installed on Dell, HP (NYSE: HPQ) and Lenovo PCs.

Recently, though, Microsoft — perhaps mindful that it is losing two dollars for every dollar its online division is bringing in — has talked about being somewhat more conservative in its online spending. At the company’s analyst meeting this summer, for instance, Ballmer said, “We’re not confused that investors see the big price tag to get into this business and say, ‘What’s the progress going to look like on that?’” and Microsoft SVP Yusuf Mehdi has said he is confident that the online division will eventually be profitable.

This might be the start of Microsoft showing investors it does actually want to dial down its online spending — or the company may simply have been unenthusiastic about AOL’s bleak prospects as a place people will continue to go to in order to search. The company isn’t commenting.

Microsoft is also talking to MySpace (NSDQ: NWS) about replacing Google as the provider of search ads on that site. We might have a better sense of whether Microsoft has actually changed its approach, depending on how those talks turn out.

  1. Agent Mulder lives Saturday, September 4, 2010

    Fundamentally, in a syndication model, you have to have search that’s at least pari passu with the share leader. Otherwise, you can offer 100% of the revenue OR MORE, and in the longer run, it won’t matter b/c it’s up to the users. If it isn’t pari passu, you will lose audience faster not only for search, but the rest of your publishing network. So, until MS/Bing gained organic search share, there’s really no reason for MS to spend much time negotiating syndication partners. Of course, Google can’t rely on this logic, since MS has proven itself to act irrationally many (most) times in the past, so a preemptive re-up makes sense…just in case…and they can afford it. AOL clearly realizes the logic as well. Don’t know the renewal terms on the commercial deal, but I’ll bet that they weren’t better than the terms set out in the original deal…

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