Home  › Search › Paid Search

AOL: Worth $20 Billion?

  |  December 23, 2005   |  Comments

What’s the added value AOL and Google can bring to one another?

Is a 5 percent stake in AOL worth $1 billion? That would put the total value of AOL at $20 billion. As AOL has approximately 20 million subscribers, each AOL subscriber is valued at about $1,000. Clearly, this is much more than the ISP revenue one could attribute to an AOL member, even at broadband rates. At $25 per month, it takes 40 months just to generate $1,000 in cash flow. And obviously, it costs some money to run an ISP.

We must also remember not all AOL subscribers use AOL Search or the internal search box in the AOL software. Many use Google, Yahoo, MSN, or even Ask Jeeves as their preferred search engine. Realistically speaking, the value of the AOL searcher to Google should be based on those who actually search.

To conduct this analysis, I pulled up the search query rankings. For example, Nielsen//NetRatings’ MegaPanel puts AOL’s monthly search volume at 368 million for October 2005. That’s each AOL member searching 18.4 times per month, on average. Even if a user clicked on a PPC (define) search link every time (which is unlikely because many searches aren’t commercial in nature) and we use a $0.50 CPC (define), total revenue generated from the average AOL member is $9.20. A more reasonable estimate might be $2.00.

Surely, then, the billion-dollar decision was made based on more than just the surface numbers. What’s the added value AOL and Google can bring to each other?

I’d have loved to have been a fly on the wall at the meetings at Google, AOL, and Microsoft over the last few months. Google, as is usually the case, must have made compelling arguments about not only immediate money and cash flow, but also what else could be brought to the table. Similarly, there must have been several meetings at AOL where the company wondered how much its loyalty was worth to Google -- or any other party. Microsoft must have been somewhat surprised at the speed and magnitude of Google’s offer. Rumors swirled that even IAC/InterActiveCorp at one point was interested in AOL, but AOL wanted a large valuation; perhaps something in the range of $20 billion?

Let’s examine, point by point, the non-cash elements of the deal as currently reported and the impact of the deal elements on both sides. Much of the deal foreshadows the future of search as envisioned by Google, or perhaps as jointly envisioned by AOL and Google:

  • Google will allow AOL, and perhaps other companies, to place display ads on Google pages. We all knew at some point certain search queries would be accompanied by graphical ads, because it’s good for the searcher. A high percentage of search activity is centered around music, celebrities, movies, TV, and entertainment. Those kind of searches lend themselves to graphical advertising, in conjunction with textual advertising. Google will test the relative interest levels that searchers exhibit to graphical ads. So there won’t be a degradation in user experience; instead, there’ll be an improvement, particularly for some searches types. This is consistent with Google’s implementation of its one-box results, where an area of the page is reserved for content from a different tab or source.

  • Ads sold by AOL will be displayed on Google. Google is in the yield-optimization business. If that means ads from the AOL (or Advertising.com) network perform well on Google, well, we could expect Google to run those ads at its discretion.

  • There will be separate bidding or campaign settings for AOL. It took Google years to realize many marketers wanted to bid separately for content ads and pay more (or less) for that network segment. In the case of AOL traffic (which converts better for many marketers than Google or Ask Jeeves traffic), allowing marketers to separate bids potentially makes AOL more revenue per search (and Google, too). However, there may be a slight drop in pricing across the other network segments as marketers take advantage of the ability to cherry-pick.

Some discussion areas weren’t covered in detail in the media. For example, there was no mention of demographic profiling in any news coverage I’ve seen. Yet Google may see some value in replicating some MSN AdCenter features. AOL has a lot of information about its members which is already used to display better-targeted ads to those members. The same data could be leveraged for search.

There was also no mention of the Google Wallet. Wouldn’t it be cool if charges to the Google Wallet appeared on the AOL bill already being processed? Behavioral targeting within ad networks based on search behavior is also a hot topic and may have been a major point of discussion between Google, AOL, and MSN.

There was also no specific mention of pay-per-view content. AOL and its parent company, Time Warner, have some of the best archival video available. Would the Google wallet and AOL direct billing be the best way to monetize that great video content? Perhaps.

I like it when networks compete; both advertisers and marketers benefit. Of course, an overly monopolistic Google might slip up and do some evil. Let’s hope it sticks to its mission.

Want more search information? ClickZ SEM Archives contain all our search columns, organized by topic.

ClickZ Live Chicago Join the Industry's Leading eCommerce & Direct Marketing Experts in Chicago
ClickZ Live Chicago (Nov 3-6) will deliver over 50 sessions across 4 days and 10 individual tracks, including Data-Driven Marketing, Social, Mobile, Display, Search and Email. Check out the full agenda and register by Friday, Oct 3 to take advantage of Early Bird Rates!

ABOUT THE AUTHOR

Kevin Lee

Kevin Lee, Didit cofounder and executive chairman, has been an acknowledged search engine marketing expert since 1995. His years of SEM expertise provide the foundation for Didit's proprietary Maestro search campaign technology. The company's unparalleled results, custom strategies, and client growth have earned it recognition not only among marketers but also as part of the 2007 Inc 500 (No. 137) as well as three-time Deloitte's Fast 500 placement. Kevin's latest book, "Search Engine Advertising" has been widely praised.

Industry leadership includes being a founding board member of SEMPO and its first elected chairman. "The Wall St. Journal," "BusinessWeek," "The New York Times," Bloomberg, CNET, "USA Today," "San Jose Mercury News," and other press quote Kevin regularly. Kevin lectures at leading industry conferences, plus New York, Columbia, Fordham, and Pace universities. Kevin earned his MBA from the Yale School of Management in 1992 and lives in Manhattan with his wife, a New York psychologist and children.

COMMENTSCommenting policy

comments powered by Disqus

Get the ClickZ Search newsletter delivered to you. Subscribe today!

COMMENTS

UPCOMING EVENTS

Featured White Papers

IBM: Social Analytics - The Science Behind Social Media Marketing

IBM Social Analytics: The Science Behind Social Media Marketing
80% of internet users say they prefer to connect with brands via Facebook. 65% of social media users say they use it to learn more about brands, products and services. Learn about how to find more about customers' attitudes, preferences and buying habits from what they say on social media channels.

An Introduction to Marketing Attribution: Selecting the Right Model for Search, Display & Social Advertising

An Introduction to Marketing Attribution: Selecting the Right Model for Search, Display & Social Advertising
If you're considering implementing a marketing attribution model to measure and optimize your programs, this paper is a great introduction. It also includes real-life tips from marketers who have successfully implemented attribution in their organizations.

Jobs

    • Tier 1 Support Specialist
      Tier 1 Support Specialist (Agora Inc.) - BaltimoreThis position requires a highly motivated and multifaceted individual to contribute to and be...
    • Recent Grads: Customer Service Representative
      Recent Grads: Customer Service Representative (Agora Financial) - BaltimoreAgora Financial, one of the nation's largest independent publishers...
    • Managing Editor
      Managing Editor (Common Sense Publishing) - BaltimoreWE’RE HIRING: WE NEED AN AMAZING EDITOR TO POLISH WORLD-CLASS CONTENT   The Palm...