AOL just made their first major post-Verizon acquisition business play, and it’s a doozy: The increasingly advertising-centric AOL is taking over Microsoft’s display ad business on Xbox, Skype, and other products. By making the agreement, AOL just got control over some of the most prominent advertising space in the tech world . . . advertising space that many feel was underutilized by Microsoft for years.
Under the terms of the agreement, both companies would benefit. AOL would take over management and sales for the majority of the advertising on Microsoft’s gaming, mobile, and web products. In exchange, AOL would make Bing their search engine of choice instead of Google–a significant boost for Bing since AOL still has 2.2 million dial-up subscribers alone (yes, even in 2015). AOL would also extend job offers to more than 1,000 Microsoft employees working in the adtech space. Specific terms of the deal were not disclosed, and Microsoft will continue to have an advertising division with a much smaller portfolio. Additional Microsoft responsibilities were handed over to another adtech firm, New York’s AppNexus.
The partnership also signals something we’ve known for a while. Microsoft and AOL–two iconic-but-aging tech firms–are reinventing themselves. AOL is in the middle of a substantial pivot into one of the U.S.’s leading adtech firms, and Microsoft, under new CEO Satya Nadella, is smartly centering on core properties like Windows, Azure, and Xbox after years of sprawling into any and every tech vertical . . . including adtech.
At the same time as the AOL news was going out, Microsoft made another realignment: Uber bought Microsoft’s mapping technology for an undisclosed sum.
And while Microsoft’s advertising division tried hard, offering customers unique ad formats and interesting targeting tools, they suffered from a larger structural issue: Microsoft is a sprawling tech corporation with many lines of revenue that are not advertising. In comparison with other ad-dependent tech firms like Facebook or Google, advertising was just one monetization strategy among many for the company. Their adtech side suffered, with considerable layoffs as part of a larger round of Microsoft job cuts in 2014.
For Microsoft, handing the keys to a trusted outsider like AOL for advertising just makes sense. Nadella is up front about his top goal for Microsoft (just like another aging tech firm, IBM) being a transition to cloud software and software-as-a-service (SaaS) products sold by subscription fee. The company’s secondary priorities are well-performing products like Xbox and Skype, as well as promising futuretech revenue streams such as HoloLens.
AOL, meanwhile, is moving beyond their troubled years in the ‘00s and reinventing themselves as one of the most aggressive mobile-centric advertising players in the tech world. When Verizon acquired AOL earlier this year, it was largely an adtech play for Verizon. AOL has aggressively invested in the video-content space in the past few years, and also developed robust tools for buying, selling, and targeting advertisements.
In a memo sent to AOL employees during the acquisition, CEO Tim Armstrong wrote, “The deal means we will be a division of Verizon, and we will oversee AOL’s current assets plus additional assets from Verizon that are targeted at the mobile and video media space. The deal will add scale, and it will add a mobile lens to everything we do inside of our content, video, and ads strategy.”
Signing the deal with Microsoft gives AOL control over ads on Skype, Xbox, and MSN (whose demographics overlap with AOL.com’s considerably).
There’s also a loser in the deal. Yahoo, which has a less robust but still strong adtech business than AOL, had been trying to pull off a similar partnership for years. Ross Levinsohn, Yahoo’s former interim CEO, revealed in a LinkedIn comment that was picked up by Business Insider’s Lara O’Reilly that Yahoo had tried to work on a similar deal three years ago.
“Had we combined Yahoo inventory with MSFT inventory, it would have had significant impact on the market,” Levinsohn wrote. “Unfortunately, Yahoo went another direction and now three years later, Tim and Bom pull off a good deal.”
Levinsohn attempted to broker an agreement where Yahoo would divest itself of web search entirely, and would use Bing in exchange for taking on Microsoft’s advertising properties. The deal fell through, and Levinsohn is no longer at Yahoo.
Marissa Mayer, Yahoo’s current CEO, publicly downplayed programmatic advertising and AOL’s strategy at an event in May. Earlier this year, Yahoo shut down Right Media Exchange, an advertising exchange they spent $680 million on in 2007.