Big Money: AOL's Beauty Pageant With Google, Microsoft For New Search Deal

Time Magazine Editor Josh Quittner and AOL CEO Tim Armstrong took the stage on Friday afternoon at the Fortune Brainstorm Tech conference in Aspen. Most of the interview was centered on AOL’s content strategies.

But what I really wanted to know about was what AOL’s plans were around search. Their long term Google deal expires in December. And from what we hear both Microsoft and Google are gunning for AOL’s search traffic.

Why? AOL is the fourth largest U.S. search engine, but they have just 2.5% market share.

If Microsoft could add AOL’s searches, though, they’d be, with Yahoo’s share, above 30%. Search volume brings more advertisers, and more advertisers means a more robust bidding system. Microsoft needs that 2.5%.

But there’s more. AOL visitors tend to click on search ads at more than twice the rate that people click on ads on Google’s search engine. So that 2.5% market share is really more like 6% of total search advertising market share.

Google has paid AOL more than $600 million/year for search over the last several years. With the appropriate amount of negotiating leverage, that number could increase dramatically.

Armstrong says there are more than two companies competing for their search traffic, which presumably means Yahoo has somehow gotten itself into the mix. But the only real competition, says our sources (and common sense), is Microsoft and Google.

Both companies want the deal. The bids are getting high enough that one person familiar with the negotiations suggested (jokingly, I think) that it may be cheaper just to buy AOL outright – their current market cap is just $2.25 billion.

Lots of people are keeping an eye on the ongoing MySpace search negotiations. But the MySpace deal will be a pittance compared to what AOL brings in. We expect a deal to be done by September, based on information from sources.