AOL doesn't seem to have gotten any big upfront payments from Google for its search deal.

How come?

Probably because AOL wasn't in a very good position to negotiate.

The speculation is that while CEO Tim Armstrong may have talked and even negotiated with a handful of search companies (he says it was six or seven), he only really ever had one choice…Google – the incumbent.

One source familiar with the process gave us two big reasons:

• AOL has about ~4.5 million access subscribers who still generate huge amounts of cash for the company. It can't do anything to scare them away. They are very used to seeing Google search results. Can't mess with that.

• The only real rival to Google for AOL search was Microsoft. But AOL couldn't do a search deal with Microsoft because it wants to sell to Microsoft. The only reason Microsoft would ever actually buy AOL is to get AOL's search business. If AOL turned itself over to Bing for a cash payment now, Microsoft would no longer have any incentive to take that step. It's that whole if-you-give-the-milk-away-no-one-will-buy-the-cow thing.

And then there's another reason: Money. Microsoft's revenue-per-search is so much lower than Google's that Microsoft would have had to have taken a huge loss on the deal to guarantee as much revenue to AOL as Google will deliver. 

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See Also:

• JULY SEARCH SHARE: Google Loses, Yahoo Gains, Bing Hits Wall
• ComScore: Here's How We're Going To Weed Out Bogus Searches From Our Stats Now That Everyone Is Gaming The System
• THE MICROSOFT INVESTOR: Betting On Gaming With Its Mobile Strategy Is Not Wise

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MSFT Flat As Market Trades Sideways
With mixed economic news out this morning, shares of MSFT are trading relatively flat. Upcoming catalysts include upgrade cycles of Office 2010 and Windows 7; any entrance into the tablet market; the launch of Windows 7 mobile; any adoption of Azure (cloud computing); and gamer reaction to Kinect. The stock currently trades at 8x Enterprise Value / TTM Free Cash Flow, inexpensive compared to historical trading multiples.

Microsoft Wants To Take Over China (The Wall Street Journal)
Microsoft has a huge potential market in China; nearly every U.S. tech company does. The country is the world’s second-largest PC market by shipments behind the U.S., creating a widespread need for software.  And Microsoft has healthy government relations with China, so far. Simon Leung, Microsoft’s chief executive for the Greater China region, talked with The Wall Street Journal about how cloud computing can help stop piracy, how Bing competes with Google and Baidu, and how Microsoft can catch up with Apple in the smartphone race. I laughed out loud on that last one.

Software Veteran Analyst To Microsoft's Rescue (CNBC)
Heather Bellini, an analyst at ISI Group and Wall Street veteran, said there are several events that might make investors take a second look at Microsoft. The mobile strategy will be addressed when Windows Phone 7 comes out in October. Concerns over its tablet will remain until they launch a credible device and she thinks that's a year away. In the near-term, the company's board meets in September. That's when the company usually decides if they'll return cash back to shareholders via buybacks or if they'll raise the dividend. Also, the enterprise PC cycle is "really good" and that's to Microsoft's benefit.

Which Incubating Business Will Be Microsoft's Next Cash Cow, If Any? (Redmondmag)
Whether you believe that Microsoft is too dependent on its cash cows or that Microsoft is spreading itself too thin, what will be the next billion-dollar baby in Redmond? Online advertising may bring in a billion in revenues, but it's also racking up massive losses, so the net is a wash. Some other incubating businesses include: Business Productivity Online Suite; Identity; Desktop virtualization; Unified Communications: Office Communications Server, Exchange Hosted Services and Live Meeting and Voice; Storage (Data Protection Manager); Mobility; and Bing Maps. Those are a lot of darts.

Daily Trader: Bullish Pressure Building (Learning Markets)
There is some bullish pressure building up in the background of MSFT. Looking at Monday's money flows, $80 million poured into the stock,  $217 million flowed on uptick trades while only $137 million flowed in on downtick trades, giving the stock an up / down ratio of 1.58. Microsoft stock has lost 10% during the past month and is currently trading below its 20-day, 50-day and 200-day moving averages.

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See Also:

• THE MICROSOFT INVESTOR: Despite Intel's Warning, Hedge Fund Managers Pound The Table On MSFT
• THE MICROSOFT INVESTOR: Gates Continues To Unload Shares Of MSFT
• THE MICROSOFT INVESTOR: Betting On Gaming With Its Mobile Strategy Is Not Wise

For the past year, we've been arguing that Research In Motion (RIMM) is in trouble.

The smartphone leader is rapidly losing share to Apple and Google in the consumer market, which is where most of RIM's growth comes from. Worse, the iPhone and Android have also recently begun making inroads in RIM's core market--the enterprise.

Put those trends together, and RIM looks like the next Palm--a one-time smartphone leader who lost a step in the innovation game and was quickly rendered irrelevant (with predictable effects on the stock price).

We think that eventually Microsoft will buy RIM as a way of shoring up its own demolished mobile business, and the two companies' strength in the enterprise market would certainly complement each other.  But the trends that are driving iPhone and Android into the corporate market are also rapidly blurring the line between "consumer" and "enterprise."

Even normally optimistic Wall Street has begun to throw in the towel on RIM.  The latest analyst to do so, Bernstein's Pierre Ferragu, cites several important factors:

• The large enterprise market is saturated (i.e., no growth there)

• The small-and-medium-sized enterprise market is more open to competition, and there is limited room for growth.  Also, average selling prices will decline.

• Companies are increasingly opening up and allowing employees to use the smartphone of their choice--and, increasingly, those smartphones are iPhones and Android phones.  This has two benefits: It makes the employees happy AND it saves the companies money.

Here are some quotes from Ferragu, via John Paczkowski at All Things D:

“The market for corporate mobile e-mail is highly penetrated and saturated outside of SMEs (Small and Medium Enterprises)... Growth in the number of companies using mobile e-mail will be limited to the SME market, in which RIM is likely to suffer the most from competition. If there is still some growth in the number of users at companies already using mobile email, it is limited and we suspect it will turn into negligible value growth as it will go along with significant ASP decline.”

“… Despite the company’s overall dominance of the [enterprise] segment … 74 percent of companies with mobile e-mail have already adopted alternative platforms, including the iPhone and Android,” Ferragu explains. This phenomenon is very new: almost all these companies “opened-up” their systems in the last two years, half of them in the last 12 months. We expect these companies to progressively ramp up the installed based of non-Blackberry solutions and therefore expect increased pressure on RIM’s performance.”

“Enterprise satisfaction with RIM solutions is very high, and most managers surveyed said that they expected BlackBerry products to remain innovative and competitively featured... The issue boils down to cost and consumer preferences: employees want to be able to use their own phone, and allowing them to do so presents IT & Telecom managers with a way to substantially cut their operating costs.”

So what can RIM do to stop the decline? Not much, says Ferragu. It missed a step, and now the competition has blown right past.

Time for RIM to sell while it still can.

See Also:
RIM Is The New Palm -- Doomed
We Have Seen The Future Of RIM's Stock Price And This Is It

Join the conversation about this story »

See Also:

• RIM Is The New Palm
• Let's Be Honest: Microsoft's Mobile Business Is A Fantasy
• It Seems Reasonable To Suggest That This Is What RIM's Future Stock Chart Might Look Like

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MSFT Down As Market Gets A Respite
Americans' confidence in the economy improved slightly in August. That should be short lived. Shares of MSFT are trading sideways as a result. Upcoming catalysts include upgrade cycles of Office 2010 and Windows 7; any entrance into the tablet market; the launch of Windows 7 mobile; any adoption of Azure (cloud computing); and gamer reaction to Kinect. The stock currently trades at 8x Enterprise Value / TTM Free Cash Flow, inexpensive compared to historical trading multiples.

Top Hedge Fund Managers Pound The Table On Microsoft (Reuters)
Top hedge fund managers (Dinakar Singh and David Einhorn) scooped up shares of Microsoft during the second quarter, taking advantage of historically low price-to-earnings multiples for the world's largest software company. The stock is now trading ~10x expected 12-month forward earnings, close to its lowest multiple on record and a 70% discount to peers. Even Whitney Tilson believes the shares are "insanely cheap for a company of this caliber and market position."

Analysts Weigh In On Intel's Warning And Its Impact On Microsoft (Various)
Intel announced that its third quarter revenue will be below the company’s previous outlook. Intel revised the mid-point of September quarter revenue to an increase of 2% sequentially vs. 8% previously, due to weakness in developed market consumer PCs:

• Philip Winslow at Credit Suisse believes that despite the consumer slowdown and its negative impact to his above-consensus Microsoft estimates, several PC-related positives remain in the market: 1) there is no evidence of any reductions to corporate PC build plans (~53% of global units); 2) Europe sell-through (~22% of global units) was less impacted than feared during the second quarter; and 3) Windows-based tablets will likely be available in stores before Thanksgiving. He is cutting his September quarter estimates to revenue of $16.2 billion and EPS of $0.59 from revenue of $16.5 billion and EPS of $0.61. That said, Microsoft remains his top pick in large-cap software.

• CLSA analyst Ed Maquire is adjusting his Microsoft revenue and EPS estimates to reflect third quarter softness in the consumer PC market, driven by iPad cannibalization of netbooks and softer US and European demand. Impact on his forecast is cushioned by the relatively low price points of impacted products and corporate demand, which has trended toward premium SKUs. He thinks lingering weakness in MSFT shares does not reflect potential from enterprise products, Azure cloud services and a revitalized Xbox and Halo franchise. While near-term concerns are likely to weigh, Ed thinks that current valuation does not reflect the potential upside. He continues to rate Microsoft Buy with a $32 target price.
  

Microsoft Shows Google Some Love, Introduces Bing For Android (The New York Times)
Microsoft’s Bing released an application for the Android platform from Google. The move could be seen as an encroachment on Google’s turf, as the two companies compete directly on a number of search platforms. The app comes with the typical Bing offerings, including image search, movies, maps, local, news and driving directions. From the products Microsoft highlights in its announcement, it seems that the company is trying to separate itself from Google by highlighting features that Google does not offer. Whatever works at this point.

Microsoft Now Thinks It's A Good Time To Invest In China Search (The Wall Street Journal)
Microsoft is looking for a Chinese joint venture partner to expand its Internet search services in China, the largest Internet market dominated by incumbent Baidu. The company is aiming to turn around its less than 4% market share and become a major player. Microsoft's search engine, Bing, is currently operated in China by Shanghai MSN Network Communications Technology Co., a Microsoft joint venture with Shanghai Alliance Investment Ltd. Perhaps the time to have done this was when your arch rival, Google, was struggling. Good luck guys.

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See Also:

• THE MICROSOFT INVESTOR: Gates Continues To Unload Shares Of MSFT
• THE MICROSOFT INVESTOR: Betting On Gaming With Its Mobile Strategy Is Not Wise
• THE MICROSOFT INVESTOR: Microsoft–Yahoo! Partnership Launching Ahead Of Schedule

We recently argued that Microsoft's mobile business is now little more than a fantasy--because, among other things, Microsoft wants to charge $15 per copy for Windows Phone 7 licenses while Google gives Android away for free.

Well, a person familiar with Microsoft's mobile strategy immediately squawked, arguing that Android comes with all sort of hidden costs that drive up the per-unit expenses such that Microsoft's $15 per unit actually seemed like a better deal.

Is that true?

Below are the specific hidden costs that the person familiar with Microsoft's mobile strategy say make Android much more expensive than it seems.  Please help us get at the truth.

(And, if you can, please compare/contrast the relative costs of Android versus Windows Phone 7 for the handset manufacturers).

Reasons why the person familiar with Microsoft's mobile strategy says Android is much more expensive than "free":

·         OEMs are not using the stock Android build.  All Android OEMs are bearing costs beyond “free.” 

·         Lawsuits over disputed Android IP have been costly for Android OEMs.  (See Apple/HTC, as just one example.)  Microsoft indemnifies OEMs who license Windows Phone 7 against IP issues with the product.  That is, legal disputes over the IP in Windows Phone 7 directed at OEMs will be handled by Microsoft.  This goes a long way toward controlling legal costs at the OEM level.

·         Android’s laissez faire hardware landscape is a fragmented mess for device drivers. (For background, just like PCs, mobile devices need drivers for their various components—screen, GPS, WiFi, Bluetooth, 3G radio, accelerometer, etc.)  Android OEMs have to put engineering resources into developing these drivers to get their devices working.  The Windows Phone 7 “chassis strategy” allows devices to be created faster, saving significant engineering cost.  It’s essentially plug and play, with device drivers authored by Microsoft.

·         Windows Phone 7 has a software update architecture designed to make it easy for OEMs to plug-in their custom code, independent of the OS code.  We’ve seen the delays due to Android OEMs having to sink engineering resources into each and every Android update.  Some Android OEMs skip updates or stop updating their less popular devices.  Because of the unique update architecture, Windows Phone 7 OEMs don’t need to roll their own updates based on the stock build. Costs are reduced significantly.

·         Android OEMs need to pay for licenses for many must-have features that are standard in Windows Phone 7.  For example, software to edit Office documents, audio/video codecs (see some costs here), or improved location services (for this, Moto licenses from Skyhook, just as Apple once did).  Of course, all of these license fees add up.

·         Windows Phone 7 supports automated testing.  Android doesn’t. When OEMs hit the QA phase of the development lifecycle, it’s faster and less expensive to QA a Windows Phone 7 device than an Android device.

·         Finally, Windows Phone 7 comes with great user experiences in the Metro UI, Zune, Xbox LIVE, Exchange, and Visual Studio for app development.  Creating these experiences for Android is costly.  They’re not baked into the stock build of Android. 

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See Also:

• Let's Be Honest: Microsoft's Mobile Business Is A Fantasy
• "Android Tools Are Horrendous, OS Is Hideous," Says Facebook iPhone App Developer
• RIM Must Switch To Android Now, Before It's Too Late