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Google pays $1 billion for 5% of AOL

By and Juan Carlos Perez, IDG News Service
December 21, 2005 08:57 AM ET

IDG News Service - After flirting for months with Google competitors, AOL Tuesday reached a deal with the Mountain View, Calif., search-engine giant that expands their years-long technology and advertising partnership and ends advances from suitors, particularly Microsoft.

The deal, which calls for Google to pay $1 billion for a 5% stake in AOL, also plunges Google into the waters of graphical online ads where it has until now only reluctantly dipped its toes. AOL content will also be more readily available to Google's search engine technology, and Google Talk instant-messaging users will be able to communicate with AOL's AIM users, the companies said in a joint press release issued Tuesday afternoon.

Additionally, the companies will work together on video search and AOL will receive what the companies called "marketing credits" for its content from Google. Financial terms of the deal other than the $1 billion investment were not disclosed. The deal includes an extension to working agreements between the two companies in Europe.

"For Google, an AOL deal should cement its market lead - in advertising inventory and monetization - and keep competitors such as Microsoft's MSN at bay," analysts at Susquehanna International Group wrote in a research note distributed Tuesday.

AOL uses Google's search engine to power its general Web search service. It also carries paid search ads Google sells to advertisers, and splits the revenue with Google. Through the deal, AOL now can sell search advertising directly to advertisers on AOL-owned properties, according to the companies.

AOL reportedly held talks in recent months with Microsoft, Yahoo and others, seeking apparently a better deal than the one it had until now with Google.

"It's pretty much an extension of the status quo, and AOL went with the safe, proven incumbent," wrote Charlene Li, an analyst with Forrester Research, in her blog Tuesday afternoon after the deal was announced. "Google/AOL is much cleaner and synergistic, as Google is happy to direct traffic to AOL content."

Yahoo in November acknowledged having discussed a possible deal with AOL, but those talks went nowhere. Ultimately, Microsoft was the only suitor left, but Google evidently managed to woo AOL back and prevent it from straying from their pact by agreeing to new conditions.

Microsoft was reportedly interested in luring AOL into its camp to give a boost to the new MSN AdCenter online ad network it is putting together. Because AOL's traffic is so substantial, distributing MSN AdCenter ads through AOL properties would make the fledgling ad network very attractive to advertisers.

A Microsoft spokesman declined to comment on Google and AOL's announcement.

"We look at the loss of AOL as a setback for MSN, which will now face a greater hurdle to catch up in Internet advertising. For Yahoo, we see a Google/AOL deal as a modest short-term positive and potential long-term negative, as AOL's help would enable Google to build a rival in display advertising," Susquehanna analysts wrote.

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