Google Spends $1 Bln for 5 Pct Stake in AOL

In what’s being hailed as a landmark deal, Web search (and stock market) phenom Google has agreed to invest $1 billion for 5 percent stake in America Online as part a newly expanded strategic alliance and online advertising partnership. The agreement centers around AOL’s content offerings and Google ability to put links to those offerings in front of millions of Web users: AOL gets more people to access (and buy!) its stuff, where Google can enhance its own services and offerings by integrating AOL content.

The broad agreement includes the following important points:

  • Google will provide AOL an estimated $300 million in marketing credit on Google Internet properties like Google search, Froogle, and Google Local.
  • Google Talk, the company’s Jabber-based instant messaging client, will be able to interoperate with AIM “provided certain conditions are met.”
  • Google will help AOL optimize its content for better placement and discoverability by Google’s (and, presumably, other) Web indexing engines.
  • Google and AOL will collaborate to create a video search feature showcasing AOL’s video content within Google Video.
  • Google will expand display advertising opportunities to AOL (and others) throughout the Google network. This includes Google enabling advertisers to put ads with graphics on Google’s search results pages and in other Google online offerings.
  • The companies will collaborate to create an AOL Marketplace through which AOL can sell search ads on AOL properties using Google’s advertising technology.

Placing a $1 billion price tag on a 5 percent stake in AOL implicitly values the company at $20 billion, a key figure if dissident AOL shareholder Carl Icahn proxy campaign to sell off Time Warner assets bears fruit. Icahn argued against the AOL/Google deal, labelling it “disastrous” because it may close doors on future buy-ins or mergers with companies like eBay, Microsoft, or IAC/Interactive.

So far, analysts generally hold that AOL gains the lion’s share of concrete rewards from the deal: they’ve opened up Google’s famously spartan text-based search results ad placements to graphics, converted Google’s industry-leading ad placement system into their in-house partner, picked up a free $300 million in advertising on the Web’s leading search engine, and walked away with a fistful of cash. For Google, the move is seen as more of a strategic win: it’s not so much that Google bought a 5 percent stake in AOL, but that Google prevented Microsoft from taking away AOL’s search business. AOL is reportedly Google’s single largest advertising customer, accounting for over $400 million in ad spending during the first 9 months of 2005 (roughly 10 percent of Google’s revenue). If fuddy-duddy Microsoft had been able to kneecap Google’s search business, Google wouldn’t as easily be able to position itself as a technology leader or a success story as information technology continues to shift its focus from desktops to the Internet.

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