December 16, 2005 2:39 PM PST

AOL to stick with Google

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Google may pay $1 billion for a 5 percent stake in America Online as part of an exclusive deal with Time Warner that would strengthen ties with the search giant instead of dumping Google for Microsoft.

As part of the current negotiations with Google, AOL would be able to sell additional ads for its search engine also powered by Google on top of those provided by Google, according to a report Friday in The Wall Street Journal Online. Google also could promote AOL Web sites among sponsored links in search results, according to an unidentified source in the report. The report said the deal would not be finalized until after Time Warner's board meets on Wednesday.

Representatives at AOL parent company Time Warner, AOL and Google did not return calls seeking comment. A Microsoft representative declined to comment.

AOL was in talks with Microsoft this year about forming a strategic partnership, with negotiations at one point touching on a potential buyout or a Microsoft investment in AOL, a person familiar with the negotiations, who asked not to be identified, told CNET News.com.

The talks escalated in recent months to focus on a broad, long-term partnership that News.com's source described as a "game-changing deal for the media business." Under the proposal, Microsoft and AOL would have combined their advertising forces to form a massive global advertising network, selling multimedia, brand- and search-related ads for their own Web sites and third-party sites on the Internet. The deal also would have included joint promotions and content-sharing between the sites.

Then, AOL suddenly told Microsoft early on Friday that the deal was off the table, opting to forge stronger ties with its current advertising partner, Google. The Dulles, Va.-based media company has been interested in selling its own search-related ads, which are currently provided exclusively by Google, the source said.

The shifting negotiations apparently put an end to a heated and closely watched contest between Google and Microsoft over a key source of Google's advertising revenue. According to filings with the Securities and Exchange Commission, Google derives as much as 10 percent of its advertising revenue and traffic from its partnership with AOL through sponsored listings within its search engine. And although that percentage has dropped from 12 percent a year ago and will likely continue to fall, the estimated $400 million in revenue isn't likely easy for Google to give up.

The reported Google-AOL deal would give AOL a valuation of $20 billion. Time Warner shares closed at $18, giving it a market capitalization of nearly $84 billion, compared with Google's $430.15 a share close and more than $127 billion market cap. Microsoft, meanwhile, saw its stock close at $26.90, giving it a market cap of more than $286 billion.

Google had 48 percent search market share in October, compared with 22 percent for Yahoo, 11 percent for Microsoft's MSN and 7.2 percent for AOL, according to Nielsen/NetRatings.

JPMorgan analyst Imran Khan predicted the deal would have a slightly positive or no impact on Google's earnings and would make it harder for MSN to have a strong advertising network.

"We believe this deal makes it more difficult for MSN to develop a strong advertising network as scale is very important in order to attract (advertisers)," he wrote in a research report. "By tying up AOL, Google has made it more difficult for MSN's ad network to reach critical mass."

Piper Jaffray analyst Safa Rashtchy said the proposed deal delivers the most benefit to Google, as opposed to AOL. If the deal goes through, Google will retain its search relationship with AOL, as well as its revenue source, and stave off Microsoft in its quest to acquire AOL as a partner. Finally, Google will be able to use AOL's network as a test lab for new services, such as its banner and display advertising sales. Google, for example, could sell a display ad for AOL pages and maintain its search engine's signature spare look.

In contrast, the deal doesn't necessarily help AOL greatly, Rashtchy said.

"AOL's biggest challenge is still to reposition the company" as a player in the Web content business, he said. "This would be more of a cash infusion for that than anything else."

Yahoo and Comcast reportedly were in talks with AOL at one point too, but dropped out of the race, leaving heavyweights Google and Microsoft to duke it out.

AOL was initially a huge success, bringing millions of Americans online with its ubiquitous subscriber CDs and Internet-made-easy campaigns. After Time Warner and AOL's $109 billion merger in 2001, AOL began weighing on the old media company's stock as AOL lost dial-up Internet subscribers to faster broadband connections.

AOL recently had a makeover and a huge shift in its business model, launching a new AOL.com portal and opening up its formerly walled-off content to the Internet at large. The move was designed to help grab some of the dollars going toward Google and others in the fast-growing Internet advertising market.

The changes weren't fast enough to suit billionaire Carl Icahn, who directly and indirectly controls 3 percent of Time Warner shares. Icahn has been organizing a proxy battle for control of the company and wants to split AOL off.

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Yahoo Meme Eclipses Google & AOL
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Posted by Broward Horne (88 comments )
Reply Link Flag
Win Win for Microsoft
AOL had been providing 15% of Google revenue -- now Google hands 80% of that back to AOL in hopes of dubious future "synergies".

Looks like MS got what they wanted (gutting Google revenue) and didn't have to part with a penny to do it. Impressive.
Posted by Betty Roper (121 comments )
Reply Link Flag
Wow a Microsoft Lover
Wow a person that cheers on Microsoft. Did not know that you
people existed.
Posted by Cornholieo (15 comments )
Link Flag
dubious win
This wasnt the intended end of the story from Microsoft side. When your competitors, which are of comparable size get into alliances, that is not really a good thing.
Furthermore the money Google paid is Bubble money (remember the dot com days?), not revenue money. Google has a lot of cash to invest, and buying a stake at the company that provide a sensible part of your revenue is just an obvious step.
About synergies, they already exist: AOL provides 10% of Google's revenues, and now Google is indexing music: Warner's assets!
Microsoft, now facing Yahoo, and Google-AOL, is now caught between a crossfire.
You have to look to the big picture
Posted by sancat (13 comments )
Link Flag
Not really.
I differ on that point. Anything MS doesn't prevent Google from getting is a loss. Companies are siding with Google because it has the edge in many ways. The world senses this might be the company and time to start hedging against MS.
Posted by NWLB (326 comments )
Link Flag
comment on comment
I think this is an accurate assessment. It is likely to push Yahoo into #3 spot, the way Nintendo has been pushed into #3 spot. :) :) :)_
Posted by FisherKingKQJ (59 comments )
Link Flag
:-)
I was gonna say something...
Then I thought... Too easy.
Posted by UntoldDreams (91 comments )
Reply Link Flag
Win for AOL & Google, embarassments continue for Bill and Ballmer
There is no way to read this story as anything but a big loss for Mr. Softie. Two months after results starting pouring in regarding their new MSN search showind DECREASING market share, MSN looses out on the hugely successful AOL property. Frankly, I doubt if they were ever in the running seriously. The Wall St. Journal Saturday had a very detailed account of the timeline leading to MSFT loosing out. Apparently, shockinglingly actually, their were antitrust concerns due to the dial up numbers.
Googe wins big in shoring up an about to expire, very successful partnership with AOL.
What will the angry Carl Ichan say? He's been hammering Dick Parsons to dump AOL.
I was with AOL when you still paid for time used, and like others dumped them when I went broadband. Through the time, I always defended the service due to its incredible ability to get newbies online. Frankly, I think some of the hemorraging of users could have been slowed if they had introduced a bare bones dial up service like they have now with the $9.95 Netscape service (they also provide the service for Wal-Mart connect).
The great James Stewart of the Wall St. Journal and Smart Money have argued that AOL is very valuable for both it's sites (Mapquest, Moviefone, and the AOL homepage), but also it's dial up business. At this point in my life, I can't afford/won't pay $40-50 for cable broadband, and don't have cell reception in my apartment. So, I have to have a landline. $9.95 or $23 at AOL is still a good option. (I know DSL rates are falling).
AOL/Prodigy/Compuserve (Steve Case specifically) brought the Internet to millions and millions of people. That is a great thing. Yes, yes, the merger was a stock disaster, but as much because of the arrogance of the TW people and their intransigence in blocking AOL's access to their precious content. The market reacted harshly to these non-existent synergies and the rest is history. That can't be blamed on Case/AOL by leftist Turner and other bitter people at TW.
When Case got word recently of the deal, he left the board and wrote an op-ed criticizing management's neglect of AOL. Good for him. Just now, years after the merger, in my area TWC is offering AOL with RoadRunner.
Best of luck to Google and AOL, and Mr. Softie your troubles continue.
Shalom,
EJ Passeos
Akron, OH
Posted by ejpasseos (14 comments )
Reply Link Flag
More of an embarassment for Ballmer than Bill
Microsoft's issues come down to Ballmer. Since Bill left primary
managment to Ballmer, the company has lost its mojo. Explorer
has not had a major revamp in ages, and is now reluctantly doing
so due to a small, but slowly eroding customer base (Firefox).
There also been no major upgrades to their office programs, since
they have a monopoly on the products. Now that Bill seems to be
getting back into the creative aspects of the company it will be
interesting how things shape up.
Posted by Cornholieo (15 comments )
Link Flag
Very Nice
This is good news for AOL as well as Google. They do great business together. So, it only makes sense.
Forget Mr Gates and Ballmer.
Posted by Dead Soulman (245 comments )
Reply Link Flag
Don't Be Evil
If Only Micro$oft had come up with that slogan. It appears that while Microsoft is evil (for making money presumably), Google is fresh innovative and nice and not evil (for not making as much money presumably).

AOL is a mess
Microsoft is changing
Google is a few bad choices away from AOL

All three will destroy little competitors. None of them will lose (by "them" I mean the people who actually make money). Most people are poor investors, or poorer employees. Having an opinion about the BILLIONS these companies make whilst struggling with Credit Card debt - is amusing but somewhat worthwhile. It's amazing how much people forgive in order to belong to the "google clan" or the "anti-MS bashers".
This is part of the corporate money go round...the only thing that changed is that Google is a new entrant into the ring-o-money game...

To all those that hate M$ but bought an XBOX360 - I salute you.
Posted by exquicorp (2 comments )
Reply Link Flag
LOL
Don't feel sorry for any of the employees at these companies.
These employees are well paid and it is common knowledge that
many of the employees at Google at time of IPO are now
millionaires, and have cashed out and realised the millions. Google
will probably be around awhile as will yahoo, they both are very
profitable and both made it through the .dot bust. And if these
companies do fold, they will find jobs in another tech company.
Such is the circle of life in the tech industry.
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