December 20, 2005 3:41 PM PST

Google, Time Warner strike $1 billion deal on AOL

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Google will invest $1 billion for a 5 percent stake in Time Warner's America Online unit as part of a partnership that expands their existing search engine deal to include collaboration on advertising, instant messaging and video.

Google also is offering a $300 million credit that AOL can use to buy keyword-based ads from Google, the companies announced Tuesday.

Google will become the only shareholder in AOL other than Time Warner. Google also will have "certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL," the companies said in a statement.

Under the new global advertising partnership, AOL will be able to sell all types of ads, including search, banner and display, across Google's network, which includes Google's own Web sites and the publisher sites that display Google-powered ads, said Marissa Mayer, Google's vice president of search products and user experience. Google's home page and core search results page will stick with text-only ads, while graphical ads could appear on Google's video and image search sites, she said.

AOL will be able to use the $300 million credit to purchase search-related ads through Google's AdWords auction system or for other undetermined promotional purposes, Mayer said. The deal also calls for the creation of an "AOL Marketplace through white labeling of Google's advertising technology" that will enable AOL to directly sell search ads on AOL-owned properties, the companies said.

Also under the deal, Google will "make sure AOL Webmasters architect their content" so it gets maximum exposure to Google's Web crawlers, but will not exchange any proprietary information to do that. She addressed concerns that arose before the deal was announced, saying an agreement with AOL could bias Google's search results. "We provisioned into the deal that there will be no way to influence the core search algorithm," Mayer said.

The companies said they will collaborate on online video search and showcase AOL's premium video service within Google Video, as well as allow Google Talk and AIM instant messaging users to communicate with each other.

"This agreement is key to fulfilling our commitment to realize the potential of AOL's very large online audience," Dick Parsons, Time Warner chief executive, said in a statement. "A critical piece of this strategic alliance will be our content, which we will be making more accessible to Google users."

Google Chief Executive Eric Schmidt said: "Today's agreement leverages technologies from both companies to connect Google users worldwide to a wealth of new content. We've also created a simple way for AOL Marketplace advertisers to buy and place search-related advertising across the AOL network. This partnership is an important next step for our companies."

Several analysts gave the deal a thumbs up, especially for Google.

"I don't see it as a strategic technology deal. I see it more as a tactical advantage, especially against Microsoft," Piper Jaffray analyst Safa Rashtchy said of Google's investment amount. "It gives Google a laboratory or testing ground for them to test new ideas about advertising. I don't see the AOL network to be of strategic value to either Google or Microsoft."

Google and AOL complement each other, said Todd Chanko, an analyst at JupiterResearch. "Google has locked up paid search, and AOL does really well with the display and banner ads and the other forms of advertising," he said.

Google derived about 10 percent of its advertising revenue, roughly $400 million, from its partnership with AOL through sponsored listings within its search engine in the first three quarters of this year. The companies first partnered three years ago.

The deal, details of which emerged last week from unidentified sources, leaves Microsoft out in the cold after months of negotiations with Time Warner over AOL's search business. Microsoft was on the verge of striking a deal before the surprise turn in Google's favor late last week.

The Google-AOL deal would give AOL a valuation of $20 billion. Time Warner shares closed at $17.74, giving it a market capitalization of nearly $82.7 billion, compared with Google's $429.74-per-share closing and more than $127 billion market cap.

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.

Billionaire Time Warner shareholder Carl Icahn, who controls 3 percent of Time Warner shares--some owned directly and some controlled indirectly through a fund--and has been organizing a proxy battle for control of the company, wants to split AOL off. He warned the Time Warner board on Monday against making a "disastrous" and "short-sighted" deal with Google that would preclude a merger or other transaction between AOL and some other company.

CNET News.com's Greg Sandoval contributed to this report.

See more CNET content tagged:
America Online Inc., Time Warner Inc., Google Inc., agreement, search result

17 comments

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Interesting to see the Google-AOL IM partnership
But, does this mean AOL will open up and support Jabber? That would be nice.
Posted by jegrant (14 comments )
Reply Link Flag
Sounds like it.
From what /. article says... "Under this new agreement, among many other things, Google Talk will now interface with AOL's instant messenger according to the announcement on Google's site."

AOL needs to open up, there's no reason not too.

<a class="jive-link-external" href="http://www.binaryfrost.com" target="_newWindow">http://www.binaryfrost.com</a>
Posted by icenfrosty (9 comments )
Link Flag
So much for "Do no evil"
AOL is evil and now Google owns part of them.
Posted by aabcdefghij987654321 (1721 comments )
Reply Link Flag
If AOL is evil...
...would you rather Google own a piece of the evil, or the evil own a piece of Google? ;)

What I'm honestly more worried about is if AOL sticks its nose in too far. Google has come up with some pretty damn cool things... Desktop search and Google Earth, in addition to the original search engine. I hope AOL doesn't put the kabash on it... If AIM is any measure of AOL's originality, it fails. AFAIK, it *still* has no native webcam support (yes, they ARE used for things other than pr0n), and the VoIP support still lags way behind Skype (the king) and even Yahoo (which recently has become more Skype-like).

Just my $0.02US... :D
Posted by unigamer69 (75 comments )
Link Flag
I just pray
That we don't see those big, flashy annoying ads everytime I log on to google. Like many others, I despise these ads screaming at you "Please buy my crap!!", but I DO click on google's ads just because they're not intrusive and genuinely helpful. If Google doesn't realise that then they're not as smart as first thought.
Posted by City_Of_LA (118 comments )
Reply Link Flag
I Agree
If I start seeing Times Square or Vegas on Google, I will find another search engine to use. I like the way Google is set up. Simple and to the point.
Posted by Wildcat0695 (22 comments )
Link Flag
Very good point
That's one signature feature of Google - it doesn't have flashy ads, or even image ads. The only ads are carefully chosen, unobtrusive, "cute" text ads - these have become a Google trademark. I'd hate to see Google go the way of other sites.

For what it's worth, although it doesn't seem to apply as much anymore, I had a checklist to see how far a free service has declined toward either closing down or becoming paid. It was:

1.) A site with few or no ads begins to become infested with more and more ads - kind of like kudsu.
2.) A bigger red flag: obtrusive ads, especially with sound.
3.) Redirect ads, which get in between you and the content.
4.) Quotas on the free service (at least those which are very restrictive).
5.) Checkmate.
Posted by unigamer69 (75 comments )
Link Flag
Another Dinosaur Bites the Dust
Business as usual, and dirty practices just lose market when you deal in an almost perfect market - that is the nature of the internet  almost frictionless, almost perfectly informed, almost ubiquitous. MS is the big loser, now that Google precludes them to buy AOL, the weakest/less expensive player (kind of the American Motors of the pack). Yahoo would be just too expensive and too full of air to buy with MS real money.

What we are seeing now is how two guys, with the simple idea of giving stakeholders what they really want, in less than 10 years take over an old and business as usual company. The Do No Evil thing is not only for the customer (the experience that 99% of us have) but also to announcers, and employees  the happy new world (hopefully not Huxleys)

If things go the way they should, MS might fall under the same spell, once the little people loses fear of Linux. Once guys like me feel comfortable installing and supporting a Linux system, the game might be over for MS. And then again, for that to happen, the priesthood that owns Linux, and solves the problems of the servers of the world, should be smart and make things as simple for the non-initiated as it is to unwrap XP and install it. They have to lose a little bit of cachet, and earn the general acceptation.
Posted by sancat (13 comments )
Reply Link Flag
Microsuck is left out
Good news!
Posted by microsoft slayer (174 comments )
Reply Link Flag
Twilight of the AOL-gods.
What we are really seeing is a long and complex war playing out. This isn't a war over the future of AOL, because it doesn't have one. This is a war over who gets to feed on the carcass of AOL.

No matter how you look at things, AOL is dying, yet in its decline there remains great value to players that will long outlast it. AOL represents tens of millions of users who are losing their fear of going someplace else, using a new email address, etc. They have to go someplace, and whomever has the inside track to them will gain considerably if they know what they are doing.

I don't think we should look at this in terms of what AOL will become with help from Google. I think we should view it in terms of how does Google parlay this in the long-term. This was a poker game against Microsuck, and Google won.

If Google is going to buy-out Opera, AOL might finally dump its current IE browsing engine. Google Talk could ultimately be the first Google Service to replace a current AOL service. Blogger would be second. Google might help AOL unscrew its lousy approach towards email. In time, as AOL's dial-up base declines, I could see a vague scenario in which Google uses Gmail as the land-point for remaining AOL mail users (maybe helping preserve their old address'.) Google might be able to offer a client based on some rebuilt varient of Opera-if they buy it out, and replace AOL's faulty software. I can see Google slowing taking over, or co-oping AOL's services, until they effectively absorb all its users.

Somebody needs to remind me if we are mis-reading something here. Isn't 5% of AOL actually AOL-Time-Warner? IE: Time-Warner with its connections to Road Runner, CNN, etc?
Posted by NWLB (326 comments )
Reply Link Flag
Interesting to read your comment, five years later. I see that your predictions regarding the fate of AOL, and the direction taken by Google, were mostly accurate!

However, much to everyone's surprise, mine included, AOL Mail users endure, and AOL's wretched so-called browser still has a good chunk of devotees (such as my mother, uncle and brother, all with the same accounts that they started using nearly daily, approx 15 years ago), many of whom will stick with AOL to the bitter end. Part of the motivation is retaining the same email address, an issue you mentioned!

I was surprised to learn that AOL is trying to revitalize itself with a former Google exec (I think!) in charge, and new hiring in R&D in NYC. Something will need to change soon. If AOL seemed out-dated in 2005, I assure you that it is appallingly antiquated in 2010, compared to EVERY other browser in use today!
Posted by javelinadream (28 comments )
Link Flag
AOL, a web portal...
Yahoo and MSN both have a web portal. It looks like Google is going to buy out AOL and use it as its own web portal.
Posted by tony_z (32 comments )
Reply Link Flag
Close.
I think Google won't use AOL's as much as migrate people from it to their own.
Posted by NWLB (326 comments )
Link Flag
 

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