America Online and Google confirmed late yesterday that they have agreed to a deal under which Google will pay $1 billion for a 5% stake in AOL and AOL will retain Google as its search provider.
The board of directors of Time Warner, parent to AOL, met in New York yesterday and agreed to accept the Google offer despite strong opposition from shareholder Carl Icahn.
The deal will give Google another five years as AOL’s search provider and will establish some new advertising relationships between the pair. Perhaps as importantly for Google, it represents a setback for Microsoft, which has courted AOL since September in hopes of scoring a large customer win—and a major ad market-- for its fledgling MSN Search product.
The agreement will “meaningfully strengthen AOL’s position in the fast-growing online advertising business and help drive more advertisers to its Web properties,” Time Warner chairman and CEO Dick Parsons said in a release. “This agreement is key to fulfilling our commitment to realize the potential of AOL’s very large online audience.” Estimates put AOL’s base of registered users at about125 million worldwide.
Details of the proposed agreement are still incomplete at press time, but the general terms of the agreement are that AOL will “whitelist” Google’s ad-serving technology and then sell search advertising that will appear only on AOL Web sites, through a platform to be called “AOL Marketplace”. Google will also permit AOL to sell some display ads directly into Google’s AdSense network.
The announced deal will also give AOL some credits—pre-announcement reports put the figure at more than $400 million—with which to purchase sponsored listings for its Web properties within Google’s search ad program. The same reports said these ads would appear in a special featured section of the relevant Google search results pages, possibly marked with an AOL logo or some other graphic branding device.
AOL will also get help from Google in “making AOL content more accessible to Google Web crawlers,” the statement said. Observers say this will probably involve optimizing AOL pages to improve their natural rankings within the Google search engine. The assistance won’t involve changing the Google search algorithm, according to reports, but will be “technical” assistance to bring the pages into closer compliance with Google’s relevance measurements. Google has in the past offered that same kind of help to other online marketers, including eBay and DVD rental service Netflix.
Google also agreed to collaborate with AOL to showcase its premium video service within Google Video, the engine’s increasingly popular video search platform. Where its media content is relevant, AOL will also see some of that content featured in a dedicated spot on Google search results pages. It’s not clear what this will look like, but reports have suggested that it might be a special location on the page marked with an AOL logo or some other graphic branding.
Google in turn gets at least two important benefits from the agreement as it’s currently understood. There’s the immediate benefit of retaining its single most important client for search services, and therefore an important source of ad revenue. AOL reportedly accounts for 10% of Google’s total income from pay-per-click ads.
In a statement announcing the deal, Google CEO Eric Schmidt said, “Our investment underscores our recognition of AOL as a valuable strategic asset and our desire both to contribute to and to participate in its future success.”
“AOL and Google have a very successful history working together, and this is an opportunity to take it to a new level that will benefit both companies and the customers we serve,” said AOL chairman and CEO Jonathan Miller. in announcing the deal.
The deal is also being seen as a major competitive block to MSN Search, which was reportedly trying to woo AOL away from Google.
In recent years, AOL has been trying to refashion itself as a Web portal and content provider, now that its dial-up business model is drying up. For its part, Google has been exploring new ad alternatives to grow revenue beyond its pay-per-click origins. Last March, the company began a test selling various display ads on a cost-per-thousand basis, reportedly in hopes of drawing online the big brand advertisers who are largely uninterested in selling directly online.
Advertisers will be watching the impact of the AOL deal on Google’s ad model will be particularly noteworthy, say industry observers. In particular, search advertisers and search marketing firms will want to see if offering AOL content guaranteed featured placement either in ads or in natural search results will have an effect on their own results.
“Given that [Google has] built their brand largely on the integrity of their search results, I think it’s important that they provide transparency into the nature of these arrangements and any advertiser or partner that may be getting preferred placement across the network,” said Peter Hershberg, a managing partner with Reprise Media. “That’s something that the public and advertisers should have some visibility into, because it’s a departure from the way they’ve done things in the past. Given Google’s history, I can’t say for certain that’s going to happen.”
