Web Search Giant Buys Stake in AOL
Web Design & Technology News, December 16, 2005

December 16, 2005

Web Search Giant Buys Stake in AOL
By Stefanie Olsen and Elinor Mills

Web search giant Google may pay $1 billion for a 5% 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 ongoing 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, according to a person familiar with the negotiations who asked not to be identified.

The talks escalated in recent months to focus on a broad, long-term partnership that the 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 Web. 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% 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% a year ago and will likely continue to fall, the estimated $400 million in revenue isn't likely easy for Google to give up.

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 Web-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 Web 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 Web at large. The move was designed to help grab some of the dollars going toward Google and others in the fast-growing Web advertising market.

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