Google does $1bn AOL deal

Google will invest $1bn for a five per cent stake in Time Warner's AOL 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 $300m credit that AOL can use to buy keyword-based ads from Google, the companies announced on 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 websites 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 $300m 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 labelling 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. Mayer said: "We provisioned into the deal that there will be no way to influence the core search algorithm."

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.

Dick Parsons, Time Warner chief executive, said in a statement: "This agreement is key to fulfilling our commitment to realise the potential of AOL's very large online audience. 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.

Piper Jaffray analyst Safa Rashtchy said of Google's investment amount: "I don't see it as a strategic technology deal. I see it more as a tactical advantage, especially against Microsoft. 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 per cent of its advertising revenue, roughly $400m, 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 favour late last week.

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

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

Billionaire Time Warner shareholder Carl Icahn, who controls three per cent of Time Warner shares - some owned directly and some controlled indirectly through a fund - and has been organising 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

Elinor Mills writes for CNET News.com