Google Takes $1 Billion Stake In AOL

Under the deal reached with AOL parent Time Warner Inc., Google, based in Mountain View, Calif., will get a 5 percent stake in AOL, based in Dulles., Va. As a result, the search engine giant will become the only shareholder in AOL, other than Time Warner. The New York media giant, however, would retain management control and full strategic flexibility over its subsidiary

Google, on the other hand, would have certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL.

The ad deal is important to AOL as it moves from being an Internet service provider dependent on a dwindling number of dial-up subscribers to becoming a portal capable of tapping the growing online advertising market. For Google, the deal expands its reach as a Web advertising platform, and gives it access to AOL content, particularly its video services.

Google has provided search to AOL for three years, so the three companies positioned the latest deal as an expansion of the current alliance.

"We're very pleased to build significantly on our special relationship with Google in a way that will meaningfully strengthen AOL's position in the fast-growing online advertising business and help drive more advertisers to its Web properties," Dick Parsons, Time Warner chairman and chief executive, said in a statement.

Eric Schmidt, chief executive of Google, said the company was "thrilled to strengthen and expand" its relationship with AOL.

"Today's agreement leverages technologies from both companies to connect Google users worldwide to a wealth of new content," Schmidt said.

As part of the agreement, Google agreed to expand its use of display advertising throughout the Google network. Until now, Google has been reluctant to use graphics, such as banner ads, preferring to maintain an uncluttered interface known for downloading quickly. Google's early success was driven in part by this reputation.

AOL would apparently be able to buy display advertising on Google in order to promote its own products.

In addition, Google has agreed to let AOL advertisers buy and place search-related advertising across the portal's network. So called "contextual advertising," which is the placement of text ads related to search queries, is the hottest segment of the online advertising market.

Google and AOL also agreed to let users of their respective instant-messaging systems communicate with each other, provided certain conditions are met.

Yahoo Inc. currently leads in overall advertising impressions with 25 percent of the market, according to Web metrics firm Nielsen/NetRatings. Microsoft Corp.'s MSN and Google each have 9 percent of the market and AOL has 4 percent.

But in search-related advertising, the fastest growing segment, Google leads with almost twice as many sponsored-link impressions than No. 2 Yahoo, Nielsen/NetRatings said.

In a research note, Victor Schnee, president of researcher Probe Financial Associates Inc., praised the deal as helping AOL in its ad revenues, "but it does nothing to address the underlying problem, which is whether a media conglomerate like Time Warner can successfully manage a leading web property and keep up with the lightning fast pace of change in that arena."

Time Warner has been criticized over the last several years for its botched merger with AOL. The media giant has yet to recover from the beating its stock has taken since the merger.

In addition, dissident shareholder Carl Icahn, whose group has a 3.1 percent stake in Time Warner, has publicly come out against a Google deal, calling it "disastrous," according to the Reuters news agency.

Google closed the deal with AOL following months of negotiations, fending off competing offers from major rival Microsoft. The Redmond, Wash., software giant and owner of the MSN portal had reportedly wanted to replace Google as AOL's search engine and wanted to partner in online advertising.