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Google buys 5 percent of AOL; Google Talk and AIM to chat it up

Time Warner just sold a small stake in its online arm AOL to its current …

Anders Bylund – Dec 21, 2005 9:13 am | 0

Google and Time Warner have finally reached an agreement on what to do with AOL. As expected, and over the protests of Steve Case and Carl Icahn, Google will fork over US$1 billion to the entertainment conglomerate, along with a coupon for US$300 million worth of free AdSense advertising. That princely sum entitles Google to call themselves 5 percent owners in AOL, and ensures the long-term stability of the two companies' advertising and search partnerships. AOL had been eyeing Yahoo! and Microsoft's MSN as possible replacements for those services and indeed as prospective partners, but that game is all over now. It looks like Google is putting some of that massive pile of cash they've been sitting on to work.

AOL and Google have been major partners in business since 2002, when AOL dropped Overture (now part of Yahoo!) as its search engine of choice and signed on with Google instead. Google has also been running their signature text ads on AOL properties, which include AOL.com (of course), Compuserve, and Netscape. So what's changed under the new agreement?

For starters, AOL wants to use graphical ads, or "display advertising" as they like to call it, through Google and its massively successful AdSense program. AOL is pushing through the change, but anyone will be able to follow and enter their own banners, boxes and whatnots as long as they pay up. Google has championed text-only advertising to this point, though that's certainly not an exclusive policy. There will just be more graphics to come, and they will be eligible for display in more places than before. However, Google insists that no graphical ads will ever show up on the company's own pages, so the sanctity of the uncluttered search interface is presumably preserved. Unless you use their personalized portal page, of course, but that's a whole other ball of wax. AOL will also sell AdSense services rebranded under the AOL Marketplace moniker. That will be the preferred ad service for sites under the AOL umbrella, and should bring in a tidy revenue stream for both partners.

Moving right along, Google will provide AOL with some insider info on how to optimize their pages to get high search result rankings. They pretty much have to, considering that they own part of the company now and have a vested interest in making all that juicy content as available to Google users as possible. On that note, making sure that Google Video can find AOL's large collection of video clips is now a high priority. With network after network offering TV shows through Apple's iTunes, making sure that AOL's In2TV stays relevant is very important. That just about rounds out the package AOL is getting out of the deal.

So what does Google get in return for their cool billion-plus dollars? Aside from the considerable benefits of not losing their largest customer to MSN or Yahoo! and putting some pressure on those rivals to improve their services, the search colossus is looking to increase the number of eyeballs exposed to Google-powered advertising. There will be cross-promotion between the two partners, and the efforts to improve the PageRank of AOL content—supposedly without altering the actual algorithms—are self-serving, really.

Then there are the instant messenger apps. Google Talk and AIM/ICQ will be able to communicate with each other, now that there is co-ownership and no business reason to stay separate and proprietary from each other. AIM sports millions of users, while Google Talk is a relative newcomer and much smaller. However, if Google's efforts to standardize the instant messenger piggybacks on the enormous reach of AIM, that could be the first domino to topple as other service providers then succumb to pressure from their respective user communities and start to talk to Google AIM and each other in an enormous '60s-style service federation love-in. Well, I can dream, can't I? MSN Messenger and Yahoo! Messenger are already working on interoperation.

The only thing missing from the announcement is some sort of integration between AOL mail and Gmail. Before the deal was finalized, Gartner analyst Allen Weiner pondered what could be if the twain were to meet:

The conversion from aol.com to gmail.com as an e-mail suffix would be relatively easy, he predicted, given Google's technological savvy. Such a move would put Google on par with Yahoo Mail and MSN Hotmail, and make it into a major force that could draw more users.

"Converting AOL's users to Gmail puts Google in the vital path of creating a communications layer that allows users to store, subscribe to, and share content," Weiner said.

Sounds good, but Google has expanded Gmail slowly through its invitation-only Beta program, and opening the floodgates to more than twenty million AOL refugees at once would put a strain on any service, let alone one that allocates a couple of gigabytes of storage to each user. Still, the day may come when reserve storage is cheap and plentiful enough that Gmail as a file sharing tool becomes a reality, and then the focus will shift to fighting off the RIAA and MPAA instead. Having Time Warner in their corner will certainly help on that front, though it might mean that the sharing and subscription would trade in nothing but Time Warner-owned content.

Google is spending a lot of money for what at first glance seems like very little benefit, but with some scratching beneath the surface coupled with some imagination, it looks like this could be the start of something rather major. AOL might still spin off from its corporate parent, but the new partnership shortens the list of suitors. That makes a stand-alone AOL more likely than a buyout, unless Google wants to trade another US$19 billion or so in cash and stock to get it done. In the meantime, both parties stand to benefit, but it isn't clear yet who's getting the short end of the stick other than Microsoft.

Anders Bylund

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