AOL, Google Ink $1 Billion Ad, IM Deal

As expected, Google and Time Warner announced late Tuesday a deal in which the search giant will make a $1 billion investment in AOL in return for a 5 percent stake in the company. The agreement expands a previous search partnership to include advertising and the linking up of Google and AOL's instant messaging networks.

News that Google had effectively ousted Microsoft from talks with AOL surfaced Friday. Microsoft's MSN division had been expected to replace Google as AOL's search engine and advertising provider, but months of negotiations came to a sudden halt after Google offered to include the monetary investment.

Under the new expanded alliance, AOL's Advertising.com division will sell search and banner ads across Google's Web sites, except its homepage and core search results page. Graphical ads could appear on Google's image and video search pages, the companies said.

In addition, AOL will be given access to Google's advertising technology to implement within the AOL Marketplace, which means it can sell text ads directly to advertisers rather than directing them to Google.

Google will also provide AOL a $300 million credit to purchase keyword ads on Google search properties and promote its content. AOL content will be made more accessible to Google's Web crawlers as part of the deal, but Google officials stressed the company would not give AOL precedence or access to proprietary information.

AOL's premium video offering will be added to Google Video and showcased on the search engine as well.

One interesting twist in the agreement is that AOL will open up its AIM instant messaging service to Google Talk users. Because it currently dominates the marketplace, AOL has been hesitant to connect AIM with any other network. Microsoft and Yahoo recently pledged to make their IM services interoperable.

However, little details were given on the IM proposal and the companies said interoperability would only happen "provided certain conditions are met."

"This agreement is key to fulfilling our commitment to realize the potential of AOL's very large online audience," said Time Warner CEO Dick Parsons.

"As digital technologies continue to drive industries together, the great value and opportunity inherent in Time Warner's structure and array of premier businesses becomes increasingly clear," Parsons added. "A critical piece of this strategic alliance will be our content, which we will be making more accessible to Google users."

Remarked Google CEO Eric Schmidt: "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."

With its new 5 percent stake in AOL, Google becomes the only shareholder other than Time Warner. "Time Warner will retain management control and full strategic flexibility over AOL, while Google will have certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL," the companies said.

Still, Time Warner may face scrutiny over the deal from billionaire investor and shareholder Carl Icahn. In a letter published Monday, Icahn warned that if the deal with the search engine would prevent a merger or deal with another online company, the board could be "on the verge of making a disastrous decision."