Google to buy five per cent stake in AOL

By Steve Malone

Posted on 19 Dec 2005 at 10:43

After weeks of speculation and rumour, it looks as though media giant Time Warner is to sell a five per cent stake in AOL to Google. The stake, which has to be approved by the Time Warner board later this week, is said to be in the region of $1bn.

According to various sources, the five year deal means that Google will remain the default search engine on the AOL service. AOL will also sell advertising through Google's own lucrative AdWords network as well as receiving a large chunk of free advertising for itself. According to the AOL also gets the exclusive right to sell online banner ads for Google. The revenue from the sale will be split 20/80 between AOL and Google.

According to the New York Times report, Google has also agreed to give preferential treatment to content from AOL. If true, this would be a massive turnaround for the search engine which has always prided itself on the integrity of its search results and is some indication of how badly Google wanted this deal.

There has undoubtedly been some arm twisting on the part of Time Warner in closing the deal. Earlier this month, 'anonymous sources' were saying that a deal to sell part of AOL to Microsoft was close to completion. This undoubtedly was intended to put pressure on the Google negotiators to sign an agreement.

Indeed, Microsoft may have thought it had the deal in the bag until late of Thursday when Steve Ballmer was told that Time Warner would sign with Google. Microsoft had apparently offered to set up a joint venture between the two companies to sell advertising targeted through search engine traffic.

For Google to lose this deal would have meant an end to an agreement which this year in 2004 accounted for 12 percent of Google's revenues. Now, it seems Google is even more firmly entrenched as the number one online advertising destination with Microsoft a long way behind.

Meanwhile Time Warner can feel pleased with the deal. It not only has a new revenue stream for its sales force to exploit, the $1 billion will help the bottom line and establish the worth of the AOL division at $20 billion - considerably more than the recent valuations on Wall Street.