December 19, 2005

Google is expected to acquire a five percent stake in AOL for a sum of about $1 billion.

This acquisition could possibly give Google access to coveted content assets from Time Warner.

Although the terms of the transaction aren't finalized yet, this is interesting.

Quoted from the New York Times: "Google, which prides itself on the purity of its search results, agreed to give favored placement to content from AOL throughout its site, something it has never done before".

In 2004, AOL earned about $300 million from revenue share payments related to clicks on Google PPC ads shown on AOL search results pages.

The original merger between Time Warner and AOL was worth approximately $163 billion (combined value of the companies at the time).

This investment, if extrapolated, would value AOL at $20 billion today. At today’s market close, Time Warner’s market cap was approximately $84 billion, while Google’s was roughly $127 billion.

This deal represents something of an easier “integration” than a joint venture with Microsoft would have been.

Here’s what the Wall Street Journal (sub req’’d)said earlier today about the terms and implications of the deal:

The deal would help Google sell more of the display ads that run on some of the Web sites affiliated with Google.

AOL’s big sales staff would begin selling such display ads for an unspecified number of Web publishers that have outsourced at least part of their ad sales to Google.

In turn, Google, whose technology powers the AOL search engine, would allow AOL to directly sell search ads, which appear when users type key words in queries or when the words appear in the texts of Web sites.

Google also would promote AOL’s Web properties among ads that appear beside its search results, and include AOL’s online videos among search results.

It would extend by five years its deal to operate AOL’s search engine, which was to end next year.

Most interesting here is the idea of Google having a greater “branding” (display ads, read larger advertisers) opportunity and leveraging AOL’s sales force.

Also, as I mentioned above, display/distribution of some of AOL’s video content assets would probably benefit Google in its bind to become a video search engine/portal.

AOL also owns Advertising.com and I wonder if the latter’s inventory or technology (e.g., behaviorial targeting, rich media) are contemplated to come into play in any way in this?

The analysts and commentators who spoke with The Mercury News think the retention deal was mainly about PR rather than revenue for Google (interesting):

Although losing AOL as a partner would not have significantly hurt Google’s financial bottom line—AOL was shrinking as a source of ad revenue—it would have been a public embarrassment for the company, several observers said.

“I think this has more to do with stature than economics,’’ said Ellen Siminoff, chief executive of search marketing company Efficient Frontier. “I think it was shrewd of Google to go after it, because it doesn’t allow anyone else to come after that business.’’

Standard & Poor’s Internet analyst Scott Kessler agreed.

“Internet searching is going to be big for Microsoft, and I think the last thing Google wants to see is Microsoft making a splashy debut with their former best customer,’’ Kessler said. “I think to some extent it’s a land grab.’’

Of course $1 billion is a lot to spend on PR.

Source: Search Engine Journal

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