Google Inc. and America Online Inc. on Tuesday expanded their Web search and advertising alliance to offer the sharing of video and instant messaging, shutting out Microsoft Corp., which had fought hard for a deal with Time Warner Inc.'s AOL Internet unit.
America Online confirmed that Google had agreed to invest $1 billion to take a 5 percent stake in AOL, as part of a pact where Google will move beyond text-based advertising to allow AOL to sell graphical ads to Google's fast-growing ad network.
The stake effectively values AOL at $20 billion, a key benchmark should Time Warner elect to spin-off or sell a part of its Internet unit in response to dissident shareholder Carl Icahn's proxy campaign to break up the company.
Terms of the deal call for AOL's Advertising.com unit to sell display and banner advertising via Google's network of partner sites. Roughly half of Google's advertising revenue comes from text ads on its own site, while the other half comes from ads sold through partners such as AOL.
Google has previously only experimented with offering logo or brand advertising on top of the text-based, keyword search advertising which it specializes in selling.
In addition, AOL agreed to make more of its content-rich Web pages searchable via Google search, including plans to feature AOL's premium video services within Google Video, a way for users to find and view video programs over the Internet.
They also said they had agreed, under unspecified conditions, to allow users of Google's recently introduced instant messaging system Google Talk to communicate with users of AOL's market-leading AIM instant messaging service.
"I view it as a generally positive deal for Google," Piper Jaffray analyst Safa Rashtchy said in response to the deal. "I suspect the video side is the most exciting piece for Google. The biggest drawback of searching for video on the Internet is the lack of good quality (programing)," he said.
NOT JUST ADS, BUT VIDEO AND MESSAGING
The instant messaging deal between AOL and Google Talk could represent a boon for consumers as the era of conflicting instant messaging systems appears to be coming to an end. Until recently, users of AOL's AIM, Microsoft's MSN Messenger, Yahoo Messenger and Google Talk could only communicate with other users of their respective instant messaging software systems.
The tie-up responds in part to a recent move by Microsoft Corp. and Yahoo Inc. to allow the hundreds of millions of users of their rival instant message systems to contact one another.
Tim Armstrong, head of Google's U.S. ad sales operation, said in an interview his company had no plans to clutter its own site with display or other types of graphical advertising. "We have been steadfast in adhering to our 'church and state"' policy with regard to advertising on Google's sites, he said.
Wall Street analysts consider the renewed agreement a major defensive win for Web search leader Google, depriving Microsoft of a major customer that would have jump-started its push to compete with Google in the online ad services market.
In a letter on Monday to Time Warner's board of directors, billionaire investor Icahn called the potential AOL-Google deal "disastrous" because it could rule out future deals AOL might do with Google rivals such as eBay Inc. or Microsoft.
Microsoft had been in talks with AOL to use its search technology instead, which would have given a huge boost to the software giant's fledgling paid-search business.
Microsoft ranks as the Internet's No. 2 supplier of display advertising behind Yahoo. AOL is a distant No. 3 in the market for online, display-based advertising, according to data from market research firm Nielsen/NetRatings.
Microsoft only introduced its own search system in February and is now testing a keyword-based text advertising system in France, Singapore and the United States. It plans to introduce this ad system worldwide by mid-2006, a spokesman said.
"Everyone likes to write that the game is over -- but it is still early," said Adam Sohn, a director in Microsoft's MSN division. "The story is that people are finally lining up in the starting blocks."
Together the different types of advertising make up a market of roughly $12 billion annually.
Ahead of the news, Google shares closed at $429.74, up 1.2 percent, or $5.14, in regular trading on Nasdaq. The stock was little changed in after-hours trade following confirmation of the deal. Time Warner shares closed down 21 cents, or 1.2 percent, at $17.74 on the New York Stock Exchange.