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AOL hails revived alliance with Google

America Online (AOL) formally announced a revived partnership with Google Inc on Tuesday, a deal that affirmed AOL's value less than a year after a chorus of calls for its parent, Time Warner Inc, to dump the division as a lost cause.

Google said it had agreed to buy 5 percent of AOL for US$1 billion and to provide advertising credits for AOL to promote its Web sites on Google's search service. Those advertising credits total US$300 million over the five-year term of the deal, according to an executive involved in the negotiations.

In return, AOL agreed to continue to use Google as its Web search engine and to display its search-related advertising, as it has since 2002.

Richard Parsons, the chief executive of Time Warner, said the deal would help accelerate AOL's shift from selling Internet access subscriptions to running free advertising-supported Web sites.

"By sticking with our current partner, we have the best partner, the most technologically sophisticated and powerful company in the ads space, and we have deepened our relationship with them," he said. "We are aligned around the opportunities to drive more revenue in this fast-moving space than either of us could do separately."

Google chief executive Eric Schmidt said the deal offered a way to accelerate its goal of expanding from simple text ads associated with search to a broader range of advertising formats including graphical display ads. Under the arrangement, AOL's sales force will be able to sell both search advertising and display advertising on Google's own Web site and the many sites on which Google places ads.

"We have not offered a complete advertising solution until this point. This is about expanding the network of our revenue and partners and advertisers, and we couldn't do that by ourselves," Schmidt said.

Google beat out Microsoft Corp, which had made an aggressive bid to win AOL as the premier outlet for its new search and advertising services. Microsoft had offered a large guaranteed payout for America Online and a joint venture to sell ads.

The Google-AOL deal involves a range of other forms of cooperation. Notably, AOL will allow users of Google's new Google Talk instant messaging system to chat with users of AOL's messaging network, the largest in the country. Until now, AOL has resisted linking its system with those run by its major rivals -- including Yahoo Inc and Microsoft, which recently agreed to link their own. It does connect to Apple Computer Inc's message system and several services aimed at corporate users.

There will be a somewhat complex procedure to link the two systems, however. Google Talk users will need to add an AOL screen name to communicate with other AOL users.

Google will help drive users to AOL's Web sites by giving it the free advertising and by highlighting AOL's video programming in its growing video search service.

"If AOL is going to become a powerhouse again, it needs to return to growth," said Jordan Rohan, an analyst with RBC Capital Markets. "This is a first step. By partnering with Google, maybe some of the Google magic will rub off."

But Rohan said the likelihood of this deal restoring AOL to its former pre-eminent position online is low.

So far, AOL's effort to promote its Web sites have hardly produced significant results.

In November, 70 million people, or 41 percent of the Internet audience, visited AOL.com, the company's lead Web site, according to comScore Media Metrix. That is down from 48 percent of Internet users a year ago, before AOL started moving much of its better content from its paid service to the free AOL.com.

Time Warner investors appear not to be impressed by the deal. The company's shares have trended down since word that it had selected Google emerged on Friday. Time Warner formally announced its deal about 6pm on Tuesday. In after-hours trading, its shares rose by US$0.01 to US$17.75. Google's shares reached US$431.25, up US$1.51, after hours.
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