washingtonpost.com
Google to Buy 5% Of AOL for $1 Billion

By David A. Vise
Washington Post Staff Writer
Saturday, December 17, 2005

Google Inc. is buying a 5 percent stake in Dulles-based America Online Inc. for $1 billion as part of a far-reaching business and advertising partnership aimed at boosting AOL's financial prospects as the Internet service struggles with the loss of millions of subscribers.

The five-year deal gives AOL new life by offering it numerous ways to garner more of the billions of dollars being spent on Internet advertising. It also deepens AOL's relationship with Google, the leading gateway to Internet sites for millions of computer users.

Google has been the search engine on AOL for several years, but rival Microsoft Corp. made a bid to take its place, offering AOL hundreds of millions in cash annually if it dumped Google for MSN Search. But Thursday night in New York, Google presented Richard D. Parsons, chief executive of AOL parent Time Warner Inc., with a more lucrative proposal that gave AOL numerous ways to grow along with rapidly expanding online ad spending.

Under the agreement, Google will remain the search engine on the AOL service for five years and Google will give AOL millions of dollars of free advertising on the search engine to promote its network of Web sites. AOL also will get the exclusive right to sell online banner ads for Google. AOL will keep about 20 percent of the proceeds from those ad sales, while Google will get about 80 percent.

"This is our dream come true. Our fates are intertwined," said a person familiar with AOL's strategy to link its future to Google's. The person spoke on condition of anonymity because Time Warner's board still must vote on the transaction when it meets next week.

While AOL has been losing subscribers, it is still the nation's biggest Internet service, with about 20 million users who pay for Internet access; e-mail; and an array of music, news and other content. AOL has been increasing the size of its audience by giving away content and e-mail addresses for free on AOL.com and by attracting users to Moviefone, Mapquest and other Web sites it owns.

With more than 110 million unique visitors monthly to its network of Web sites, AOL has been the largest source of ad revenue for Google. AOL's most popular feature is its free instant-messaging service, which has about 43 million users who chat online through text messages and provides an attractive platform for Google to dramatically expand its presence in free telephone service over the Internet.

"AOL is a valued partner," Google spokeswoman Lynn Fox said yesterday. "We look forward to continuing to work with them."

AOL has provided Google with more than $400 million in ad revenue so far this year, according to public filings. And AOL itself has taken in far more than that from its existing partnership with Google this year.

Google stock rose $7.62 yesterday to $430.15 a share after news of its deal with AOL leaked. Google went public in August 2004 at $85 a share.

Time Warner stock closed at $18, up 16 cents. Corporate financier Carl C. Icahn, who has been pressuring Time Warner to consider the sale of a majority stake in AOL, spin off its cable division and use cash to buy back tens of billions of dollars worth of its stock, criticized the AOL-Google agreement yesterday. He noted that Time Warner previously had rebuffed overtures from Yahoo Inc. to purchase America Online, and he argued that shareholders would have been better off with an outright sale.

"I call it a travesty," said Icahn, who is waging a proxy fight to replace Parsons and other members of the Time Warner board. "They should have allowed others to bid who wanted control of AOL."

The deal between Google and AOL is a setback for Microsoft, which had been talking with Time Warner since January. Google is the leader in Internet advertising and search, followed by Yahoo and MSN Search, which is a distant third.

For AOL, cutting a deal with Google gives the Northern Virginia firm some badly needed momentum. Once a high-flying Internet service, AOL had come to be seen as an also-ran that depended heavily on the money it made from subscribers who pay $23.90 monthly to connect to the Internet by phone. But as millions of users fled AOL for faster and cheaper Internet services in recent years, the business faced a crisis and began slashing costs. The new partnership with Google could reinvigorate America Online by associating it closely with one of the hottest firms in cyberspace.

The existing arrangement -- under which Google provides text-based ads and free search results on AOL -- will continue, with AOL keeping 80 percent of those ad proceeds and Google taking 20 percent. Businesses pay for such ads, which appear to the right of and above the free Google search results, only when computer users click on them.

As part of the new agreement, AOL also gains the right to sell Google-generated text-based ads that appear on the America Online network of Web sites. Currently, only Google can sell those ads. The change will enable AOL to approach advertisers with more options for reaching customers on the Internet.

In addition, AOL's video service will get brand-name promotion as part of Google's video search service. One source said AOL will also have the right to buy graphic ads that appear alongside the text-based ads Google traditionally has displayed to the right of its free search results.

Google's search results, based on equations that rank them according to relevancy, will not be changed as a result of the new partnership with AOL, sources said.

Google's $1 billion investment for 5 percent of AOL gives the America Online service an "implied value" of $20 billion. The five-year deal gives Time Warner the choice of maintaining its 95 percent ownership stake or spinning off a portion of AOL to shareholders to boost its stock price.

The terms of the final agreement were reached just after 9 p.m. Thursday in Parsons' New York office suite, where he was joined by Google chief Eric E. Schmidt and AOL head Jonathan Miller. Google co-founders Sergey Brin and Larry Page have close relationships with Miller, a factor that helped the deal.

In the end, a proposed joint advertising arrangement between AOL and Microsoft's MSN network proved complex and not as lucrative as the long-term potential of the partnership with Google.

Lawyers for Google and AOL will work out the final details of the new alliance over the weekend, before Time Warner board members, who have given their informal consent to the arrangement already, vote on the transaction.

"Microsoft is probably unhappy and hurt," said a person familiar with the long-running talks who spoke on the condition of anonymity because of the discussions' confidentiality.

View all comments that have been posted about this article.

© 2005 The Washington Post Company