AOL's Armstrong: Why We Went With Google

Content Portal's Search Traffic Is Falling, but Still Accounts for 20% of Its Revenue

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NEW YORK ( -- In a sign of Google's renewed belief in AOL's future, the search giant has outbid Microsoft to retain AOL's search traffic for another five years. Terms of the deal were not disclosed, but Citigroup analyst Mark Mahaney reports it is structured as a revenue share and does not include any upfront payments or guarantees. AOL's search revenue, a fraction of the overall search pie, is expected to decline 11.8% to $330 million in 2010, according to eMarketer.

Tim Armstrong
Tim Armstrong
Ad Age talked with AOL CEO Tim Armstrong about the deal.

Ad Age: We understand the talks went faster than expected. How was it accelerated?

Mr. Armstrong: This was a deal we did not want to wait for. We were very organized about it. We started it last year, running mock deals that we would want to have, and we created a checklist of things that would help in AOL's turnaround, and Google happened to hit all the checklist items.

Ad Age: How significant a milestone is this in AOL's turnaround plan?

Mr. Armstrong: It's a big milestone, not for any other reason than it's a big part of the company's revenue -- almost 20%. It was hanging out there, and it was a distraction for us. It was important to get a deal done sooner, so we can focus on our core business. Search is not our core business. Content is our core business.

Ad Age: Was Microsoft's Bing a significant bidder?

Mr. Armstrong: Yes. There was Bing and four or five ... six parties interested in this deal, and we spoke to everybody. I can't say who all the other parties were, but Bing was part of it, and we were in serious conversations with them.

Ad Age: How did your history, having worked at Google, as well as sales president Jeff Levick's previous role, play into the talks?

Mr. Armstrong: If anything, there was a higher hurdle for Google to get the deal done. We have to prove to our employees and to our board that we really took a harder look at all the options in the marketplace, and this was not an easy renewal. We spent a year on it. We looked at a lot of strategic opportunities.

Ad Age: Was the deal with Google guaranteed?

Mr. Armstrong: We can't go into details on it. It was similar to the last deal.

Ad Age: AOL's query share is 2.3% -- do you see that growing, and are there deal points related to that growing?

Mr. Armstrong: There are two things behind it: Whatever the actual effect AOL search has on the marketplace, it is much larger than the two-and-a-half percent, or whatever public numbers you want to use, because of the conversion and loyalty of the AOL customer. AOL customers convert at a much higher level than other users do on any other network. The reason you see Google doing a deal like this is because AOL represents a larger percentage in the overall search value we bring.

Ad Age: How is it that AOL users convert at a higher rate on search queries?

Mr. Armstrong: It's very basic: AOL consumers tend to be females, aged 25 to 45, and males in the same age demographic, and they have higher household incomes. They have credit cards. They have paychecks. In comparison, you look at a business we sold this year, Beebo, which is a social network for young people, and while that might be a good business for some, our core customer is different. The AOL audience just converts a lot better.

Ad Age: Despite AOL's better performing conversions on search, which way is AOL's search share headed?

Mr. Armstrong: We can't fully say, but we do expect our access for customers to decline, the dial-up business, and that will affect the search revenue at some point in the future -- but not immediately.

Ad Age: You said earlier that search accounted for almost 20% of AOL's revenue. Does that mean search will account for less of the company's revenue in the future?

Mr. Armstrong: We wouldn't give projections going forward.

Ad Age: How much of this deal had to do with answering Bing's partnership with Yahoo?

Mr. Armstrong: Zero.

Ad Age: The deal, which is five years, in some ways could also be seen as a referendum on not just AOL's future, but on your leadership.

Mr. Armstrong: First of all, we had a great deal team working on this, and they all really did an incredible job. This is a referendum on how AOL is playing offense. This deal had less to do with me than the incredible team we had working on it.

Ad Age: I can already get AOL videos on YouTube, so how is the video content partnership different?

Mr. Armstrong: Well, it's different in that right now all of AOL's videos aren't on YouTube. And the new arrangement incentivizes it for both of us, AOL and Google. It's more economic, but I can't go into details on it.

Ad Age: Will AOL announce any partnerships within the display ad space moving forward?

Mr. Armstrong: You will see us announce an ongoing list of partnerships on a number of things, including on display advertising.

Ad Age: With Google?

Mr. Armstrong: No, outside of Google. Though they could be part of it. They aren't yet.

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