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Move is a Major Blow for Microsoft Strategy

By Published on .

NEW YORK (AdAge.com) -- Google and Time Warner have reportedly reached an agreement that will allow Google to acquire a 5% stake in AOL in a deal worth $1 billion.
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A Google spokesperson Friday afternoon said the company was not disputing those reports, although it would not confirm them, either. A Time Warner spokesman denied that the deal had occurred.

Earlier today Microsoft, which had also been negotiating with AOL, dropped out of talks, in a major blow to the Redmond, Wash., company. A deal with AOL would have cut off Google and provided a major advertising conduit for Microsoft, particularly for its AdCenter search engine, which it had spent $100 million developing. A Microsoft-AOL pact would have also made possible syndicated deals for advertisers across AOL and Microsoft properties, said one person close to the deal.

Looking for a 'super charge'
The Google pact reportedly involves Google remaining the search engine for AOL in its revenue-sharing agreement in which AOL gets 80% and Google gets 20% of ad revenue. Also AOL will get the exclusive right to sell other types of advertising, such as banner ads across the Google network. According to reports, AOL will keep 20% of revenue from those sales.

AOL needs a partner that can increase its traffic and enhance its technological underpinnings and give it “a supercharge,” Time Warner CEO Richard Parsons said at a luncheon keynote at the Credit Suisse First Boston Media conference in New York last week.

The deal solidifies Google’s current ad pact with AOL in which Google powers AOL’s search. According to Google’s SEC documents, AOL provides about 11% of its advertising revenue.

That 11% would be equal to about $656 million worldwide, according to eMarketer. The deal also gives Google a stake in a portal, eliminating the need to develop one of its own.

More than search
"AOL is a much broader media property than search, and a large registered user base,” said Joshua Stylman, co-founder of search-marketing agency Reprise Media. " If someone can unleash the power of that user base, it’s a big deal." AOL has a 20-million-name subscriber base.

AOL has been a leader in online video content, since redesigning its portal, taking down the walled garden and opening AOL.com to the world as a content portal ready for a broadband world.

“It’s important that Google is both retaining the search revenue it gets through AOL and will be expanding its potential forms of revenues, most notably in the area of video,” said David Hallerman, senior analyst, eMarketer. “Google, by combining higher-level search with a lot of video content, can be a powerful way to monetize the growth of online video.”

From an advertiser perspective, the deal is great news, said Jeff Marshall, senior VP-director, Starcom Mediavest Group. “It accelerates the adoption of video consumption online and thus creates more ad opportunity.”

In Web traffic, Google and AOL are No. 4 and 5, respectively, behind Yahoo, Microsoft and MSN, according to Nielsen/Net Ratings.

Google will rake in $3.64 billion in online ad revenue, which is 28.2% of the total market. In paid search, Google’s share is nearly 70%.

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