Tech Features

AOL: You've got Google

By Andy Goldberg Dec 21, 2005, 5:07 GMT

A file photograph showing a magnifying glass enlarging the logo of the internet search engine company Google on a computer monitor. EPA/JENS BUETTNER

San Francisco - After months of negotiation, two of the biggest names in the online world joined forces this week in an alliance that illustrates the dizzying turns of fortune of the Internet era.

Google, the hottest Internet phenom of the last five years, is to buy from media conglomerate Time Warner a 5-per-cent stake in America Online (AOL), the pioneering web media company that used its overinflated stock at the height of the technology bubble in early 2000 to merge with what was then the world's largest media company.

Under the terms of the deal, Google will help AOL's web site feature higher on its all important search results, and will also work with AOL to promote its video offerings on Google Video, a search engine that many people believe will become a major media crossroads as surfers increasingly use the web to find and view TV shows and films.

Google beat its major rivals in the courtship, Yahoo and Microsoft's web arm MSN, to gain the hand of AOL, which for the last five years has looked more like a frog than a princess. But its fortunes and value have increased sharply in recent months as it became ever clearer that Internet advertising is one of the most effective ways for company's to spend their advertising dollars.

The deal values AOL at 20 billion dollars, more than a quarter of the total value of Time Warner, and almost double the valuation that Yahoo placed on the company when it pulled out of negotiations in early November.

The New York Times reported that Google - on top of its direct investment - would provide AOL with 300 million dollars in advertising on its search pages to help direct searchers to relevant AOL web sites. Google will also violate one of its cardinal rules by starting to experiment on the use of graphical ads on its page rather that the text ads that defined its no-nonsense approach to providing users with a streamlined experience.

That has opened Google to the barbs of net purists who are sure that the company is on a fast track to replacing Microsoft as the symbol of tech villainy - in violation of its oft-quoted mantra 'Do No Evil'.

'There's no doubt that Google still makes the best technology on earth. But when it comes to business practices, it's no different than any other company out there in search of the buck,' noted blogger Preston Gralia in a post that he titled: 'Is Google More Evil than Microsoft?'

Other bloggers were also disappointed.

'I like Google, I really do. So why the hell are they considering doing this deal with AOL?' puzzled another blogger who goes by the nickname Enlightened Cynic. The writer of Jos'Blog said that the deal shows that Google 'has finally lost its virginity'.

Investors basked in the afterglow of the deal, pumping up Google's share price to the point where the company's valuation exceeded IBM's. Google's previous relationship with AOL generates as much as 500 million dollars in annual revenues for the search engine, which had total turnover of 4.2 billion dollars in the first nine months of 2005.

Closer cooperation is likely to increase that figure as Google taps in more deeply to AOL's 21 million subscribers. More importantly, it takes away the possibility of Microsoft teaming up with old nemesis AOL to create a new web colossus that could challenge Google's quest for Internet dominance.

Billionaire investor Carl Icahn, who controls some 3 per cent of Time Warner and has been highly critical of management, said the deal represents a disaster for the parent company, which is prevented from selling off AOL entirety to better-suited owners such as eBay Inc. or InterActiveCorp.

Icahn said that he is 'deeply concerned' that Time Warner's board is on the verge of 'a disastrous decision' that will prevent the company from enhancing its value. In the fast paced environment of the Internet, at least it won't take long to see which side was right.