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Google scores win over Microsoft with AOL deal

Google scored a major victory over its rival Microsoft Tuesday by sealing a deal to  maintain its position as the primary search provider for America Online.
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Google scored a major victory over its rival Microsoft Tuesday as it sealed a deal to maintain its position as the primary search provider for America Online.

Microsoft, aiming to get a bigger piece of the rapidly growing Internet advertising market, had wooed America Online aggressively hoping to dislodge a business partner that accounts for about 10 percent of Google's $4 billion in annual revenues.

But on Tuesday Time Warner confirmed what published reports had indicated since late last week: Google will invest $1 billion for a 5 percent stake in AOL, which will retain Google as its main search engine.

Time Warner chief executive Dick Parsons said the deal will make the media giant's content "more accessible to Google users," which he called a "critical piece" of the deal. The two companies did not immediately detail how this would be done, although as part of the deal AOL's "premium video" will be showcased with Google's video search service.

Even a year ago AOL commanded little respect in the business world after its disastrous merger with Time Warner led to years of turmoil, a tumbling stock price and uncertain business outlook.

But with online advertising exploding and investor Carl Icahn pressuring Time Warner to unlock some of the shareholder value in the conglomerate, AOL suddenly became a hot property, with Google, Microsoft, Yahoo and cable company Comcast all angling for a piece of the action at various times.

The deal announced Tuesday marks a victory for AOL by establishing a $20 billion market value for the Internet property, bringing in cash and providing an expanded channel to distribute its content. Over the past year AOL has been trying to rapidly transform itself by moving its business strategy away from its dependence on monthly subscriber revenues, which are shrinking.

But the stakes are highest for Google and Microsoft, two technology companies increasingly at odds as Microsoft aims to get a bigger piece of the online advertising market and Google extends its reach into software markets that Microsoft dominates.

(MSNBC is a joint venture of Microsoft and NBC.)

“This is largely about a mounting battle involving Google and Microsoft,” said Scott Kessler, an equity analyst at Standard & Poor’s, before the deal was officially confirmed.

In regulatory filings, Google consistently names Microsoft and Yahoo as its two biggest competitors. AOL, meanwhile, is effectively Google’s biggest customer, funneling more than $400 million in advertising revenues in the first nine months of this year, or about 10 percent of Google’s total.

“I think Google was really keen to keep the relationship and not lose anything to Microsoft,” said Charlene Li, an analyst with Forrester Research. “AOL is apparently more comfortable with the market leader, and in the end, money talks.”

Google certainly has plenty of it, with about $5.5 billion in cash at last count after two huge stock offerings in 2004 and 2005. And Google’s stock, at $430 a share, has more than doubled in the past year, giving the company more potential currency to make acquisitions and alliances.

While Microsoft has been struggling to gain momentum in the blossoming online search market, the software giant has plenty of assets of its own including MSN adCenter, a highly touted new advertising technology — not to mention its own stockpile of some $40 billion in cash and equivalents.

Analysts said Microsoft saw an AOL alliance as a crucial element of its strategy to compete with Google and Yahoo for a larger piece of the rapidly growing Internet advertising market, which is expected to grow from about $10 billion in revenues last year to $29 billion by 2009.

Li of Forrester said losing the bid a major is blow for Microsoft, especially as it tries to get traction with adCenter, a platform that offers marketers extensive ability to target advertising to consumers with very specific demographic characteristics.

“It’s a huge loss for them,”  she said. “They really needed this deal to get distribution for the adCenter product, which is wonderful. It takes search to the next level.”

But Kessler said Google had all the advantages: It was the incumbent, its name is a virtual synonym for search, and it has the ability to distribute AOL content that could have been more difficult for Microsoft with its competing MSN portal.

“Even though Microsoft is one of the biggest companies in the world, it is kind of an underdog in this context,” Kessler said.

It remains to be seen how Google's sometimes-passionate users react to the deal and its implications. As part of the expanded alliance with AOL, Google intends to expand display advertising throughout its network.

Until now Google has avoided display advertising, giving its main Web site a clean, uncluttered look that stands in contrast with typical Web portals.