SAN FRANCISCO – America Online on Tuesday agreed to sell a 5 percent stake to Google Inc. in a $1 billion deal that deepens the ties binding two of the Web’s most popular sites while thwarting Microsoft Corp.’s efforts to grab a larger piece of the booming Internet advertising market.
Approving the expanded alliance had been considered a mere formality since last Friday when AOL’s corporate parent, Time Warner Inc., abruptly ended several months of negotiations with Microsoft, which had hoped to supplant Google as AOL’s main advertising partner.
Many of the details, including a plan that may display more ads on Google’s traditionally sparse Web pages, had been leaked to the media in the last few days. None of the so-called banner ads will appear on Google’s home page or alongside its primary search results.
There was one significant new twist in Tuesday’s official announcement: Users of AOL’s Internet-leading instant messaging service will be able to communicate with the users of Google’s 4-month-old service. Microsoft and Yahoo Inc., another major rival of Google and AOL, plan to link their instant messaging services next year.
Google’s aggressive courtship of AOL illustrates how seriously it regards the looming threat posed by Microsoft as the world’s largest software company eyes the lucrative field of online search – a specialty that Google has so far dominated to emerge as a corporate powerhouse in its own right.
“This is a very big deal for us, something I have wanted to do for a long time,” Google CEO Eric Schmidt said Tuesday.
Had Microsoft been able to win over AOL, it would have become a much more prominent player in Internet advertising while dealing a financial blow to Mountain View, Calif.-based Google.
AOL accounted for about $420 million, or 10 percent, of Google’s revenue during the first nine months of this year. After subtracting the commissions paid to AOL, Google wound up keeping about $63 million of the ad revenue, estimated Internet analyst Mark Mahaney of Citigroup.
AOL’s rebuff of Microsoft also demonstrates how much it prizes its relationship with Google, which has built a network where more than 200,000 businesses and Web sites now bid for the right to have their ads distributed across the Internet. Google began distributing ads to AOL three years ago.
In an interview Tuesday, Time Warner Chairman Dick Parsons cited AOL’s past relationship with Google as a compelling reason to further extend their business ties. “Do I think this is the best way to help AOL realize its full potential? Yes,” Parson said.
New York-based Time Warner has been under pressure to boost its stock price by hedge fund investor Carl Icahn, who is leading an unhappy group of shareholders with about a 3 percent stake in the company.
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