Google, AOL extend Web search pact

By Dow Jones Newswires
Posted Sep. 2, 2010 at 1:19 p.m.

Google Inc. and AOL Inc. have agreed to extend their search partnership for five years and expanded their pact into mobile search and online video, two areas expected to grow as the media business transitions to digital communications.

The deal helps Google protect its dominant share of the fast-growing Web search business from smaller competitors,  including Microsoft Corp.  and IAC/InteractiveCorp. 

For its part, AOL was able to defy expectations and win more favorable financial terms from the search giant in the agreement, according to a person familiar with the matter.

AOL Chief Executive Tim Armstrong, a former Google sales executive who is leading an aggressive restructuring of the slumping Web company, called the agreement a “home run” and said “all aspects of our partnership will be improved by this deal.” AOL’s previous negotiation with Google coincided with the search giant buying a 5 percent stake for $1 billion.

The companies provided no specifics on the financial terms of their new arrangement, which allows AOL to share with Google revenue generated by searches from its websites. Clayton Moran, analyst with Benchmark Co., said AOL likely garnered a modest improvement in its deal.

“There was some concern out there that they would have to give a little in the revenue sharing on search, so this result is a big plus,” Moran said.

AOL shares recently rose 0.6 percent, to $23.04, while Google shares added 0.5 percent, to $462.58.

AOL’s deal with Google could have ramifications on ongoing talks between social networking site MySpace and the search giant as well. MySpace and Google recently agreed to a one-month extension of their search-advertising partnership, according to a person familiar with the matter. That deal has been a key source of revenue for MySpace, which has been surpassed in popularity by rival Facebook.

News Corp.  owns MySpace, as well as Dow Jones & Co., publisher of this newswire and The Wall Street Journal.

AOL and Google have been working together on Internet search services for nearly a decade. In the second quarter, search revenue accounted for 36 percent of AOL’s ad revenue and 18 percent of its overall revenue. Its search business is largely tied to its dial-up web access business, which has been in a long decline that is expected to continue as consumers switch to broadband.

The company’s ad business — its main focus — is also declining, with total ad revenue down 27 percent in the second quarter, but Armstrong is revamping the company and doesn’t expect to return to growth until sometime next year. AOL was spun off from Time Warner Inc.  last year after it became a financial drain on the media giant, and the company has since cut its workforce, rebranded itself and shifted its portfolio of Web content assets.

The new search agreement with Google, which Armstrong viewed as a key step in the company’s turnaround, will cover searches on mobile devices and bring AOL’s video content to YouTube — also under an ad revenue sharing model. Google will also provide AOL with additional features to its web search.

AOL’s existing contract with Google doesn’t expire until December, leaving many observers surprised that it reached a new agreement so early. The company spoke to five or six other search providers, but Google’s offer fulfilled the objectives that Armstrong had laid out in his methodical approach to running the company.

Google controlled 66 percent of the online search advertising market in July, compared with Yahoo Inc.’s 17 percent and Microsoft’s 11 percent, according to ComScore Inc.

“Google has proven to be the strongest search partner in the business and probably offers the best opportunity to monetize content, so it’s a good thing that AOL is sticking with them,” Moran said.

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