Byte By Bite

Google and AOL Seal Billion Dollar Deal

by Marv Dealy

Published December 23, 2005

In what might be considered their private Christmas shopping spree, Google has peeled off about one billion George Washingtons from its stack of about $7.6 billion to purchase a 5% interest in AOL.

Google can afford it; it’s expected the company’s cash flow will generate another $2.2 billion in the upcoming year.

Time Warner broke off talks with Microsoft December 16th and began negotiating exclusively with Google over the investment, which would seem indicate that AOL is now worth some $20 billion.

Microsoft had hoped to beat out Google and become AOL’s biggest advertising partner. As more people spend less time watching TV, reading the newspaper (gasp!), or listening to the radio and instead turn to surfing the Internet, online advertising continues to grow rapidly.

Last year, about $9.6 billion was spent on Internet advertising and that’s expected to top $12 billion this year, according to the Interactive Advertising Bureau (http://www.iab.net/). Some say that could grow to a staggering $55 billion in just 4 years (http://www.piperjaffray.com/).

If Microsoft had won the fight over AOL with Google, Google would have lost out in that advertising market while Microsoft gained a major toehold.

Under the agreement, AOL will continue to provide Google’s search engine results to its subscribers and will receive a $300 million credit to buy ads on Google, hopefully to drive more traffic to its web site.

Google and AOL were the third and fourth most visited web sites in November with 85.5 million unique U.S. visitors and 74.3 million, respectively. Yahoo was the top site with 104 million visitors, with Microsoft’s MSN.com in second with 91.3 million visitors, according to Nielsen/NetRatings (http://www.netratings.com/pr/pr_051220.pdf).

AOL, Google’s biggest customer, accounts for about 10% of Google’s ad revenues. Most of the money comes from the ads that Google distributes across AOL’s web site, an arrangement that began in 2002 when AOL switched from Overture (now owned by Yahoo).

Nielsen/NetRatings says the top five online advertisers and the estimated amount they spent were Vonage ($31 million), LowerMyBills.com ($11.6 million), BellSouth ($10.6 million), General Mills ($9.6 million), and Dell ($8.3 million).

Microsoft and Time Warner were in discussions apparently for much of the past year, and while Microsoft hoped to beat Google – which they now consider a fierce competitor – the Redmond gang apparently weren’t ready to do anything it took to get the deal, particularly if it involved a bunch of cash.

Microsoft apparently views Google as more and more of a threat as computing moves from the desktop onto the Internet, an area that could threaten Microsoft’s core business of putting software onto lots and lots of individual computers as opposed to making software available online when and if you need it.

AOL’s parent Time Warner has been pressured to do something to improve its lagging share price, with options for ramping up AOL’s advertising business high on the list. AOL is shifting its business model from selling dialup Internet access to selling online advertising, which is a booming and growing market, as evidenced by Google’s dramatic success.

Does this whole Google/AOL deal bail out Time Warner’s management? Will the deal, which Time Warner chairman Dick Parsons said was “the best way to help AOL realize its full potential,” satisfy Carl Icahn? Who knows; stay tuned.

What’s next in the Yahoo-AOL-Google-Microsoft opera? AOL’s leading instant messaging program will soon be able to “talk” with Google’s fledgling IMers, while Microsoft and Yahoo are planning to hook up their IM services soon, as well.

Meanwhile, a new craze called “visiting” will sweep parts of the nation as people actually get into their vehicles and go to someone else’s house or business and sit and talk a spell.

To the Mailbag – Writes reader Shelly Davis-King “thanks so much for your Friday Freebie! My goodness it has made Christmas shopping that much faster, cutting out the Google search step and going right to the company's webpage.”

Happy I could help, Shelly. Sometime reader Cookie from Jupiter called to say that he’d read the same column but called it an advertisement. I told him if it worked next time I’d talk about cars, trucks, boats and airplanes.

From reader Cindy Graham: “I read your column religiously and have learned so much! My question is: my son has an English class at Columbia where he uses Microsoft Word. He can save his work on a disc and bring it home but we have Microsoft Works on our PC and they are not compatible. How can he do his homework? Any suggestions?”

Yes; have your son use the “Save As” feature in Word; if he scrolls down the list toward the bottom he should find one or two types of Works document with which he can save his stuff. Then, he can use Works at home. He may face switching it back and forth several times between Word and Works, which might be a bit of a pain and might cause unexpected problems if there are a lot of special formatting elements or graphical elements.

You might inquire at Columbia as to whether or not there is some way you can get a “student copy” of Word to install on your home computer for little to no cost, as well. And failing that, you might call Bill Gates and ask what the heck was he thinking.

Lastly, have a very Merry Christmas and remember – we need those hi tech gadgets. I have right here a pole from AP-Ipsos (http://www.ipsos-na.com/news/ap/) that says that of those of us with broadband, 40% would only give it up over our dead bodies, 20% of us feel that way about our CD and DVD players and digital cable, and 50% that way about their PCs. In a stunning finding, the poll revealed that more men than women bought gadgets, and those with more money bought more toys.