AOL-Google Deal Even Better In Details

Thanks to leakage, trial-balloons, and market conditioning that would do the White House proud, there wasn't much news in the TimeWarner-AOL-Google press release.  If anything, though, the deal looks even better than previously described.

For example, Google agreed to "white label" its search technology for AOL so the AOL sales force will be able to sell search within the AOL properties.  This should not only invigorate the sales force, but allow the company to get a quick if modest bump in advertising revenue.  Per the New York Times, Google also agreed to give AOL $300 million in marketing credits (links within Google to AOL content), which should drive significant amounts of new traffic to AOL--and traffic of a different demographic than AOL's core user base (teenage girls).  The two companies will also link their messenger products, creating a powerful alliance against Microsoft and Yahoo! and allowing Google Talk to become slightly less irrelevant.

Although Google purists are bemoaning the company's lurch toward "evil" by helping a partner figure out how to game the search engine and by agreeing to plaster some of its pages with banner ads, Google shareholders should be applauding this move: Google's search business is amazing, but if disaster is to be forestalled, the company's future growth cannot and should not depend on search alone.  As for the $1 billion investment, this is relative chump change (two quarters of cash flow or 1/4 of the $4 billion Google raised a few months ago by selling a tiny percentage of itself), and Google now owns a piece of a company that can help it improve its weak communications and content capabilities while generating meaningful revenue on the side (a run-rate of $600 millionish).  And, who knows, it might even turn out to be a good investment.

The deal will not save AOL, so the backslapping in Dulles and New York shouldn't last too long.  The company still needs to find some way to migrate its fleeing dial-up subscribers to broadband plans (cable, DSL, wireless, or BPL--the subscriber's choice), and until it does this, it is screwed.  Still, the Google deal addresses one of the company's big problems (more web-only traffic to the portal), and, Carl Icahn notwithstanding, is a big step in the right direction.

Comments

[Randy Charles Morin]

What's your price target. $5b/share?

[Henry Blodget]

A googol, actually. By tomorrow afternoon.

[Dana Mauch, Jr.]

What exactly does GOG get for their one billion. AOL has no stock. Do they get 1% of TWX? Talk about a minority investor.

[Henry Blodget]

They get 5% of the AOL division (as I understand it). Time Warner's divisions are autonomous, with separate financials, management teams, etc. And media companies often own pieces of assets, so this wouldn't be unusual.

[Stuart MacDonald]

Well said, Henry. And your comments about them moving out of reliance on search revenue are spot on -- not only do they need to do that to continue to grow apace, but marketers need them to do it as well. That's part of why GoogAOL makes sooo much sense. As traditional media continues to implode, the quest for an effective, alternative brand building marketing platform will become increasingly urgent (and paid search ain't it), and the winners will soak up billions of former TV/print/radio ad dollars.

That said, I do fear for the GOOG brand if they straight-up juice AOL's search results in algorithmic.

Happy Holidays,

- Stuart

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