Google’s Got AOL, Say Insiders

Press reports on Friday and over the weekend maintain that Google and America Online are near to an agreement that will retain Google for both search and ad placements on AOL Web properties. In return, Google will purchase a 5% stake in America Online from Time Warner.

The deal, which may be formalized in an agreement soon after the Time Warner board of directors meets on Tuesday, would represent a large setback for Microsoft’s efforts to gain market share for its MSN Search property, particularly at the expense of rival Google, the top-ranked engine in terms of ad revenue.

The Wall Street Journal and Reuters both credited unnamed sources for the report that Google was in “exclusive” talks with AOL and close to an agreement, after several months of competing bids by Microsoft to win the contract to replace Google as AOL’s search engine. The current contract between Google and AOL will expire in 200[?]. AOL currently accounts for about 10% of Google’s total ad revenue, making the Internet company Google’s biggest single customer.

Negotiations included a $1 billion payment by Google for a 5% stake in AOL, the Journal reported on Friday.

As described in press reports, the deal would retain Google as the engine behind AOL Search for five years. AOL’s sales staff would begin helping Google sell more display ads to add cost-per-thousand (CPM) revenue to its pay-per-click (PPC) performance-based search ad business. In turn, AOL would reportedly begin selling some search ads directly and would be able to limit those ads to its own sites.

Google would also include search ads for AOL Web sites in prominent locations on results pages, where those pages were relevant to users’ searches. According to press reports, the deal might also give AOL content a featured place in the search results themselves, perhaps in a dedicated area marked with an AOL logo. Time Warner video content would also be featured in Google’s increasingly popular video search feature.

The New York Times reported that any enhancement of Time Warner search rankings on Google would be the result of “technical assistance so AOL can optimize its Web pages, but would not involve changing the algorithm by which Google decides which pages are most relevant to a search.

Google has been testing entry to the CPM display ad market since April, when it introduced a non-contextual ad program that would charge for impressions rather than performance. The industry opinion, since validated by Google, was that the company was looking for a more effective way to draw online the big brand advertisers who may not necessarily need to reach an audience at the precise moment they’re researching a purchase.

Microsoft had been courting America Online since September in a bid to replace Google as the official search engine for the Web company, which has 20 million U.S. users and 6 million European ones. The deal would have conferred instant credibility on Microsoft’s MSN Search, which has been making strategic moves to become a third option for online advertisers. It would also have been an important competitive blocking move to Google, the company that Microsoft has identified as the one to beat in order to increase its share of the Internet ad market.