Google deal to include AOL ads partnership

Google is expected to announce a deal with AOL on Tuesday which will include an advertising partnership, the promotion of AOL content on Google and the joint development of video search, marking a shift in the search giant’s strategy.

The deal is expected to be approved on Tuesday by the board of Time Warner, AOL’s parent company.

Google, which has shied away from in-depth partnerships with its competitors, particularly on the content side, has seen its shares double this year on the back of strong growth in search advertising. Google is expected to pay $1bn for a 5 per cent stake in AOL.

The likely AOL deal was revealed at the end of last week when Google entered exclusive talks, trumping rival Microsoft, which had hoped for a deal with AOL to boost its MSN internet division. The final details were ironed out over the weekend.

“We had anticipated that Google would be reticent to give the same operational support (such as drive traffice to AOL.com) as MSN,” said Jessica Reif Cohen, analyst at Merrill Lynch. “It appears the strategic importance of the relationship, and the desire to stymie MSN, led Google to make significant concessions to AOL.”

Specifically, Google will allow AOL to run auctions for search-related advertising. Under their existing search deal, the ads are sold by Google. AOL will also sell display ads on Google sites. The deal is likely to include a credit that AOL can use for search ads promoting its content, including some with graphic displays. The joint development of video search is also planned, and Google will have access to AOL’s video library.

Any sign that Google will give preferential treatment to AOL’s content could damage the credibility of its search engine, analysts warned. “They’ve worked very, very hard to persuade the market that they’re not playing favourites in terms of content,” said Michael Gartenberg, an analyst at Jupiter Research. “That’s an arrangement they want to preserve.”

The deal with AOL also opens up Google’s closed advertising system for the first time, potentially weakening its claim to being able to deliver the most revelant advertisements available anywhere on the web.

The deal comes as Time Warner faces a fight for board control from Carl Icahn, the activist shareholder who owns 3 per cent of its shares. If the board can strike a deal which pushes the company’s price higher, it will be harder for Mr Icahn to gain support.

On Monday, Mr Icahn sent a letter to the board, urging them not to approve a deal with AOL that might “make it more difficult or in any way preclude a merger or other type of transaction with companies such IAC, eBay, Yahoo or Microsoft”.