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The 5% solution

December 16, 2005

Faced with the prospect of losing a sizable chunk of its ad business to Microsoft, Google has, apparently, made AOL a counteroffer it can't refuse. According to media reports, Google will give Time-Warner, AOL's beleaguered owner, a cool billion in return for a 5 percent stake in AOL. It will also give AOL the privilege of selling ads that will run on Google's search network, which up to now has been restricted to ads sold by Google. Finally, in a concession that apparently clinched the deal, Google will give AOL ad content special treatment, according to the New York Times:

Google, which prides itself on the purity of its search results, agreed to give favored placement to content from AOL throughout its site, something it has never done before.

So much for the purity of the algorithm.

In isolation, the deal seems to be good news for Google - it's going to make it harder for Microsoft to build up its own ad service and challenge Google's nascent monopoly. But the deal may not be an isolated event. The question is: How many more deals will Google need to cut with advertisers and publishers in the future? Is this deal a sign that Google is consolidating its power or losing it?

UPDATE: A Washington Post piece has more details on the deal, including how Google will subsidize AOL ads on its network through a "substantial fixed-dollar budget."

UPDATE 2: For the record, both the Times article and the Post article have now been revised. The Post's new version omits the sentence I quoted from. (The disappeared sentence originally read "AOL will also be given a substantial fixed-dollar budget from Google to purchase advertising to promote the Internet service.") The Times's new version changes the sentence I quoted to read "Google has agreed to give AOL ads special placement on its site, something it has not done before. Until now, Google prided itself on its auction system for ads, which treated small businesses on an equal footing with its largest customers."

Posted by nick at December 16, 2005 06:49 PM

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This has to be a misprint / miscommunication by the NYT.

There's no way that Google would degrade their search results, the single driver of their business model, to hold on to AOL's search business.

I hope.

Posted by: lawrence coburn at December 16, 2005 07:40 PM

Lawrence, The Times quote isn't clear, but I'm assuming it refers to the positioning of paid search results (ie, ads), not regular search results. It's important to remember, though, that Google uses an algorithm to determine the placement of paid results as well as regular ones, taking into account not just advertisers' bids but also relevance to the searcher. Its privileged relationship with AOL would require it to compromise the integrity of the paid-search algorithm. -Nick

Posted by: Nick at December 16, 2005 09:05 PM

Interesting. Do you have any comments on the long term implications (taking a broader view than just edging out MSFT)? I meant to look at it how and why Google was desperate for the deal, and what it means to it. I wonder if it is just erecting entry barriers for MSFT.

Posted by: Nitin at December 18, 2005 04:38 AM

No question about it. Google is consolidating it's power. Like the Borg, Goog is quickly assimilating the rest.

Interesting that its nemesis is named Bidu.

As in Be-Do-Have paradigm of Conversation with God by either Neale Walsch or William Shad.

MS is Have goods or all mine or needle shots for the masses.
Goog is Do good or else or assimilation of all ads.
Bidu may Be good finally or will it be Alibaba with the 40 thieves as wss Robin Hood?

Posted by: 666 at December 21, 2005 01:59 PM

The 5% solution

December 16, 2005

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