Google Sells $1B Stake in AOL for $283M

Google sold its $1 billion investment in AOL for just $283 million July 8, more than four years after buying the 5 percent stake in the Web portal in a coup against rival Microsoft, according to a regulatory filing July 27.

Google had purchased the stake in Time Warner's online unit in May 2005, beating out Microsoft to win the right to continue to provide search and advertising through AOL's portal, which at the time was the second most trafficked Website. Google's investment valued AOL at $10 billion in 2005; the sell-off implies AOL is worth $5.66 billion.

What was a sound business decision and a strategic coup at the time has turned sour in just a few years, as AOL's fortune has faded.

Google, Yahoo, and the rise of social networks such as Facebook and Twitter have left AOL in the dust. Last August, Google said in a regulatory filing that it was concerned its investment in AOL might be "impaired."

Now Time Warner is preparing to spin off AOL, which will be called AOL Inc. and will be traded on the New York Stock Exchange under the symbol AOL, according to the Securities and Exchange Commission filing.

In an interesting twist, former Google sales executive Tim Armstrong is now AOL's CEO. Armstrong, who has a three-year contract with AOL, has decided to refashion AOL as a digital content display advertising provider.

This means he will be taking on Google, Yahoo, Microsoft and social network sites such as Facebook and Twitter—all of the sites responsible for pushing AOL down on the Web service pecking order in the last few years.

While Google seems to have taken quite the bath on its AOL sell-off, the filing tells a lot about how valuable Google was to AOL.

AOL said in the filing that Google is the exclusive Web search provider for AOL Media, except in a few special cases. The spin-off candidate noted that for 2008, search advertising revenues comprised one third of its advertising revenues and was the only category of its advertising revenues that grew year-over-year.

Moreover, AOL has agreed to use Google’s algorithmic search and sponsored links exclusively in the United States through Dec. 19, 2010. AOL noted: 

Upon expiration of this agreement, there can be no assurance that the agreement will be renewed, or, if the agreement is renewed, that we would receive the same or a higher revenue share as we do under the current agreement. In addition, there can be no assurance that if we enter into an arrangement with an alternative search provider the terms would be as favorable as those under the current Google agreement.

Even if we were to enter into an arrangement with an alternative search provider with terms as or more favorable than those under the current Google agreement, such an arrangement might generate significantly lower search advertising revenues for us if the alternative search provider is not able to generate search advertising revenues as successfully as Google currently does.

AOL is hamstrung by its lack of a search engine. Without one, AOL noted it is not able to package and sell search advertising along with display advertising services outside of AOL Media.

"As search advertising represents a significant portion of online advertising spending, we believe that our lack of a proprietary search service could adversely affect our ability to maintain and increase advertising revenues," AOL added.

The big questions remain: What will happen when AOL's agreement to use Google's search expires in 2010?

Will the company still be viable then? AOL's future remains uncertain at a time when companies are increasingly turning to real-time content and search services, such as Twitter.

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