Google Grabs 5 Percent Solution

News Analysis: Google emerges as a top tech firm, but shows its vulnerable side, as it beats Microsoft for a 5 percent stake in AOL's business.

Google Inc.: 1, Microsoft Corp.: 0.

The two tech behemoths have had their first significant head-to-head battle, and Google has emerged a winner.

In doing so, many feel something much bigger has happened after the first of what will surely be a significant number of duels. Google may have supplanted Microsoft as the dominant technology company around.

As previously reported, America Online, Time Warner Inc.s online division, will use Googles advertising technology for another five years. In return, Google will invest $1 billion into AOL, and therefore own a 5 percent stake in the second most trafficked of the Internets portals.

/zimages/4/28571.gifRead more here about the Google/AOL deal.

Up until a few weeks ago, Microsoft had been in the running for the same advertising deal with America Online.

"What this [AOL] deal means to Microsoft is that Google is a formidable player that can outmaneuver Microsoft and maintain its market position," wrote John Zappe, an analyst with research firm Classified Intelligence.

"What it means to the ad industry is to show how far Google is willing to go."

"Without any doubt, this puts Google in position over Microsoft as leader in technology space," adds Internet search market expert Andy Beal, chief executive of Fortune Interactive, a Raleigh, N.C. interactive marketing consulting agency.

By making the investment, Google is also tipping its hand to a new strategy of "buying new eyeballs instead of securing them via the creation of new Google products and services," Beal believes.

Googles new direction, in turn, could force Googles competitors to go on a buying spree of their own to build upon their own sizable community of loyal users. In fact, the buying frenzy may have begun with Yahoos purchase of blog aggregator

"I wouldnt be surprised to see Google go after a company like Wikipedia," the online encyclopedia created and edited by its readers, said Beal.

A consensus among many analysts chiming in on the deal is this: its bad news for Microsoft.

Google is perhaps Microsofts biggest rival right now. No longer content to provide just Internet search, Google has begun delivering computing software that competes with some of Microsofts successful lineup.

Winning the deal with AOL means Microsofts recently redone advertising technology would have experienced a major boost.

A deal with AOL would have allowed Microsoft to get an instant audience of tens of millions for its own Internet advertising system, which has had trouble denting Googles strength in winning huge advertising contracts.

/zimages/4/28571.gifRead more here about how the Google/AOL deal will affect instant messaging.

A relationship with AOL would have also boosted traffic to Microsofts Internet portal, which is becoming increasingly important to the company.

In a nod to Googles growing threat, Microsoft earlier this year said it plans to use its Internet portal to deliver more of its software, including versions of its flagship products Word and Windows.

Thats a big change in how Microsoft sells its software; usually its stored on a compact disk on a retail store shelf.

The deal also exposes a rare Google vulnerability.

AOLs business relationship with Google, now three years old, is perhaps Googles most important and among its biggest, in terms of the revenue it generates. The ads Google distributes throughout AOLs Internet fiefdom amount to about a tenth of Googles revenues.

To preserve the deal, Googles had to make precedent-setting concessions, including allowing AOL to have content more prominently displayed in general search results, and also having graphic or banner ads on Google search results page.

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