Google Buying Stake in AOL for $1 Billion

Google Inc. is buying a 5 percent stake in Dulles-based America Online for $1 billion as part of a far-reaching business and advertising partnership that will link the two companies in many ways and will greatly enhance AOL's financial prospects, according to people familiar with the agreement.

The deal between Google and AOL is a setback for Microsoft Corp., which had sought to replace Google as the search engine on the AOL service and had been in talks with AOL's parent, Time Warner Corp, since January. Google is the leader in search, followed by Yahoo Inc. and Microsoft's MSN Search, which is a distant third.

"This is our dream come true," one source familiar with AOL and Time Warner's strategy said. "Our fates are intertwined."

AOL is already the largest single source of ad revenue for Google, generating about 10 percent of its ad dollars, according to public filings. AOL's business strategy under its chief executive, Jonathan Miller, is to garner more of its revenue in the future from rapidly-growing online advertising.

As part of the new agreement, AOL gains the right to sell Google-generated, text-based ads that appear on the AOL service. This change will enable AOL to sell all forms of online advertising itself to any company.

In addition, AOL's video service will get special promotion as part of Google's video offering. And AOL will have graphic ads that attract attention and appear alongside the text-based ads Google traditionally has displayed to the right of its free search results.

AOL will also be given a substantial fixed-dollar budget from Google to purchase advertising to promote the Internet service. Google's free search results, based on math equations that rank them according to relevancy, will not be changed as a result of the new partnership, sources said.