AOL renews, expands search pact with Google

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The company said the new deal will extend to mobile search and online video. Currently Google provides search services to AOL's content network and properties in return for a cut of the proceeds.

AOL said that the new deal allows it to distribute its video content on Google's YouTube. It is also working with Google to develop an AOL mobile search product.

According to Armstrong, the deal marks an "important step in the turnaround of AOL" and will expand their "global relationship to mobile search and YouTube."

"All aspects of our partnership will be improved by this deal," he said.

"We're excited to deepen our partnership. This agreement combines Google's expertise in search and advertising with AOL's strength in online content," Google CEO Eric Schmidt said. "It's particularly exciting to see our relationship expand into video and mobile. These areas are now at the heart of users' online experiences and at the core of both of our businesses."

AOL did not provide financial details of the deal because of a confidentiality agreement but it is obvious that the broader scope of the deal will translate into more revenue for the company.

AOL's advertising revenue from its deal with Google last year was $556.7 million or about one-third of AOL's total advertising revenue.

According to analysts, the deal is important to AOL, which is looking to turnaround its business.

Once an Internet giant, AOL's fortune and market share dwindled as it struggled to compete with Microsoft, Yahoo and Google.

Last month AOL reported a massive second quarter loss on the back of a plunge in advertising sales and a one-time goodwill impairment charge related to its sale of social networking site Bebo.

AOL said it incurred a net loss of $1.06 billion or $9.89 per share in the June quarter as against a profit of $90.7 million or $0.86 per share in the year ago period. Analysts expected the company to report earnings of $0.41 per share.

Revenue also slipped 26 percent to $584.1 million or lower than analysts' average estimate of $610 million.

However, ever since AOL spun off from Time Warner last December, the company, under Armstrong, a former Google employee, has been trying to streamline its operations by selling some of its assets like instant messenger ICQ, digital ad firm Buy.at and social networking site Bebo.

It has also rolled out a new web mapping service and migrated the majority of AOL mail users to an improved email platform.

Currently, the company is looking to build an Internet content business sustained by advertising.

Meanwhile, the deal is seen as delivering a severe blow for Microsoft, which is competing with Google to provide search to the Web's most popular sites. In AOL's case, Microsoft was expected to aggressively go after the company's search business in its attempt to build its Bing search brand and strengthen its adCenter ad platform.

According to comScore, Google controls 66 percent of the search market while Microsoft controls 11 percent.

As for AOL, it handled only 2.3 percent of US searches in July, according to comScore. However, its audience is considered loyal.

"This is good news for AOL," Benchmark Co. analyst Clayton Moran wrote in a research note. "We are pleased to see AOL stay with Google given its stronger monetization than other search providers."

Agrees Citi Investment Research & Analysis Managing Director (Internet Research) Mark S. Mahaney. "We believe there were three key positives for AOL: 1) Parity of search results should help improve AOL’s search experience and should help AOL maintain if not gain some of query market share; 2) Distribution of AOL content on YouTube which should help AOL with its content strategy; and 3) the new deal expands to Mobile Search and Mobile Search Advertising," Mahaney said.

AOL's original search agreement with Google dates back to 2002. Google secured that deal by buying 5 percent stake in AOL for $1 billion. Google also gave AOL a $300 million credit for use on the search giant's ad platform. AOL used that credit to invest in advertising across Google.com and publisher Web sites. In 2008, Google wrote down its $1 billion investment by $726 million and last year Time Warner bought back the stake for $283 million.

AOL's shares closed flat at $23.05 on Friday. Google's shares closed 1.54 percent up at $470.30.