AOL’s Choice Leaves Microsoft Scrambling

In an about-face, Time Warner’s America Online unit is expected to announce tomorrow that it is allying with Google rather than Microsoft, according to BBC News.

The deal, in which Google will reportedly buy a 5 percent stake in AOL for $1 billion, will solidify Google’s grip on the top spot in online search, while leaving Microsoft as an “outsider,” according to a New York Times analysis.

AOL is renewing a three-year-old partnership with Google as the provider of search technology. AOL is currently Google’s biggest customer, accounting for 10 percent (about $429 million) of Google’s revenue during the first nine months of 2005. But in recent weeks, Microsoft executives said they would win AOL away and become its provider of search technology. The combination would have created a strong rival to Google and the number-two search company, Yahoo. Instead, Microsoft will now have to go it alone with its new Live.com portal and a revived MSN.com portal.

AOL will continue to steer its subscribers to Google’s search engine as part of the deal, but AOL will gain new benefits it did not have under the previous agreement with Google, such as help in sending traffic to AOL websites. The move by AOL was characterized variously as a purely defensive move by Google, as a snub of Microsoft, and as a bellwether of Google’s dominant position in online technology.

–Edward Prewitt