AOL, Google ad pact to include video, instant msgs

NEW YORK - Google and America Online has expanded their search and advertising alliance to include video and instant messaging, shutting out Microsoft, which had fought hard for a deal with Time Warner's AOL unit.

America Online said Google had agreed to invest US$1 billion to take a 5 per cent stake in AOL, as part of an enhanced pact where Google will move beyond text-based advertising to allow AOL to sell graphical ads to Google's fast-growing ad network.

The stake effectively values AOL at US$20 billion, a key benchmark should Time Warner elect to spin-off or sell a part of its internet unit in response to dissident shareholder Carl Icahn's proxy campaign to break up the company.

Terms of the deal call for AOL to make more of its websites searchable via Google search, including a plans to feature AOL's premium video services within Google Video, a way of searching for Web-based video programming.

They also said they had agreed, under certain unspecified conditions, to allow users of Google's recently introduced instant messaging system Google Talk to communicate with users of AOL's market-leading AIM instant messaging service.

Ahead of the announcement, analysts called the new agreement a major defensive win for Web search leader Google, depriving Microsoft of a major customer that would have jump-started its push to compete with Google in the online ad services market.

In a letter to Time Warner's board of directors released on Monday, billionaire investor Icahn labelled the potential AOL-Google deal as "disastrous" because it may rule out potential future deals AOL might do with Google rivals such as eBay Inc. or Microsoft.

- REUTERS