• by Gord Hotchkiss , Featured Contributor, December 21, 2005

I'm from Canada, and up here, we examine every hockey trade in minute detail. We look at who got what for whom, how the trade adds or detracts from the respective team's talent pools, and who came out the winner. So, the recent AOL-Google deal caught my attention. Why does Google want AOL? What's the strategy? Where's the win?

AOL: Hanging On. From AOL's perspective, the deal makes tons of sense. AOL is an anachronism in a fast-changing world. It's a dial-up service that's trying to carve out a niche in the new broadband landscape. It's been struggling to survive as an online portal, with its once mighty subscriber base dwindling by 33 percent (we'll come back to this subscriber base in a minute). Time Warner has pretty much hung AOL out to dry, reducing it to running TV ads saying you should continue to use AOL because it will protect you from online viruses. Come again? If that's your most compelling differentiation strategy, alignment with the current online Golden Child can't be a bad thing.

With the deal come a couple of strategic promises to AOL. First of all, it gets a guaranteed position in Google's sponsored search ads. Rumor has it that the last right-side sponsored position on page one is now AOL's. Anyone who's looked at our eye tracking report on Google knows that this is hardly prime real estate. In this spot, you can expect to be seen by about 10 percent of the visitors to the page, and capture less than 1 percent of the click-throughs.

But, this deal does mark a departure from Google's existing model, where there are no guaranteed spots and position is determined by a combination of click-through and the price the advertiser is willing to spend. Even though the placement on the page is hardly ideal, AOL's guaranteed slot now means someone gets bumped to page two of the search results, which means an immediate 80 percent to 85 percent reduction in the number of people who will visit that page. This is not the democratic advertising model that Google originally envisioned.

Church/State revisited. Another rumor had Google apparently offering advice to AOL on how to get its content pages to rank better in the organic results. Again, this appears to call into doubt Google's constant fallback position on the church/state divide, where the organic results will never be subject to any commercial influence.

My sense is that this line is getting more and more difficult for Google to define, and this trend can only continue. I'm not so sure this is a bad thing. If you read my previous column on Matt Cutts, the Google engineer that heads up the spam squad, you know that Google has been reaching out to the Webmaster community more and more. The once-locked doors appear to be opening, even if it's just a crack. Based on my company's experience, if you can present Google with a case where the indexing of a site isn't going as expected, it is usually responsive in offering some advice. To me, this form of technical troubleshooting is a win/win. Google gains some insight that could help to improve the entire index, and you can find out why the hell your site isn't being indexed properly by Google.

What is less clear is when Google passes on "optimization" advice, which is what the AOL deal appears to promise. Here, the church/state line is pretty much obliterated by the tap dance that Google is performing on top of it. And it becomes a question of whom Google is offering this advice to. Is it everyone? Is it the biggest advertisers? Is it only companies that they own a piece of? If this is indeed part of the deal, expect a lot of blog and forum fodder on this topic.

What's in the deal for Google? First of all, Google locks up AOL's sponsored search business for another five years, effectively locking out Microsoft. When this currently accounts for approximately 11 percent of Google's gross revenue, that could be reason enough. Also, financial analysts expect an imminent transfer of ownership with AOL, which could trigger a quick liquidity event for Google, minimizing its long-term risk.

But I believe the strategic value of the deal lies in AOL's user base. True, it's smaller than it used to be, dropping from a one-time high of over 32 million down to a current level closer to 20 million, but it's still the largest base available anywhere. Comcast is the next closest at around 8 million (based on ISP Planet numbers). And AOL's base is 20 million people that the company knows something about.

One of Google's challenges has been in getting users of its tools to surrender profile information that could be used to better target advertising messages. MSN is already offering targeted search advertising, which means Google is desperate to even the playing field. Microsoft has the advantage of having years of profile information accumulated through users signing up for Hotmail or Messenger accounts. Google had to catch up, and quickly. This one deal may have helped the company do that. The one question mark is that AOL's user base is notorious for their lack of online sophistication, being relatively new to the Internet. Does this user base come with a demographic profile that will appeal to Google advertisers?

On the face of it, the AOL deal appears to be another smart move on Google's part. For a relatively small investment, the company seems to gain all the strategic advantages it was looking for. Google captures a large block of users with some existing profile information, it locks up an important revenue stream, and it gains access to a very important portal property without jeopardizing its current wildly successful search site. As they say up north: good trade, eh?