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AOL, Google Finalize $1B Deal

AOL IM instant messenger computer chat
AOL/CBS
America Online on Tuesday agreed to sell a 5 percent stake to Google Inc. in a $1 billion deal that deepens the ties binding two of the Web's most popular sites while thwarting Microsoft Corp.'s efforts to grab a larger piece of the booming Internet advertising market.

Approving the expanded alliance had been considered a mere formality since last Friday when AOL's corporate parent, Time Warner Inc., abruptly ended several months of negotiations with Microsoft, which had hoped to supplant Google as AOL's main advertising partner.

Many of the details, including a plan that may display more graphical ads on Google's traditionally sparse Web pages, had been leaked to the media in the last few days. None of the so-called banner ads will appear on Google's home page or alongside its primary search results.

There was one significant new twist in Tuesday's official announcement: users of AOL's Internet-leading instant messaging service will be able to communicate with the users of Google's 4-month-old service. Microsoft and Yahoo Inc., another major rival of both Google and AOL, plan to link their instant messaging services next year.

Google's aggressive courtship of AOL illustrates how seriously it regards the looming threat posed by Microsoft as the world's largest software company eyes the lucrative field of online search – a specialty that Google has so far dominated to emerge as a corporate powerhouse in its own right.

"This is a very big deal for us, something I have wanted to do for a long time," Google CEO Eric Schmidt said during an interview Tuesday.

The battle for AOL illustrates the rising importance of the online advertising market as a steadily growing number of people spend more time surfing the Internet instead of watching television, listening to the radio or reading newspapers.

About $12 billion is expected to be spent on Internet advertising this year, a 25 percent increase from $9.6 billion last year, according to the Interactive Advertising Bureau, a trade group. By 2010, worldwide spending on Internet ads could swell to $55 billion, with Google and Yahoo positioned to be the biggest beneficiaries, predicted Piper Jaffray analyst Safa Rashtchy in a report earlier this month.

  • Stephen Smith

    Stephen Smith is a senior editor for CBSNews.com