AOL expands Google search pact

The companies extended their agreement, first signed in April 2002, for an unspecified number of years. In 2002, Google replaced Overture Services, currently in the process of being acquired by rival Yahoo, as the exclusive provider of paid links on AOL's search pages. Under the companies' current arrangement, Google pays AOL every time someone clicks on one of its sponsored links and lets advertisers bid for the AOL search result placements for specific keywords users enter.

AOL executives said the company wants to broaden its existing agreement with Google primarily to foster a closer working relationship with the search giant.

"We wanted to lock in the relationship for a longer period of time based on the success we've had working with Google over the last year or so," said Gerry Campbell, executive director for search navigation at AOL.

Campbell said AOL continues to test newer Google technologies, including its AdSense text-based ad service, which is meant to deliver advertising content that's tailored to specific Web pages. AOL has been conducting tests with AdSense for roughly two months and has other plans to work with Google on targeted content strategies. The ability to offer leading search capabilities remains a primary goal of the company and one of its major selling points to consumers, Campbell said.

"We're basically sprinkling Google technology here and there throughout AOL and seeing what sticks," he said.

AOL also announced a new "smart box" search tool, which automatically presents users with relevant keywords, Web sites and company information as they type words into a search field. Other upgrades include new navigation tabs, improved local search functions, expanded music and entertainment programming, and hot searches that highlight heavily used search terms or content areas.

Wall Street analysts have said in the past that they expect Google to become a major contributor to AOL's online advertising revenue. While online advertising has declined overall for three straight years, search-based ads have been a bright spot, accounting for nearly 15.4 percent of the roughly $6 billion online ad industry in 2002, according to the Interactive Advertising Bureau. Revenue from paid search placements was up more than 200 percent to nearly $1 billion last year, compared with 2001.

Google executives said the extension of the AOL contract is a welcome validation that it is providing the company with competitive search capabilities and multiple opportunities to drive revenue. Susan Wojcicki, director of product management at Google, said the companies' businesses complement each other nicely.

"AOL has so many members and so much content that when combined with our search capabilities, it creates a lot of opportunity to (drive revenue) for both companies," she said.

Wojcicki said experimenting with AdSense is one of the ways in which the companies are trying to create new revenue streams. Another example, she said, is Google's serving of advertisements for AOL's yellow pages section.

At least one industry expert agreed that the extension could prove fruitful for both Google and AOL. Charlene Li, an analyst with Cambridge, Mass.-based Forrester Research, said she wasn't surprised to see the companies renew their relationship.

"There's no reason for these companies not to work well together," she said. "Google gets valued distribution, and AOL gets another opportunity for revenue."

Li observed that the companies' work with AdSense likely represents the most promising channel to expand their partnership in the future. The analyst said AdSense could double the returns the companies see from contextual listings, which could be "found money" for both companies.

"AdSense is only six months old, but based on what's being heard from the publishers already working with it, it's clear that this could be the model for the advertising network of the future," Li added. "It could be a great opportunity for marketers as well, especially in the case of AOL and Google, because they have the chance to reach very different users, which is an attractive proposition."

CNET News.com's Jim Hu and Stefanie Olsen contributed to this report.