Can Google save America Online?

Paid search listings have helped pull Yahoo and Microsoft's MSN Web portal from the dot-com advertising mire, but America Online is still in search of a savior.

Jim Hu
Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
5 min read
Paid search listings have helped pull Yahoo and Microsoft's MSN Web portal from the dot-com advertising mire, but America Online is still in search of a savior.

Read more about paid search
AOL Time Warner on Wednesday reported another profitable quarter, but soured its outlook on its AOL division. AOL's online advertising business dropped 48 percent from last year while its U.S. subscriber base dropped by 846,000 members to 25.4 million, prompting its parent company to lower its financial expectations for the unit.

Lost in the discussion were details about AOL's partnership with search giant Google, which last year replaced Overture Services as the exclusive provider of paid links on its search pages. Some Wall Street analysts expect Google will become a major contributor to AOL's online advertising revenue after it cycles through its spate of bad dot-com deals. But questions remain about whether Google's commercial search business will help AOL out of its hole as quickly as Overture rescued Yahoo and MSN.

"Maybe in a couple of quarters from now there may be more talk and disclosure about it," David Joyce, an equity analyst at Guzman & Company, said about AOL's relationship with Google's paid search business. Current revenue from Google may be so minimal that some could mistake it as a "rounding error," Joyce added.

AOL did not break out Google's contribution to the bottom line on Wednesday. But its earnings report nevertheless offers a glimpse into a burgeoning Web search rivalry for control of the most promising prize in Internet advertising--paid links in search results triggered by keywords and sold off to the highest bidder.

In a sign both of Overture's growing sway and vulnerability, Yahoo earlier this month offered $1.63 billion to acquire the 5-year-old company, setting the stage for a long-term battle with Google for market share.

The prize promises to be huge.

Net advertising's big star
Online advertising has declined for three straight years, but search-based ads have come on strong, 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 at nearly $1 billion was up more than 200 percent last year, compared with 2001.

Financial analyst Salomon Smith Barney expects the estimated $1.4 billion market in 2003 to grow 30 percent to 35 percent per year, reaching $5 billion by 2008. Paid search is also making inroads into the $200 billion traditional direct-marketing industry.

The AOL-Google deal, signed in April 2002, allows Google to offer algorithmic and paid search results to AOL Search pages. Like Overture's deals with MSN and Yahoo, Google pays AOL every time someone clicks on a sponsored link. Google lets advertisers bid for placement every time specific key words are entered.

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By some estimates, Google's revenue contribution remains minimal, although it is slated to grow significantly in the coming years.

Merrill Lynch financial analyst Jessica Reif Cohen issued a report this week estimating that Google will add $28 million in advertising revenue to the AOL unit's 2003 earnings. Reif Cohen expects that Google will account for $44.5 million in revenue next year, and $76 million, or 33 percent of AOL's ad sales, by 2007.

An AOL representative declined to comment on the details surrounding its deal with Google, but said AOL Search's traffic has increased by one-third in the past year.

Google's revenue contribution to AOL may be growing, but it's nothing compared with Overture's contribution to Yahoo's current profitability. Thanks to its Overture partnership, Yahoo has reported five consecutive profitable financial quarters. In May, Yahoo disclosed that Overture contributed about $54 million, or 19 percent, to its first-quarter revenue.

Overture's influence over Yahoo's fortunes is clear. Yahoo's stock closed Wednesday at $32, in contrast to its 52-week low of $8.94, helping to line pockets for the company's top executives.

Microsoft executives have also hinted that Overture's quarterly revenue windfall is comparable with Yahoo's.

Google's Overture play
Google's financial contribution to AOL remains a mystery since the privately held company Google does not disclose figures. But its methodology behind commercial search is familiar.

Google Adwords, its system for allowing advertisers to bid for placement in its search results, is a relatively new service compared with Overture's, which launched in 1998. To make its popular Web search service more attractive to partners, Google syndicated Adwords in early 2002, a move that quickly started drawing partners.

Since then, Google and Overture have competed fiercely to win over distribution partners. On Wednesday, Google inked a deal with Weather.com for Web search, commercial search listings and contextual ads. Overture that day signed a two-year deal with Sympatico.ca, owned by Bell Canada, replacing the Canadian portal's former partner, Google.

Google has also solicited advertisers to its Adwords program--now totaling more than 100,000, compared with Overture's 95,000.

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Despite its quick success, industry watchers say Google is less experienced than Overture in serving the needs of advertisers. This has warranted less average "cost-per-click" fees that advertisers are willing to pay Google. One financial analyst said that Ask Jeeves, one of Google's Adwords partners, has seen an average cost-per-click price of 30 cents over the past three quarters. Comparatively, Overture's average cost-per-click rate is about 40 cents, up from 30 cents in the second quarter of 2002.

"Google has an excellent product because they pay attention to rankings and product. Overture has an excellent product because they pay attention to customers," said one industry insider.

Industry watchers say AOL's paid search partnership with Google is quietly growing. Though AOL continues to have the largest population of narrowband subscribers, the company's influence is limited to its proprietary environment. Yahoo and MSN, the two most trafficked Web sites, have the benefit of reaching anyone with an Internet connection.

"It's a case of AOL with its gated architecture that isn't quite as appealing to users as it was before," said Chris Sherman, editor of Search Engine Watch. People are "more sophisticated and want to go straight to the Web."

According to market researcher comScore qSearch, AOL Web search attracted 19 percent of the U.S. Internet population in May, flat from January. It beat out MSN, with 15 percent of the Web search traffic in May, but still falls behind Yahoo with 25 percent and Google at 32 percent.

AOL also isn't playing up commercial listings the scale of Yahoo and MSN. In the past year, Yahoo has placed more prominence to commercial search listings, displaying more text ads at the top and to the sides of its search results and throughout other pages on its Web network. In contrast, AOL is still experimenting with how to place Google's text ads throughout its Web properties.

"Anyone who is an Overture partner is going to end up becoming a bigger player in (cost-per-click advertising)," said Jessie Stricchiola, president of search marketing company Alchemist Media. "They're making a lot more money at it than anyone else."