Google Bails on AOL

Back in 2006, Google bought a 5 percent piece of AOL for a hefty $1 billion, reflecting the power of AOL as major force in the online world. How times have changed. When Google issued its fourth-quarter numbers a few weeks back, it wrote down its AOL holdings by $726 million, essentially declaring that it believed AOL was worth just $5 billion, considerably lower than its 2006 value of $20 billion.

Now, Time Warner executives have confirmed, Google wants out altogether. Google has exercised a clause in its contract to demand that Time Warner either buy back its AOL shares at an appraised value or spin them off into a publicly traded unit. Google is dumping AOL, and there's no turning back.

You can hardly blame Google. In its recent fourth-quarter report, Time Warner officials acknowledged that AOL's quarterly revenue fell by 23 percent to just $968 million. As ZDNet reports, revenue for the year declined by 20 percent, and AOL incurred an operating loss of $1.9 billion, largely because it bought a bunch of online startups that turned out to be junk. Which, apparently, is what Google did when it picked up a piece of AOL.

Or did it? Google may be taking a loss on AOL, but, as Motley Fool's Rick Munarriz points out, making money wasn't the point. The point was to gain access to AOL's users and subscribers—and to keep competitors Yahoo and Microsoft from doing the same. With the AOL deal, Google was extending its ubiquity and locking out its rivals. Now, with 63 percent of the American search market, it simply doesn't need AOL anymore. "One can only wonder how relevant Yahoo! or Microsoft would be with advertisers today, if it was handling the paid search rights on the heavily trafficked AOL," Munarriz writes. It was great while it lasted, AOL, but Google's grown and moved on.