David Notik

I've read opinions from across the board about Google's decision to invest $1 billion for a 5% stake in AOL, and I thought I'd weigh in. I started life on the Internet with AOL, I'm now a big Google fan, and I'm very familiar with the services of each.

A History of AOL

In the early 90's, the Internet at large was a tangled jungle occupied mostly by hardcore geeks and savvy elitists -- your friends definitely weren't in the mix. AOL saw opportunity, and moved to open the Internet up to everybody -- ironically, by closing out the Internet as it was, effectively creating an exclusive walled garden.

Back then, the only way to get online was to use a dial-up modem -- you picked the best local access number from a list and waited for your computer to tie up your phone line so it could communicate with other computers on the Internet. Where other providers at the time (CompuServe was a popular one AOL later bought) connected you, then left you to your own, AOL took it further. Users of its service were greeted with a friendly "Welcome, you've got mail!" and were instantly privy to plush content and exclusive services.

If you were an AOL user, instead of navigating the HTTP Web, you typed in a keyword and were instantly greeted with quality controlled information. Rather than fuss with geeky IRC channels, you popped into one of the various AOL Lobbies to chat aimlessly, or went to one of the myriad other rooms dedicated to your interests. You saw when your other AOL friends were online and you could chat with them instantly, and you finally had the whole e-mail thing under control.

As AOL got better, its user base grew, buoyed in part by the fact that to really interact with your other friends, they had to reside in the walled garden too. Further, AOL made its software available for free and distributed it with some of the most aggresive marketing I've ever personally witnessed. A new installation disc arrived in the mail every few weeks it seemed, with new colorful packaging and more hours to try it free (no credit card required), and those same discs were for the taking at the local grocery store. If you bought a new computer or installed something, it wasn't uncommon to find that an invitation to try AOL had made its way on to your desktop.

At one point, AOL boasted 32 million subscribers, and to many in the US and beyond, AOL simply was the Internet. However, as the ease and popularity of services and content on the general Internet grew, many realized they were paying for something they could get for cheaper. By just paying for a connection to the Internet instead, you basically got the same content and services, and were often better off when freed from the confines of the AOL software.

AOL realized this themselves, and moved to make certain assets viable on the open Internet. They created AOL Instant Messenger (AIM) which let anyone create an account for free (it was supported by rotating ads), effectively giving users of the open Internet a channel (at least via instant messaging) to its exclusive community. Since AIM was the only way to talk to the millions of AOL subscribers (other than being a paying subscriber yourself), its popularity grew and it is still the most popular instant messaging service today. AOL, on the other hand, continued to struggle with the new dynamics of the Internet, and in 2004 it reported a declining subscriber base of 24 million, a drop of over a quarter of its subscribers.

Kings and Rockstars

The open Internet has since blossomed, due in part to widespread adoption of always-on broadband service. And on the open Internet, Google is the rockstar. Where AOL once served to soften the Internet with its walled garden approach, Google now serves as a friendly conduit to an array of new, powerful services available on an increasingly open and interconnected Internet. Google has become a warm haven for people who have all but given up hope of ever being able to make use of this whole Internet thing. It offers search, aggregates news from across the Web, and has recently introduced a number of popular services including e-mail and instant messaging. And it makes money from simple, contextual ads that aren't obtrusive, keeping all these services free.

Of course, no story in this industry is complete without mentioning Microsoft. Undisputably the king of the computer desktop, with its Windows operating system and Office productivity suite nearly ubiquitous, Microsoft has been struggling to reinvent itself for the Internet age. As services move off the desktop to the open, interconnected Web, Microsoft's entire business model of proprietary, desktop-based software is at risk of being sidelined. Further, Microsoft is reviled in much of the industry for its long-time dominance and loathsome business tactics, and is widely regarded as the chief inhibitor of progress and innovation on the Internet.

A Bid for AOL

Since AOL's merger with Time Warner, the mammoth media company, and with both the head of AOL (and the man who architected the deal) and some major shareholders recommending that the deal essentially be reversed, AOL has been looking for options. Rumor had it that the AOL unit was up for grabs and talks were purportedly held with Microsoft to that effect, but nothing came of it as it was obvious that the real asset AOL had was its still-huge user base.

Google was obviously concerned about a possible Microsoft/AOL alliance, especially with 10% of its revenue coming from its advertising deal with AOL. Awash in $7 billion dollars in cash from its recent stock plays, Google is serious, and it too started talking to AOL.

And so it was, as we're told: executives from Google and Microsoft shuffling between offices in Time Warner's New York City headquarters, with AOL ultimately shunning Microsoft and choosing to continue and expand its engagement with Google. Under the terms, Google would invest $1 billion dollars for a 5% stake in AOL, give $300 million dollars spending money and expertise for AOL and its 300 person advertising sales team to sell ads on Google, and the two would collaborate on instant messaging and other unspecified services. AOL also reportedly requested that Google speed up its introduction of more graphical branded ads (something it was already considering), a departure from the solely text based ads it currently employs.

Google + AOL = Good?

I won't dare comment on whether the $1 billion figure was worth it, and I don't care. What I will say is that an engagement with AOL makes sense to me. Sure, Google defends itself against the all-powerful and aggressive Microsoft, and it locks in a large and growing source of advertising revenue by keeping its relationship with AOL. And sure, Google gets to publicly thwart Microsoft (something it indirectly did when it announced a small alliance with Sun a few months ago) and further captivate an industry undeniably ripe with anti-Microsoft sentiment. But it's more.

AOL is still today synonymous with a friendly Internet, and it is popular especially amongst families and older generations. Its instant messaging service is widely used, including on many mobile phones. AOL has successfully made it to those on the edges, everyday people who rely on its services to interact and to buy things. Google care deeply about those same everyday people and have crafted a startling array of powerful services with a relentless focus on simplicity and ease of use. AOL surely isn't a winner on the open Internet, but it's where people are flocking to, and Google can show the way.

It's about advertising money, and both Google and AOL will rake in revenue, but I believe it's also about a deeper alliance. If Google hadn't secured a deal with AOL, it wouldn't be all that disastrous for them. Sure, securing the deal retains a growing revenue source, gives a chance to publicly snub Microsoft, and keeps investor confidence high and the stock moving -- but it also works because Google wants the reach AOL has, in the near term versus later. And it knows how to monetize them on an open Internet.

Consider this. AOL Instant Messenger is the most ubiquitous instant messaging platform in the world, with 129 million users reported in January 2003. AOL has repeatedly refused to open up its service to users from other networks and software clients, because it basically means those users aren't using its own ad-supported client and it makes no money. Google Talk (Google's instant messaging and voice service) on the other hand is built on an open protocol known as XMPP, and they firmly and publicly believe that communications should be open and networks should be interoperable (think phones), and that there are other ways of monetizing this.

With the news that Google is strengthening their relationship with AOL, I look forward to seeing Google help AOL's various services to become more open, and as a result we'll see Google -- no, the open Internet -- take another, very real step forward.