AOL Googles for Ad Dollars

Time Warner (NYSE: TWX  ) recently spoke highly of its ability to advertise to the Web masses. It seems that its partnership with Google (Nasdaq: GOOG  ) is bearing more fruit when it comes to boosting ad revenues on AOL's now-free service, since AOL is announcing a new paid search offering.

AOL will use a "white label," or rebranded version of Google's AdWords technology, allowing it to better target advertising to people who use AOL's search. Dubbed AOL Search Marketplace, the initiative will allow advertisers to bid on search keywords so that their ads can better reach AOL users.

The use of Google's technology comes as part of the late 2005 deal between the two companies. Google paid $1 billion for a 5% stake in AOL, which also guaranteed that Google kept AOL's share of the search market. Check the press release for that deal, and you'll see that this initiative was planned from the very beginning. (Further digging there reveals other areas that seem haven't materialized yet, including potential interoperability for AIM and Google Talk, and a proposed alliance in online video, now apparently rendered moot by Google's purchase of YouTube.)

Partnering with Google can only help AOL, which has a measly 5% market share in search at this point, down from 8% one year ago. (Yahoo!'s (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  )  are both striving to improve their own search technology, too.) Despite its shrinking share of searchers, AOL points out that it has 36 million unique users each month, giving it obvious appeal for advertisers.

AOL's transition from a paid subscription service to a free, ad-supported destination has been interesting thus far. We recently learned that AOL increased its ad revenues by 41% last year. I also peeked at the transcript from a recent Wall Street conference featuring Time Warner, and noticed a possibly unhealthy fixation with advertising that might threaten to obscure future innovation at AOL.

It's not surprising that AOL is moving in this direction. While it seems obvious that AOL has serious plans to further increase its success as an advertising platform -- a crucial revenue channel, now that the service has gone free -- hopefully it won't forget the importance of delivering new developments in content and services as well.

Time Warner and Yahoo! are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick.   

Alyce Lomax does not own shares of any of the companies mentioned.