GOOGLE’s willingness to pay $1 billion (£564m) for a modest 5% stake in AOL has again illustrated the importance of the relationship between the search engine giant and the fallen internet star.

Reports from New York this weekend suggested that Google had beaten Microsoft in the bidding war to secure a partnership with AOL, the largest single source of Google’s advertising revenue. Microsoft, which has launched its own search technology through MSN and Live.com, was hoping a deal with AOL would help close the gap on Google and Yahoo.

AOL has had a difficult few years since its merger with Time Warner in 2000, but it still has 20m American users, and another 6m in Europe. AOL’s use of Google’s search engine means that its millions of users provide a big audience for Google’s pay-per-click advertising, a business that is expanding rapidly.

It is understood that AOL provided about 10% of Google’s revenues in the first nine months of this year, or about $420m.

News of Google’s success in the negotiations lifted its shares above $430, another new high. The shares have more than quadrupled since flotation 18 months ago at $85. The deal, which could be announced tomorrow, will provide Google with access to Time Warner’s film and television library. This continues Google’s expansion beyond its original search business.

A year ago, Google agreed a generous price to secure its advertising relationship with AOL Europe. According to The Google Story, a book by David Vise recently serialised by The Sunday Times, Google founders Sergey Brin and Larry Page diverted the corporate jet from its journey to Spain, and flew to London to lead those negotiations themselves.

Those familiar with Time Warner said the company regards a deal with Google as a safer option than a move to Microsoft’s relatively-untested search technology.

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