Google Investment Loss on AOL Shouldn’t Bring Government Intrusion in Finances, Experts Say

Published October 10, 2008

Web search giant Google has filed papers with the Securities and Exchange Commission (SEC) that project the value of America Online (AOL), in which it holds a 5 percent stake, at $10 billion.

AOL was valued at $20 billion when Google acquired its stake for $1 billion in December 2005. The August 8 filing demonstrates Google’s skepticism about the future of the venerable Internet service provider and has raised concerns AOL’s devaluation may bring calls for regulation.

Google has spent billions of dollars in recent years purchasing popular Web sites such as YouTube and DoubleClick. Google bought YouTube for $1.65 billion and DoubleClick for $3.1 billion to expand its holdings beyond search engine development.

Those investments have yet to yield a substantial profit for the firm, even as the company’s focus shifts to mobile operating systems, clean fuel production, and space exploration. Google is also continuing to use its personnel and technology resources on dozens of services still in beta testing, including Google Mail, Maps, and Shopping.

Corporate Culture Problem

Most experts familiar with intellectual property and e-commerce believe Google’s decreased assessment of AOL will not harm the company in the long run.

“I think Google is willing to take the risk of overvaluing certain investments if it sees them as strategically valuable,” said Prof. Derek Bambauer of the Brooklyn Law School. These investments are designed to “capture a user base or deny a foothold to competitors” in the cases of YouTube and AOL, respectively, he explained. “Google has deep pockets. The company can afford to overpay and can afford to be less than precise in its valuations.”

Prof. James Grimmelmann of the New York Law School notes Google’s downward assessment of AOL may be more of a corporate tactic than a financial move.

“Complaining about how you lost money partnering with [AOL] is a nice way to slag a competitor in the press,” Grimmelmann said. “AOL is a marginal player, and Google’s public dismissal of it marginalizes AOL further.”

Grimmelmann is not entirely positive in his assessment of Google’s investment practices, however. “Google has a cultural problem integrating [acquired capabilities] into its own insular culture,” Grimmelmann said. He says the firm has a “not invented here” attitude where staff members lack ownership over already-established technologies.

Failures Acceptable

Joel West, a business strategy professor at San Jose State University, minimized Google’s scaled-down assessment of AOL.

“If [Google] gets lucky with one of [its investment] bets, then it will get further ahead, which is the point.” He says Google is in a win-win situation, with the potential to broaden its influence with successful investments and remain the search leader despite failed investments.

Bambauer said it’s important government agencies and lawmakers “not keep Google from overinvesting” in light of the SEC filing.

“It was hard, if not impossible, to predict the [coming success of the] iPod during Apple’s doldrums in the 1990s, and Google was once only a single member of a bevy of search engines,” Bambauer noted. “Policymakers should promote transparency and disclosure and allow companies to make bets on technology as they think best.”

Grimmelmann agrees with Bambauer’s assessment, saying the government has “no need to save Google from itself.” He thinks lawmakers “should instead worry that Google may squelch new ways of doing things on the Internet by occupying and killing off new market niches with its dominance of search.”

Nicholas Katers ([email protected]) writes from Franklin, Wisconsin.