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Analyst: Google Key for AOL Ad Future

A new bullish research report on AOL Time Warner issued by Merrill Lynch says the company's Internet unit will become more dependant on search partner, Google.

Merrill Lynch analyst Jessica Reif Cohen projects paid listings will account for 33 percent of AOL's ad revenues in 2007. Last year, Merrill pegged paid listings as accounting for 5 percent.

"We believe the online paid search business will continue to provide above-industry growth potential," Cohen wrote. "AOL is well-positioned to benefit from this trend based on its partnership with Google."

By 2007, Merrill Lynch forecasts AOL will take in $383.5 million from its Google agreement. Overall, the investment bank expects ad revenues to reach $1.2 billion in 2007. Merrill Lynch expects paid search will explode in the next couple of years, growing by 172 percent this year and 59 percent in 2004.

Google and AOL came together in May 2002, when AOL defected from Overture Services to hand its search business completely to Google, which had recently entered the paid listings business.

The importance of paid search to portals' fortunes was further illustrated this week by Yahoo!'s agreement to buy Overture for $1.63 billion. In a recent regulatory filing, Yahoo! revealed that its Overture partnership accounted for 20 percent of its revenues in the first quarter. Microsoft, in its earnings report yesterday, also hailed its Overture partnership as a key driver for robust revenue growth at MSN.

With search such a key component of its business, industry analysts said Yahoo! felt it had little choice but own it outright. For now, few industry watchers expect AOL to make any bold moves in search, since the company is still recovering from its prolonged slump.